Investment Operations

CSDR - Central Securities Depositary Regulation

With almost a year since go-live of CSDR’s settlement discipline regime, there remains live issues and advocacy topics to resolve going into 2023. The settlement discipline regime includes cash penalties, which went live in February 2022 and mandatory buy-ins (MBIs), which theoretically went-live at the same time but were effectively delayed by an ESMA no-action letter followed by a formal 3-year delay.

Mandatory buy-ins (MBIs)
In March 2022, the European Commission published CSDR Refit, outlining an approach to amend legislation whereby cash penalties are applied through settlement discipline in the first instance, with scope for mandatory buy-ins to be applied should cash penalties not achieve a set of 3 conditions including a

“continuous reduction of settlement fails in the Union”. Following this report, the European Central Bank issued their own opinion calling for the removal of mandatory buy-ins altogether. Since then, the European Parliament and Council have been forming their own negotiating positions on the proposal. Early indications are that Parliament and Council will position such that MBIs will have a very high threshold for entry into force, but will not be removed altogether.

The IA has been working with members and collective trade associations to continue advocating for mandatory buy-ins to be removed from scope altogether, including notes to the Council and Parliament outlining views on their initial draft negotiating positions and reoutlining the industry shared arguments against mandatory buy-ins.

Cash penalty implementation

Cash penalties went live in February 2022 with issues down the settlement chain. CSDs faced delays which were then exacerbated through custodians into delays and incorrect reporting.

This has slowly been improving through the year, though some timeliness issues remain. The IA are continuing to work with members and wider market stakeholders on market practices for intermediaries processing cash penalties.

The IA have been working with members and EFAMA to advocate for a cash penalty de-minimis, a value below which cash penalties are not processed by the CSD. Although there is broad support across European buy-side firms for a de-minimis, this is not necessarily shared by the wider industry. Outreach has been made to European Council and Parliament members, though receiving their consideration is challenging, with political focus prioritising mandatory buy-ins.

T+1 Settlement

The US continues to discuss a reduction from a T+2 settlement cycle down to T+1, citing a reduction of capital requirements and counterparty risks as benefits. The IA has been working with members to discuss the implications of the US moving to T+1, and the challenges this places on various parts of the

trading and post-trade workflow such as the fund settlement lifecycle, FX, funding and the securities lending flow.

The IA has also been liaising with the UK legislators, who had been in the early stages of considering their own position as it comes to T+1 settlement. Together with members, they met with contacts at HMT to put across initial views and concerns. Following this, the Government published the Edinburgh reforms including the establishment of an Accelerated Settlement Taskforce led by Charlie Geffen. The IA has engaged on the creation of the taskforce and will look to further connect members with the taskforce as we consider advocacy around T+1 settlement in UK markets.

EMIR Refit

The EU and UK have re-written their EMIR reporting requirements looking to expand the number of reportable fields up from 129 to 203, including the creation of new fields and amendments to the existing ones. ESMA had drafted these requirements in December 2020, but these had only been adopted by

European Commission in October 2022. With an 18-month implementation period, the legislation specifies a go-live date of the 29^th April 2024. ESMA in December 2022 further published their level 3 guidelines for reporting, which include validation rules, principles for reporting and example reports.

The UK has yet to publish their own version of EMIR, though the IA has been engaging with the FCA and understand that they expect to publish a policy statement in Q1 2023 and anticipate a go-live date of 30^th September 2024. The FCA have further indicated that they expect to work with market participants on L3 documentation. Although the UK and EU re-writes of EMIR have matching fields, we will be reviewing any differences with members.

The IA will be working with members and other trade associations such as ISDA to review the changes and explore where they can assist members.

Further information:

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

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