ESMA recommends European Commission to delay controversial buy-in rules

Delay suggested to avoid a collision with the final EC legislative proposal for the review of CSDR and the expected entry into force of the current CSDR settlement discipline regime.

The European Securities and Markets Authority (ESMA) has written to the European Commission (EC) urging it to consider a delay of the mandatory buy-in regime under the Settlement Discipline Regime (SDR) currently scheduled for 1 February 2022.

The move will come as a relief to market participants and the numerous trade associations who have lobbied against the rules under the Central Securities Depositories Regulation (CSDR) in recent years, though a delay would still fall short of their hopes for a scaling back of the rules.

If accepted by the EC, the delay would mark the latest in a string of regulatory delays in Europe, following the impact of the COVID-19 pandemic. ESMA is pushing the EC for a decision on the buy-in rules by the end of October.

ESMA is in favour of delaying the entry into force of the buy-in requirements while applying the other settlement discipline requirements, such as settlement fails reporting and cash penalties regime, as planned.

ESMA stated that carrying on with the implementation of these two components as scheduled will positively contribute to improving settlement efficiency and the transparency around it in the EU.

The final EC legislative proposal for the review of CSDR is expected by the end of the year, which could possibly include changes to the buy-in regime.

In respect to the buy-in regime, ESMA notes two challenges. One being the absence of clarity in respect to some open questions necessary for the implementation of the buy-in requirements.

In addition, the second challenge ESMA highlights is the lack of certainty regarding whether the EC’s legislative proposal will include changes to the mandatory buy-in rules and the extent of any of those possible amendments.

Market participants’ ability to implement the regime will be directly impacted by these challenges and they may face increased costs due to changing their systems and processes later to align with potential amendments of buy-in rules.

ESMA therefore said it considers it important that ample time is provided for the CSDR review to properly consider the mandatory buy-in framework as a part of settlement discipline.

In June 2020, the UK Treasury confirmed it would not implement the settlement discipline regime (SDR) – which includes the controversial buy-in regime – as UK regulators continue to break away from EU-led legislation. 

This is the second recommendation given by ESMA to the EC this year. In May, ESMA called for the EC to expand scope of CSDR, suggesting the scope of the rules should include oversight of T2S and of third-country CSDs operating settlement services in the EU.

Additionally, in June, the EC said it will consider implementing changes to the penalty regime set out under the CSDR, in the wake of industry-wide calls for regulators to review the rules.