ESMA finalises technical advice on CSDR penalty mechanism
20 November 2024 EU
Image: Anan/stock.adobe.com
The European Securities and Markets Authority (ESMA) has published its final report on the technical advice for the European Commission on the penalty mechanism under the Central Securities Depositories Regulation (CSDR).
This comes after a public consultation on the effectiveness of the current penalty mechanism in discouraging settlement fails, running until February 2024.
Alongside a detailed summary of industry feedback, the report also includes ESMA鈥檚 advice, which aims to incentivise all actors in the chain to improve settlement efficiency, following the recent proposal on the EU move to T+1.
鈥淎 low level of settlement fails is essential in light of the ongoing discussions about a potential shortening of the settlement cycle in the EU,鈥� says ESMA.
CSDR includes a set of measures to prevent and address settlement fails, consisting of reporting requirements, cash penalties for participants, and mandatory buy-ins.
While ESMA has seen a decrease in settlement fails since the application of cash penalties in February 2022, certain asset classes, particularly ETFs, are still associated with high levels of settlement fails.
The authority notes: 鈥淎lthough settlement fails cannot be totally eliminated, persistent settlement fails negatively affect the functioning and competitiveness of the capital markets and contradict the objectives of the Savings and Investments Union, which aims to improve the functioning of market infrastructures across the EU.鈥�
The report outlines ESMA鈥檚 advice to improve the application of the CSDR penalty mechanism, including the treatment of historical reference prices for the calculation of late matching fail penalties, as well as the design and level of the penalty rates for each asset class.
While introducing an overall moderate increase in the penalty rates, the EU鈥檚 financial market regulator and supervisor proposes to maintain the design of the current penalty mechanism.
In the absence of an overnight interest credit rate due to the monetary policy of the central bank issuing the settlement currency, ESMA advises using other comparable interest rates of the European Central Bank and the relevant central bank to calculate a proxy which a CSD can use to calculate the cash penalties due to lack of cash.
ESMA believes that cash penalties can continue to have an overall positive impact on settlement efficiency, adding: 鈥淪ince its application in February 2022, the penalty mechanism under the CSDR has improved settlement efficiency in the EU by ensuring that participants failing to deliver securities or cash by the intended settlement date incur a penalty.鈥�
The European Commission will consider ESMA鈥檚 technical advice when amending the 鈥楥ommission Delegated Regulation (EU) 2017/389鈥�.
The revised penalty mechanism will become applicable once the amended regulation has been adopted by the commission, scrutinised by the European Parliament and the Council of the EU, and published in the EU Official Journal.
This comes after a public consultation on the effectiveness of the current penalty mechanism in discouraging settlement fails, running until February 2024.
Alongside a detailed summary of industry feedback, the report also includes ESMA鈥檚 advice, which aims to incentivise all actors in the chain to improve settlement efficiency, following the recent proposal on the EU move to T+1.
鈥淎 low level of settlement fails is essential in light of the ongoing discussions about a potential shortening of the settlement cycle in the EU,鈥� says ESMA.
CSDR includes a set of measures to prevent and address settlement fails, consisting of reporting requirements, cash penalties for participants, and mandatory buy-ins.
While ESMA has seen a decrease in settlement fails since the application of cash penalties in February 2022, certain asset classes, particularly ETFs, are still associated with high levels of settlement fails.
The authority notes: 鈥淎lthough settlement fails cannot be totally eliminated, persistent settlement fails negatively affect the functioning and competitiveness of the capital markets and contradict the objectives of the Savings and Investments Union, which aims to improve the functioning of market infrastructures across the EU.鈥�
The report outlines ESMA鈥檚 advice to improve the application of the CSDR penalty mechanism, including the treatment of historical reference prices for the calculation of late matching fail penalties, as well as the design and level of the penalty rates for each asset class.
While introducing an overall moderate increase in the penalty rates, the EU鈥檚 financial market regulator and supervisor proposes to maintain the design of the current penalty mechanism.
In the absence of an overnight interest credit rate due to the monetary policy of the central bank issuing the settlement currency, ESMA advises using other comparable interest rates of the European Central Bank and the relevant central bank to calculate a proxy which a CSD can use to calculate the cash penalties due to lack of cash.
ESMA believes that cash penalties can continue to have an overall positive impact on settlement efficiency, adding: 鈥淪ince its application in February 2022, the penalty mechanism under the CSDR has improved settlement efficiency in the EU by ensuring that participants failing to deliver securities or cash by the intended settlement date incur a penalty.鈥�
The European Commission will consider ESMA鈥檚 technical advice when amending the 鈥楥ommission Delegated Regulation (EU) 2017/389鈥�.
The revised penalty mechanism will become applicable once the amended regulation has been adopted by the commission, scrutinised by the European Parliament and the Council of the EU, and published in the EU Official Journal.
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