Investment Operations

CSDR – Settlement discipline

Under CSDR (Central Securities Depositary Regime), the European Commission had originally proposed two mechanisms:

A cash penalty regime – Which debited the failing counterparty to a trade and credited those being failed into.

Mandatory buy-in regime – Forcing the failing counterpart to purchase the stock when at fault to deliver to the entity failed into.

Cash penalties went line in February 2022, with MBIs not actioned. After much industry lobbying, the EU agreed to re-write mandatory buy-ins as a tooling of last resort, to only be introduced if settlement rates had not improved. Consequently, they tasked ESMA with a review of the efficacy of the cash penalty regime, and whether a recalibration

was needed.

In December 2023, ESMA launched a consultation on the technical mechanism of the CSDR cash penalty regime. In it, they discussed and proposed a number of potential changes, including progressive penalties, a minimum value, assessment of asset class categories and associated penalties and more.

The IA engaged with members in responding to the consultation. We argued against making the mechanism more complex such as progressive penalties and a minimum value, noting that already the operational cost of processing cash penalties often exceeds the value of cash penalties. We championed the creation of a new ETF category, proposing a mechanism which pegged the cash penalty rates against a funding benchmark such as the ESTR. We noted the potential 600% increase in rates proposed by ESMA would likely have a negative effect, with potentially increased trading costs or lower liquidity. The IA were aligned with much of the industry in its response.

In terms of next steps, ESMA expect to publish a final report by 30th September 2024.

T+1 Settlement

Work to support members with the transition to T+1 settlement remains a key priority for the IA. Below we provide relevant updates per jurisdictions:

North America – The US will go live with a transition to T+1 Settlement by the 28th May 2024, with Canada and Mexico transitioning on the 27th May instead as they do not share the US national holiday.

In March 2023, the SEC published FAQs on the transition. The FAQs include a re-iteration on their views around extended settlement (namely that it has not been modified from the rules pre-transition, firms can leverage extended settlement but that it is intended for use in unusual or limited circumstances). The FAQs also provide further colour on scope.

The IA has been working with members to explore the challenges and potential solutions for firms in addressing the change, including on FX, fund settlement, the trade matching

on FX, fund settlement, the trade matching process and more.

UK – On the 28th March, Charlie Geffen and HMT published the UK Accelerated Settlement Taskforce report. The report makes several recommendations including that the UK should move no later than the end of 2027, should collaborate with the EU and explore aligning transition if possible and that mutual funds should move to T+2 to accommodate. The taskforce is now succeeded by a Technical Group, which will explore and recommend changes necessary to transition, as well as ultimately consider a date.

The IA will be re-canvassing member views on a potential UK transition and whether alignment with Europe should be the sole position, or whether we should recommend the UK move ahead of time should the gap be sufficiently big.

The EU – In late 2023 ESMA issued a Call for Evidence to gather stakeholder views on a potential EU transition to T+1 Settlement. The IA responded outlining the challenges and

potential solutions and calling for alignment with the UK. In March 2024, ESMA published a feedback statement outlining initial response views on the T+1 move.

Similarly on 25 January, the European Commission hosted a roundtable on shortening the settlement cycle in the EU, which included key industry stakeholders such as SEC Chair Gary Gensler and many firm CEOs. Whilst much of what was discussed was not new, it did strike a more pro-transition tone, with Commissioner Mairead McGuinness describing T+1 in Europe as a case of “when, not if”.

Whilst Europe haven’t explicitly mentioned a potential transition date, anecdotal discussion from industry suggests this could be 2028, though bullish and bearish stakeholders suggest this is too far or near respectively. Many stakeholders and associations are looking to see how they can influence and advocate for the EU and UK transition dates to match up.

EMIR Refit

EMIR Refit is a change to the existing EMIR transaction reporting regime for derivatives and brings about an expansion of the number of reportable fields from 129 to 204 (203 for Europe), with a transition in April 2024 and September 2024 for Europe and the UK respectively.

The IA is running working groups for both delegating and reporting members, to assist them as they gear up towards the April 2024 and September 2024. Member feedback suggests that most firms expect to be ready by the April 2024 date for Europe, but that they expect a not insignificant list of issues to be solved once live. Further member feedback indicates that some firms are looking to transition towards a delegating format to help solve for some of the complexity of the build.

The IA has updated a draft reconciliation good practice ahead of go-live and is working with members on making sure this reflects industry practice.

Further information:

Alex Chow
Investment Operations Policy Lead
alex.chow@theia.org

IA Website Hub Page: CSDR, Regulatory Trade and Transaction Reporting,