EFAMA supports the main objectives of CSDR to increase the safety and efficiency of securities settlement, including:
- Shorter settlement periods,
- Prudential and supervisory requirements for CSDs and other institutions providing banking services ancillary to securities settlement,
- The imposition of a penalty regime under CSDR as an important step towards improving settlement efficiency in European capital markets.
However, it should be noted that the volume of failed trades has decreased substantially in recent years and therefore parts of the proposed disciplinary sanctions set in the regulation and implementing texts are no longer proportionate to the remaining risks, especially considering the fact that firms already have, and continue to make use of existing contractual remedies to deal with settlement fails (such as buy-ins or termination rights).
Against this background, our comments in response to this Consultation Paper are essentially focusing on the following points:
- Applying the mandatory buy-in regime is likely to impact negatively the efficiency of European capital markets , leading to wider bid-offer spreads, reduce market efficiency and remove incentives to lend securities in the securities lending and repo markets, and may ultimately favour the settlement in non-EU CSDs of less liquid securities. For these reasons, we strongly advocate for the removal of mandatory buy-ins and instead opt for measures that better protect investors from being impacted by downstream issues with settlement which are out of their control and influence. Should buy-ins be considered as potential settlement measures this could only be on a voluntary basis as in many cases they can lead to unintended harmful impact.
- On a related point, we are commenting on the negative impact the mandatory buy-in regime would have on ETP primary market transactions, as an example of the need to revise the scope and application of the settlement discipline regime.
- We also invite the Commission to proceed cautiously as regards any significant amendments to the CSDR text in respect of the use of new technologies. Our main concern is that, while emerging technologies such as distributed ledger technology (DLT) offer potential efficiencies in terms of trading and settlement (e.g. ‘atomic’ settlement) as well as greater transparency, implementing significant amendments to the CSDR framework to accommodate such emerging technologies, where they remain untested on the scale at which they would have to operate in the context of wholesale financial markets, could complicate and hinder the provision of securities settlement services and the entry into force of the settlement discipline regime in the EU.
- Lastly, We seek for urgent clarification from the Commission on the proposed timeline for the legislative review of the CSDR and how that may impact the expected application of the settlement discipline regime currently foreseen for 1 February 2022 (subject to non-objection by the European Parliament and Council as regards the Commission's Delegated Act with that effect). We recommend that the industry has clarity on the final rules at least one year before entry into force because the changes that are expected in the market are significant and at least one year is needed for implementation.