EC eyes SRD II and CSDR reforms 19 October 2020Brussels Reporter: Drew Nicol
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The European Commission (EC) has offered securities finance market participants a glimmer of hope that some of their biggest regulatory bug-bears may soon be addressed as part of its action plan for developing the Capital Markets Union (CMU).
The commission has detailed its next set of key priorities and legislative initiatives on capital markets to be completed by 2023.
The scope of the CMU is vast, but the latest action plan touches upon some very specific sore points for securities finance markets, namely the Central Securities Depositories Regulation (CSDR) and the Shareholders Rights Directive (SRD), which was updated to its second form on 3 September.
A key aspect of CSDR is the settlement discipline regime, which is designed to support the Target2-Securities initiative by introducing mandatory buy-ins and cash penalties to encourage participants to improve settlement rates.
The regime has been plagued with issues — including a persistent lobbying effort by industry bodies flagging the potentially catastrophic consequences of its introduction — which have culminated in a second 12-month delay meaning it will now not see the light of day before February 2022, if at all.
As part of the EU’s action plan, the commission is committed to a review of the regulation, although the investigation, which will not be completed before Q4 2021, will only focus on the CSD passport (a CSD’s licence to offer services across the EU) and conditions for CSDs and credit institutions to provide bank-like ancillary activities.
Before this review can take place however the commission must conduct a consultation with industry stakeholders and the European Securities and Markets Authority (ESMA). The scope of this consultation was recently expanded to include a discussion on all aspects of CSDR, including the regime.
This opens the door to the most outspoken reform advocates, such as the International Capital Market Association (ICMA) and the Association for Financial Markets in Europe, to repeat their concerns once again and, they hope, begin a dialogue for meaningful change that pleases all parties.
The outreach effort was meant to take place last year but was bumped due to the hectic regulatory schedule. It is now expected to take place before the end of the year.
Similar to CSDR, those in-scope for SRD II were ringing loud alarm bells on its several defects long before it came into effect in September.
Chief among these shortcomings is the fact it’s a directive and not a regulation, meaning it must be interpreted by each of the 27 EU member states.
This is particularly pertinent to the definition of key terms, such as ‘shareholder’. Unsurprisingly, in the immediate aftermath of go-live, market commentators highlighted that 27 slightly different definitions of a stakeholder now existed across the bloc.
To address this directly, the CMU action plan references the “possibility of introducing an EU-wide definition of shareholder”.
The catch is that this was originally earmarked for completion by June 2022 but thanks to the pandemic disruption a legislative proposal to this effect may not appear until Q3 2023.
In addition, the EU also wishes to clarify rules on the corporate actions process, and the analysis of potential national regulatory barriers to the use of technology to facilitate communication between issuers and shareholders that will be taken forward by Q4 2021.
Market sources described the plan as “promising” but were unwilling to celebrate until proof of the EU’s commitment to the task was clear.
This extract is from a full review of the recent CMU action plan that appeared in the latest issue of SLT.
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