On 1 February 2022, the Central Securities Depositories Regulation (CSDR)’s Settlement Discipline Regime (SDR) finally came into force – following two major changes to the deadline, which together amounted to a delay of nearly two and a half years.

The SDR affects all actors in the securities lifecycle, from investors to central securities depositories (CSDs), aiming to improve the safety and efficiency of securities settlement in the European Economic Area (EEA). To achieve this, the SDR introduces a set of measures to prevent and address failures in the settlement of securities.

These include a series of operational discipline measures designed to minimise settlement failures, such as stronger reporting requirements to encourage more timely and accurate information flow, and tighter inventory management controls. Where settlement fails do occur, they will now be subject to SDR’s cash penalties, depending on the reason for the failure and the size of the transaction.¹

One measure, however, was conspicuous by its absence when the regulation finally entered into force, following significant amendments to the original plan just a few months before implementation.

In a statement published in December 2021, ESMA called for “urgent change in CSDR to allow postponing the application date of the buy-in regime”.² This refers to initial plans to enforce a mandatory buy-in for market participants that fail to settle their trades within a set period. Throughout the Covid-19 period, the industry has been rallying for just such a delay to the implementation of these rules – with some participants even arguing that the rules should be made voluntary.³

The industry is now awaiting confirmation of the details of the postponement, including how long it will last – though informal indications point to a delay of two to three years.⁴ The official announcement, however, will involve a regulatory amendment – and it is unclear how long this will take.⁵

"The implementation of CSDR penalties has gone relatively smoothly so far across the industry participants"
Mike Clarke, Global Head of Product Management, Securities Services at Deutsche Bank

Despite the noise in the industry, it is expected that the European Union’s legislators will still proceed with the introduction of a buy-in regime, likely through the previously announced CSDR refit scheduled for April 2022 – a pre-planned revision of the rules to adjust and correct them based on monitoring and feedback. There is hope within the industry that this process will see the buy-in rules benefit from meaningful revision and clarification of scope.⁶

So far, the response from market participants suggests that the implementation has gone relatively smoothly, despite a November 2021 poll of market participants conducted by the Securities Finance Times, which found that just 21% of respondents considered themselves completely ready or almost ready for the transition.⁷

“The implementation of CSDR penalties has gone relatively smoothly so far across the industry participants, albeit with some small challenges in the timing of daily reporting,” reflects Mike Clarke, Global Head of Product Management, Securities Services at Deutsche Bank. He continues, “As penalty regime beds in, the key test of the success of the regulation will be how participants in the value chain can use available settlement efficiency measures to ultimately reduce fails and minimise penalties.”

The reception has not been universally positive, however, with Pardeep Cassells, Head of Financial Products at AccessFintech, highlighting concerns of market participants having to deal with “duplication and straightforward miscalculation”.⁸

Whether these issues will come to light more as the reality of cash penalties hits home, or whether firms will be able to tighten their processes to better adapt to the new requirements, remains to be seen.

Between this and the potential reintroduction of mandatory buy-in rules, there is still plenty to watch out for in the SDR space.

Sources

¹ See https://bit.ly/35hAhhT at corporates.db.com
² See https://bit.ly/3JRPjtC at esma.europa.eu
³ See https://bit.ly/3IjzOu3 at securitiesfinancetimes.com
⁴ See https://bit.ly/3shVHoi at simmons-simmons.com
⁵ lbid.
⁶ See https://bit.ly/3JPfxNp at assetservicingtimes.com
⁷ See https://bit.ly/3Haf86F at securitiesfinancetimes.com
⁸ lbid.