The European Commission is proposing that central securities depositories (CSDs) introduce fines in cases where trades are not settled on the intended settlement date. The Commission believes the rules would serve as a deterrent penalty mechanism for settlement fails. ??
The regulator is worried about the increasing number of settlement fails due to the risk they pose to the financial system and the consequences of differing settlement timeframes across Europe, which can cause “disruptions when securities are settled across border”.
It is planning to reform the settlement system by introducing a two-day settlement cycle in Europe to ensure consistency of settlement timeframes, scrapping paper-based share certificates and making electronic registration prior to securities being traded mandatory. ??
A draft of the Commission’s new settlement regulations, due at the end of November, said: “The key objective is to reduce settlement fails cross-border and to discourage any competition on risk, for instance between markets that may have different penalty systems in place.”??
According to the text, “Important barriers to the European post-trading market continue to exist, such as … the limitation of securities’ issuers access to CSDs, different national licensing regimes and rules for CSDs across the EU and limited competition between different national CSDs.”
The Commission said the current fragmentation posed risks as well as causing process inefficiencies. “As a consequence, the cross-border settlement of transactions relies on unnecessary complex holding ‘chains’ often involving several CSDs and several other intermediaries. This has a negative impact on the efficiency, but also on the risks associated with cross-border transactions,” it said.
Author: Janet Du Chenne