The European Securities and Markets Authority has launched a consultation to assess industry reaction to potential changes to cash penalty procedures under the Central Securities Depositories Regulation (CSDR).
These proposed changes would allow central securities depositories (CSDs) to collect and distribute all forms of penalties for failed settlement under the CSDR settlement discipline regime, including penalties for centrally cleared transactions.
Under the current regime, which was enacted in February 2022, cash penalties applied to settlement fails for centrally cleared transactions are collected and distributed by central counterparties (CCPs).
Respondents have been asked to submit their input to the consultation process before 9 September 2022.
ESMA expects to publish a final report analysing the consultation findings, along with revised regulatory technical standards (RTS), before the end of the year.
“More than five months after the implementation of the cash penalties under CSDR and difficulties still remain when it comes to the timely calculation, reconciliation and distribution of penalties, ” says Daniel Carpenter, CEO of Meritsoft, a Cognizant company.
He adds, “One of the primary reasons for this is the workaround and legacy system approach being used to pull together the settlement fail data for reconciliations, let alone calculations.
Any solution put forward in response to this consultation from ESMA requires resources be allocated to implement an industrialised fails management platform that aggregates and pools relevant settlement information in a centralised location, enabling automation of the multiple stages required for more efficient calculation, and then distribution of penalties where applicable.”
Philip Flood, global business development director at Gresham Technologies says, “Ultimately, the key to success for CSDR is the cash penalties working effectively and the introduction of best practises industry wide to ensure settlement is efficient and as safe as possible.
Firms responding to this consultation will need to review their processes and frameworks as a whole to limit failed trades that could attract penalties from CSD’s. Automation (STP) for post trade capture, data quality, controls around reconciliations and exception management will all play an important part of the success.”
Last month, the European watchdog postponed the application of the mandatory buy-in regime for another three years.
Market participants had conveyed concerns over “serious difficulties” to implement the mandatory buy-in regime on the scheduled date — which has been repeatedly postponed since 13 September 2020.
These difficulties referred to “the absence of clarity regarding some open questions necessary for the implementation of the buy-in requirements”.
The postponement is expected to allow the European Commission and the co-legislators additional time to determine the best way forward to improve settlement efficiency while avoiding potential duplicative implementation costs for market participants in case extensive changes would be made to the existing buy-in measures.
