European Commission considers changes to CSDR penalty regime

With seven months to go until the go-live of SDR, participants have grown increasingly worried they will be unable to make changes to operations to meet the rules.

The European Commission has said it will consider implementing changes to the penalty regime set out under the Central Securities Depositories Regulation (CSDR), in the wake of industry-wide calls for regulators to review the rules. 

In a report on CSDR, the European Commission acknowledged industry feedback that the Settlement Discipline Regime (SDR) – specifically the rules around mandatory buy-ins – could result in unintended consequences on costs and liquidity. 

“It is appropriate for the Commission to consider proposing certain amendments, subject to an impact assessment, to the settlement discipline framework, in particular the mandatory buy-ins, to make it more proportionate and avoid potential undesired consequences,” the Commission said in the report.

However, the Commission did outline that a few stakeholders were in favour of mandatory buy-ins, arguing that: voluntary buy-ins today do not incentivise the optimisation of back-office procedures that can also cause settlement fails; there will be significant hesitation to execute voluntary buy-ins against large market participants; and they have already made significant investments to comply with the framework.

Timings of any potential changes were not outlined and any legislative changes to the rules will not be published until the fourth quarter of this year. 

With just seven months to go until the go-live of SDR, market participants have grown increasingly worried that they will be unable to make the necessary changes to their operations to meet the rules under the current timeline. 

For asset managers and other buy-side firms that seek to use a broker, custodian or a third-party vendor to manage their CSDR compliance, time is running out to finalise their relationships and be ready for the go-live of the regulation. 

The report has been welcomed by trade bodies such the Association of Financial Markets in Europe (AFME), but it has urged regulators to take serious action to separate the buy-in regime with the other aspects of the regulation.

“It is helpful that the Commission has stated its intention to consider amendments to the mandatory buy-in regime, subject to an impact assessment. Given that amendments may now be made at a later date, it does not make sense for the current rules to be implemented and enforced on 1 February 2022,” said Pete Tomlinson, director of post-trade at AFME.

 “AFME strongly recommends that the Commission and ESMA take action to decouple the implementation of the mandatory buy-in rules from all other aspects of the settlement discipline regime. This would allow other measures, such as the penalties regime, to take effect as planned in February 2022, but avoid implementation of the current buy-in rules, which have been widely acknowledged as being flawed.”