Shearman & Sterling LLP | FinReg | European Securities and Markets Authority Provides Regulatory Forbearance for EU CSDR Buy-In
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  • European Securities and Markets Authority Provides Regulatory Forbearance for EU CSDR Buy-In

    The European Securities and Markets Authority has issued a public statement on the supervisory approach to the implementation of the buy-in regime under the EU Central Securities Depositories Regulation. The EU CSDR provides a harmonized regulatory and prudential regime for central securities depositories and increases the robustness and resilience of securities settlement arrangements. The settlement discipline regime is set out in EU Regulatory Technical Standards. The RTS cover measures for preventing settlement fails through automated matching, a hold and release mechanism and partial settlement. CSDR and the RTS also provide measures for monitoring and addressing settlement fails, such as a mechanism for cash penalties and a mandatory buy-in process. The application date of the settlement discipline rules has been postponed several times, most recently, citing the coronavirus pandemic, to delay the application date to February 1, 2022.

    The Commission consulted in 2020 on proposals to improve securities settlement in the EU and on central securities depositories, and legislative proposals are expected in Q1 2022. ESMA highlighted, in a letter sent to the Commission in September 2021, the need for clarity on the timing of the settlement discipline regime and confirmed its support for the buy-in regime to be delayed beyond February 1, 2022, because of ongoing uncertainties about the regime, including whether any amendments will be made in the Commission's upcoming legislative proposal.

    In this statement, ESMA refers to the agreement of the EU legislators to changes to CSDR in the proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (known as the "DLT pilot regime"), which will allow for a deferral of the mandatory buy-in provisions. Noting that the DLT pilot regime Regulation will not enter into force before the CSDR provisions are due to apply, ESMA states that EU national regulators should not prioritize any supervisory action for the CSDR buy-in regime. Instead, national regulators should encourage CCPs to continue to apply the settlement discipline arrangements implemented in compliance with the EU Short Selling Regulation.

    In summary, the new fining regime for late settlements under CSDR will still come into force in February 2022 but the mandatory buy-in regime is being postponed. Prior to that postponement being finalized, regulatory forbearance for non-compliance has been offered.

    The U.K. government on-shored the CSDR into U.K. law after Brexit, but the T+2 settlement, penalty and buy-in rules under U.K. CSDR were abandoned. This was decided on the basis that there will be a "market solution," which means that industry will still need to promote more effective settlements and buy-in. Following the U.K.'s decision not to implement the buy-in rules, there are questions about whether the EU will follow through with the remaining elements of the settlement discipline regime which have now been postponed, and in what format.

    You may also like to see details on related developments, such as the ESMA's recommendations for reforms of CSDR, and the European Commission's consultation on CSDR.

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