In our survey of the regulatory agenda at the end of last year, we anticipated that the European Commission (EC) would present proposals for amendments to the Central Securities Depositories Regulation (CSDR). The EC has now proposed those amendments; we consider them below, with particular emphasis on those relating to the settlement discipline regime (SDR).
EC Proposed Amendments to CSDR
The proposed amendments to the settlement discipline regime are the most immediately relevant for the structured finance market and are considered in detail below. The other amendments, briefly summarised, are as follows:
- Improving the passporting regime for Central Securities Depositories (CSDs) by removing costly and duplicative procedures.
- Improving cooperation between supervisory authorities by requiring the establishment of colleges for certain CSDs.
- Improving banking-type ancillary services by adjusting the conditions under which CSDs can access banking services, enabling them to offer settlement services for a broader range of currencies and offering businesses the opportunity to obtain financing from a larger pool of investors, including cross-border.
- Improving the oversight of third-country CSDs through supervisors having better information about the activities of third-country CSDs in the EU.
We wrote on the SDR at the end of last year, setting out the fundamentals of the regime and noting the temporary delay instituted in respect of the mandatory buy-in aspects. We consider below the new proposed amendments.
The proposed amendments to Article 7(2) of the CSDR provide that in situations where a settlement fail is caused by factors not attributable to the participants to the transaction or where a transaction does not involve two trading parties, such settlement fail is not subject to the penalty mechanism. It also specifies that cash penalties should be calculated either until the end of the buy-in process if the EC has adopted the relevant implementing act or until the actual settlement date, whichever is earlier.
Under a new paragraph 2a the EC may adopt an implementing act, in accordance with the examination procedure set out in Regulation (EU) No 182/2011, to apply mandatory buy-ins to certain financial instruments or categories of transactions. The EC may take that decision where it considers that those measures constitute a proportionate means to address the level of settlement fails in the EU.
A new proposed Article 7(3)(a) of CSDR sets out how a pass-on mechanism will prevent a chain of failed settlements which each require a separate buy-in process. Instead, each participant in the transaction chain will be able to pass on a buy-in notification to the failing participant so that only one buy-in will be necessary to resolve the whole chain of transactions. This pass-on mechanism can then be replicated contractually between the participants and their clients until reaching the ultimate buyers and sellers.
Article 7(4) is amended to provide that in situations where a settlement fail is caused by factors not attributable to the participants to the transaction or where a transaction does not involve two trading parties, such settlement fail is not subject to the mandatory buy-in mechanism.
An amendment to Article 7(6) introduces symmetry of payments between the buyer and the seller in case the economic terms of the transaction at execution of the buy-in differ from the original transaction. This is intended to ensure that the buy-in restores the parties to the same economic position as if the original transaction had taken place.
Article 7(11) is amended to clarify that the exemption to the settlement discipline requirements for central counterparties (CCPs) only applies when the CCP interposes itself between counterparties. It also clarifies that if CCPs incur losses from the application of mandatory buy-ins, they may establish in their rules a mechanism to cover such losses.
A new proposed paragraph 13(a) in Article 7 gives the Commission the power to suspend the buy-in mechanism for specific categories of financial instruments where necessary to avoid or address a serious threat to financial stability or to the orderly functioning of financial markets in the EU.
The CSDR proposal will now be submitted to the European Parliament and the Council for their consideration and adoption.
The EC amendments are only proposals at this stage; we continue to monitor the progress of these initiatives and domestic discussions on how CSDR should be implemented in Ireland, and will provide further updates as relevant.