CSDR Refit: The European Commission formalises proposals for amendments
On 16 March 2022, the European Commission (EC) published its draft revision of the CSDs Regulation (CSDR 909/2014).
This proposal follows the publication in the summer of 2021 by the EC of a report containing the various contributions to the consultation conducted at the end of 2020; at that time, six domains were selected by the EC as subject to change (see Flash News).
Even if the revision of CSDR covers different parts of the text, it is obviously on the settlement disciplines that all eyes are focused. And a conclusion must be drawn: the EC has considered the many comments and concerns that the industry has regularly raised through the professional associations as well as the suggestions submitted by ESMA (see Flash News).
Concerning the most problematic measure because of its strongly negative consequences, namely the obligation to initiate a buy-in for any failing settlement, the new version of CSDR conditions its implementation to at least one of these three criteria:
the application of the penalties alone does not allow a satisfactory improvement of the settlement on the correct date,
the settlement rate is lower than what can be observed in other regions,
the suspension rate may impact/impacts the Union’s financial stability
The EC is also reviewing the scope of application of the mandatory buy-in. This would no longer apply in cases where the “settlement fails are caused by factors not attributable to the participants to the transaction or for operations that do not involve two trading parties”. Another important point, the text introduces the so-called “pass-on” mechanism to avoid triggering unnecessary buy-ins. Finally, the mandatory buy-in could be limited to types of financial instruments or transactions or could be suspended in case of a major impact on the functioning of the markets.
The penalty regime would also be amended since, like the mandatory buy-in, settlement fails that are “caused by factors not attributable to the participants to the transaction” or are related to “operations that do not involve two trading parties” become “out of scope”.
ESMA is mandated to propose to the EC delegated acts clarifying the new settlement discipline regime.
If we make a few additional changes to the above revisions, most of the questions which remain open with ESMA / the EC should find answers. However, the EC did not take advantage of this revision to require the buyer to initiate the buy-in from Level 1. On the contrary, the receiving participant remains the one who is responsible and becomes part of the "pass-on" mechanism. The transfer of responsibility from the participant to the final purchaser would therefore continue to be a matter of delegated regulation.
The text will now be examined by Parliament and the Council. In parallel, a public consultation is open until 19 May.