CSDR’s settlement discipline regime is a long-running saga but will finally come into force on 1st February 2022. However, in a surprise move at the end of the year, the mandatory buy-in regime has been excluded from application. CACEIS looks at the reasons for and implications of this postponement, which could represent an opportunity to highlight the efficiency of the penalties regime.
On 1st February 2022, the Commission Delegated Regulation (EU) 2018/1229 supplementing Regulation (EU) No 909/2014 (the Central Securities Depositories Regulation or “CSDR”) will finally come into force. As a reminder, CSDR’s main objectives are to reduce risk and raise efficiency of securities settlement, and to define a harmonised prudential framework for supervising Central Securities Depositories (CSDs) within the EU.
CSDR implementation was postponed by EU authorities in 2020 and 2021 due to the pandemic, while the financial services community remained keen to understand the major consequences for settlement obligations.
CSDR’s settlement discipline regime brings in rules designed to avoid settlement fails and raise settlement efficiency for securities transactions. The regulation brought in penalties for failed settlements and controversially, mandatory buy-in rules for certain situations.
In January 2020, these onerous rules for an industry seeking regulatory stability led 14 European marketplace associations including AFTI, EACB, EBF and AFME* (of which CACEIS is a member) to notify the European Securities and Markets Authority (ESMA) about the detrimental effects of rushed implementation of the settlement discipline regime. ESMA reacted by sending the European Commission an official letter requesting postponement, initially until 1st February 2021, and then to 1st February 2022, which was accepted.
Broadly welcoming the European institutions’ decision to postpone, the financial sector and CACEIS embarked on an extensive process of adapting their IT systems to comply with CSDR’s rules by 1st February 2022.
The deadline extensions proved very short, but European financial services participants managed to implement the settlement failure reporting requirements and the cash penalties system. ESMA requested a new extension from the European Commission specifically for the mandatory buy-in regime, after the sector had again notified them in July 2021 stating that further clarification was needed due to the complexity of the regime.
On 24th November 2021, the European Commissioner responsible for financial services announced that the mandatory buy-in regime would not enter into force on 1st February 2022. Eliane Méziani, Senior Advisor – Public Affairs at CACEIS explains, “This postponement, adopted in the form of a legislative rider introduced during negotiations of the European authorities on the pilot regime, nevertheless remains vague as to how long it will last, and raises questions as to the Commission’s ambitions for the future of mandatory buy-in rules”. She added, “According to observers, the postponement could last two to three years, clearly not in line with extensions generally applied to other European regulations”.
Daniel Pascaud, Global Head of Operations, Banking & Custody Solutions at CACEIS, believes this would not be the first time that a text that proved complicated to implement was first postponed several times before eventually being abandoned. He added, “However, this is not currently the case, and at this stage we ought to welcome the decision of the European authorities. The mandatory buy-in regime required greater clarification, unlike other elements in the settlement discipline regime, such as cash penalties. This extension will provide an opportunity for financial services participants to stabilise the penalties regime, and for the European authorities to assess the relevance of a mandatory buy-in system in this context. The latter should be limited to the highest risk transactions, rather than to all transactions, which is the case today”.
The entry into force of the settlement discipline regime therefore represents an opportunity for CACEIS to demonstrate the reliability and resilience of its operational systems and procedures for securities settlement, without the requirement for a mandatory buy-in system.
To assist clients with implementation of the CSDR, CACEIS has developed its services and solutions in relation to the two primary pillars of the Regulation: prevention (with strengthened transaction confirmation procedures to facilitate and encourage prompt settlement) and remediation with cash sanctions. OLIS, CACEIS’ client website, will include new features to address these issues.
CACEIS will keep a close eye on developments regarding the mandatory buy-in regime in the coming weeks and months, following the review of CSDR scheduled for 2022. “We hope that amendments will result in the implementation of a more appropriate regime that will not penalise European financial market participants”, concludes Daniel Pascaud.
* AFTI: Association Française des Professionnels des Titres
EACB: European Association of Co-operative Banks
EBF: European Banking Federation
AFME: Association for Financial Markets in Europe