Regulators in ‘advanced talks’ to delay Settlement Discipline Regime to February 2022

Advanced discussions are underway among EU regulators to propose a delay, The TRADE understands, though confirmation of this could still be months away.

European regulators are set to table a proposal to push the controversial Settlement Discipline Regime (SDR) back to February 2022, a move that would be hugely welcomed across the capital markets, The TRADE understands. 

The move would mean pushing the implementation date back by a further year after the European Commission already granted an extension back from September 2020 to February 2021.

Approval of the delay would still take time given it would have to go through three stages of European governing-level rubber stamping via the Commission, Council and Parliament.  

A note, seen by The TRADE’s sister publication Global Custodian, was distributed by Euroclear at the end of last week with news of the potential delay, while other sources also confirmed the move at top European regulatory level.

In the note, Euroclear said it understands that discussions are “advanced”, regarding a proposed one year delay to the entry into force of the Settlement Discipline Regime. The post-trade services provider added that it expects that ESMA will publish an amendment proposing the delay, after the summer holiday period.

Talk of the move comes just one month after the UK said it would not roll out the rules following Brexit, which penalise settlement fails and enforce mandatory buy-ins. Meanwhile, industry associations have continued to lobby against the regulation which many believe will have significant unintended consequences for the market. 

While a delay would appease these groups somewhat, the buy-in regime remains one which the industry largely opposes to in its entirety. In a letter signed by over a dozen associations in January, the consortium asked for the practice to become discretionary, highlighting extreme concerns about the impact on market liquidity, operational processes, and ultimately, end investors if implemented in its current format. 

Within the requests was also a call for a deferral until the effects of penalties and other measures to promote settlement efficiency are implemented.  

The response to this letter all-but seemed to take any wholesale changes and a delay off the table, when the European Securities and Markets Authority (ESMA) rejected the calls for changes and delays to critical elements of rules, despite the urgency from the consortium of trade bodies. 

Within the letter , ESMA denied a postponement or an alteration to make buy-ins discretionary. “It is premature to consider further action at this point in time, in the absence of concrete evidence following the implementation of the buy-in requirements,” said ESMA, adding that the mandatory nature of the buy-in regime was a “clear policy choice by the co-legislators when adopting the CSDR” and is meant to protect the securities buyers. 

While ESMA already pushed the regulation back from September 2020 to February 2021, this was to help market participants transition to new ISO messaging protocols and the TARGET2 Securities (T2S) penalty mechanism, which focuses on the daily calculation and reporting of penalties for settlement fails, which are both set to be released in November 2020.

While this was already a controversial regulation for the capital markets, the global pandemic added to the growing list of problems participants were facing in preparing for the regulation. Subsequently, the European Central Securities Depository Association (ECSDA) also weighed in during June, asking the European Commission to reconsider delaying the buy-in regime to avoid a potential bottlenecking of post-trade IT projects for the industry caused by COVID-19.