The European Commission has released an interim report on the Central Securities Depository Regulation (CSDR) to the European Parliament and European Council.
This follows a targeted consultation process which ran from 8 December 2020 to 1 February 2021, to which 91 stakeholders responded.
The report indicates that the Commission will consider proposing a REFIT legislative review of CSDR subject to an impact assessment.
This impact assessment is expected to run during the second half of 2021.
The Commission finds that, in broad terms, CSDR is meeting its original objectives to boost settlement efficiency in the EU and to promote the stability and resilience of CSDs.
Respondents to the consultation process highlighted weaknesses in specific rules embedded in CSDR, including those relating to cross-border provision of services, the operating framework for third-country CSDs, and access to central bank money.
The Commission recognises some of these issues need to be resolved and it indicated in its CMU Action Plan, adopted in September 2020, that it will consider amendments to improve cross-border provision of services.
Significantly, the Interim Report concludes that it is appropriate, subject to the impact assessment, to consider proposing amendments to the settlement discipline framework, and particularly to mandatory buy-in rules, under CSDR. These are due to take effect on 1 February 2022.
The report says that the settlement discipline rules in CSDR attracted most attention from respondents during the targeted consultation, with almost all respondents providing feedback.
These rules will introduce cash penalties for CSD participants that are responsible for a failed settlement. Mandatory buy-in procedures will be applied when a CSD participant fails to deliver a security within the required timeframe (i.e. within a fixed extension period).
The Commission proposes that amendments to these settlement discipline rules may be necessary to make them “more proportionate and to avoid undesired consequences”.
Reflecting on feedback from the market during the Consultation Process, the Interim Report reveals that the vast majority of respondents believe that buy-in rules should be reviewed, with a sizeable majority stating a preference for voluntary buy-ins rather than mandatory buy-ins.
Respondents indicated that mandatory buy-ins would reduce market liquidity, add to costs for investors and place EU CSDs at a disadvantage when competing with third-country CSDs that are not obliged to comply with these rules.
Most respondents said that mandatory buy-ins would have had a negative effect on market operations during the market disruption triggered by the Covid-19 pandemic.
The Interim Report also proposes that clarification may be required for cash penalty rules.
The European Parliament, in debating the development of the Capital Markets Union, has also invited the Commission in a resolution of 8 October 2020 to review the settlement discipline regime in the context of Brexit and the Covid-19 pandemic.
