ESMA proposals are disproportionate and unjustified, says ICMA
12 March 2024 US
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The International Capital Market Association (ICMA) has branded proposals from the European Securities and Markets Authority (ESMA) on CSDR penalties as “disproportionate and unjustified”.
The association published the remarks in a briefing note responding to ESMA proposals to increase the penalty rates for settlement fails, as well as introducing “progressive penalties” that increase every day of the fail.
ICMA analysed the Central Securities Depositories Regulation (CSDR) proposals in the context of the causes of settlement fails, the “natural cost” of failing and behavioural incentives for timely settlement.
The briefing argues that, if implemented, the proposed penalty recalibrations would undermine the competitiveness and credibility of the EU as a global financial marketplace.
Furthermore, the extreme distortions that they would bring about may incentivise adverse market behaviour, as being failed would become economically more appealing than facilitating settlement.
This would then feed into bid-ask spreads across all bond classes, says ICMA, as well as adversely impairing liquidity.
ICMA points to the US Treasury Markets Practices Group penalty framework as an example of a penalty mechanism that is appropriately designed and calibrated.
It argues that, unlike ESMA, it achieves its purpose of disincentivising poor settlement behaviour in low interest rate environments.
The association published the remarks in a briefing note responding to ESMA proposals to increase the penalty rates for settlement fails, as well as introducing “progressive penalties” that increase every day of the fail.
ICMA analysed the Central Securities Depositories Regulation (CSDR) proposals in the context of the causes of settlement fails, the “natural cost” of failing and behavioural incentives for timely settlement.
The briefing argues that, if implemented, the proposed penalty recalibrations would undermine the competitiveness and credibility of the EU as a global financial marketplace.
Furthermore, the extreme distortions that they would bring about may incentivise adverse market behaviour, as being failed would become economically more appealing than facilitating settlement.
This would then feed into bid-ask spreads across all bond classes, says ICMA, as well as adversely impairing liquidity.
ICMA points to the US Treasury Markets Practices Group penalty framework as an example of a penalty mechanism that is appropriately designed and calibrated.
It argues that, unlike ESMA, it achieves its purpose of disincentivising poor settlement behaviour in low interest rate environments.
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