Industry stakeholders have arrived at the last chance saloon to convince the European Commission to concede meaningful changes to the Central Securities Depositories Regulation’s (CSDR) settlement discipline regime, which is widely-considered to be unworkable.
The European Commission has today opened a consultation with industry stakeholders on the regulation, including the controversial regime, which will usher in mandatory buy-ins and cash penalties for settlement failures for the first time to securities financing markets.
Trade bodies, including the International Capital Market Association (ICMA), the International Securities Lending Association, and the International Swaps and Derivatives Association, among many others, have long warned that the mandatory buy-in rules would upend the market dynamic and could cause far more instability than currently exists.
More recently, European regulators were warned that, had the regime been in place during the market turmoil provoked by COVID-19, the mandatory buy-in requirement would have significantly exacerbated the ordeal for firms struggling to settle transactions.
Implementation of the regime has been repeatedly pushed back due to technical issues and other red flags raised by stakeholders and is now due in February 2022 — although a further delay is expected.
The CSDR consultation document shared with the industry includes 42 questions, six relating directly to reviewing the regime, and offers stakeholders a final chance to lay-out their concerns before the regulation is implemented.
The main barrier to amending the regime in the face of a comprehensive breakdown of its shortcomings has always been the fact it is baked into the level one text of the regulation meaning even mild amendments require a significant rewrite of the regulatory technical standards underpinning the framework.
The commission has previously batted-away the market’s concerns around the regime, but appears to have softened its stance.
The six questions on the regime offer respondents several possible amendments that could be made, although it is not committed to enacting any of them.
Suggested amendments include, scrapping the mandatory element of the buy-ins rules, introducing a pass-on mechanism, eliminating the asymmetry in the reimbursement for changes in market prices, or other making other changes.
A section is also dedicated to considering revising the need to assign buy-in agent, which is “potentially extremely problematic” according to ICMA, as only one in the market is Eurex Securities Transactions Services, which is owned by Deutsche Boerse.
Industry stakeholders have until 2 February 2021 to fill in the online questionnaire.
A report on the responses with any proposed amendments to CSDR will be published by the commission in Q2 next year.
However, market observers are already flagging that this timeline would likely mean the final amendments would not be in place until Q4 2021 leaving little-to-no-time for market participants to make the necessary changes to their systems aimed at compliance with CSDR.
In lieu of a further delay, a no-action letter is expected to be published by the European Securities and Markets Authority, advising national regulators to offer forbearance for a period until those in-scope for the regime are able to get their houses in order.
This strategy was employed at the beginning of the year to ensure the Securities Financing Transactions Regulation to come into force in April on schedule but also allow first-phase entities until the phase-two rollout in July to begin reporting transactions.
SFT understands that trade bodies are already gearing up to call for a no-action letter to be issued if one does not appear to be forthcoming from European regulators next year.
The length of the forbearance period is likely to be linked to the scale of the amendments accepted.
However, the concerns have also been raised that, aside from the technical lift needed to comply with the regulation, the legal work needed to repaper contracts to be inline with the rules is so mammoth that the market simply cannot be ready for February.
