CSDR consultation: EACH calls for delays to settlement discipline regime
03 February 2021 Brussels
Image: Soho_A_studio/adobe.stock.com
The European Association of CCP Clearing Houses (EACH) has called for a revision to the date of entry into force of the Central Securities Depositories Regulation’s (CSDR) settlement discipline regime (SDR) in its responses to the European Commission’s consultation.
The commision opened itself up to feedback on the regulation’s terms in December with a deadline for comment of 2 February.
The consultation is believed to be the last chance for trade bodies and other stakeholders to convince EU regulators that the SDR is not fit for purpose and must be significantly altered before it’s belated go-live in February 2022.
In its response, EACH explains that a delay to CSDR’s SDR would provide market infrastructures and other market participants sufficient time to implement and would also avoid unnecessary duplicative implementation costs.
EACH says it remains “concerned” that the market may be implementing an SDR that may experience significant change due to this consultation, leading to “sunk costs and the implementation of redundant technology”.
In order for the market to comply with the SDR by 1 February 2022, EACH recommends the EC provide an indication on the extent of the changes, should there be any, and the implementation timeline by the end of March 2021.
Certain market participants, such as the International Capital Markets Association (ICMA), are advocating a delay only for the buy-in element of SDR to be scrapped.
ICMA’s response argues that buy-ins, whether regulatory or contractual, should be discretionary and not mandatory.
Mandating buy-ins will have adverse impacts for European bond market efficiency and liquidity, ICMA says, noting that a significant body of evidence suggests it will ultimately lead to increased costs for market participants and particularly end investors.
Meanwhile, in a joint response from the International Swaps and Derivatives Association (ISDA), the Futures Industry Association (FIA) and the FIA European Principal Traders Association (FIA EPTA), the associations outline concerns about detrimental effects arising from the application of the CSDR mandatory buy-in regime for the derivatives markets.
The associations also request the EC and co-legislators to clarify whether the mandatory buy-in requirements of the CSDR SDR do not apply in the context of margin transfers, physically settled derivatives and emission allowances.
If the EC follows the recommendations for a delay only to buy ins, EACH requests that the commission keeps the Short Selling Regulation (SSR) in force until buy-ins can be implemented.
The association asks that any delays in the entry into force of CSDR SDR provisions are applied equally to the full market — both the cleared and uncleared space — to prevent an unlevel-playing field.
Elsewhere, EACH has suggested there be an adjustment of CSDR to ensure the buy-in regime can be implemented by reflecting the real functioning of central clearing counterparties (CCPs) where there is no such thing as a ‘receiving clearing member’.
The association also shared its concerns about the ability of CCPs to multilaterally net transactions for settlement significantly improves settlement efficiency.
Netting may involve transactions with parameters containing different values that are required by the regulation to be specified on settlement instructions.
EACH comments: “We request that it is made clear that CCPs can continue to net to the full extent possible and can provide a suitable value of a parameter of their choice on a settlement instruction where the constituents may not all contain the same value.”
Consent for CCPs to do this “is not clear” in current regulation, according to EACH, noting it would welcome either in the regulation or by formal confirmation that this is the case.
Finally, the association has called for the reduction of operational risk, complexity and duplication and an increase in efficiency through the application of a single regime for the collection and distribution of penalties under CSDR SDR Article 17, rather than two regimes under CSDR Article 17 and CSDR Article 19.
It explains that the duality in the SDR regulatory technical standards (RTS) text “leads to contradictions and unnecessary complications with regard to cash penalties involving CCPs”.
“The verbatim implementation of SDR RTS Article 19 would be complex, costly, inefficient and unnecessarily duplicative for CCPs, CSDs and the members and participants of both,” EACH notes.
Discussing the removal of Article 19, EACH suggests that all penalties could be collected and distributed by the CSDs on a single consistent basis with their participants, which the association suggests “would resolve many issues of operational risk, legal risk and development cost”.
Given the consultation deadline of 2 February and the expected period needed by regulators to review all responses, stakeholders are warning that if feedback on amendments only appears in Summer or even Autumn it would leave market participants with very little time to accommodate even minor changes to the regulation before the February go-live date.
EACH states: “We welcome the opportunity provided by the European Commission as this consultation represents an excellent occasion to address some of the issues that can ensure this piece of legislation, and from the EACH point of view its settlement discipline regime, is as robust and efficient as possible.”
The commision opened itself up to feedback on the regulation’s terms in December with a deadline for comment of 2 February.
The consultation is believed to be the last chance for trade bodies and other stakeholders to convince EU regulators that the SDR is not fit for purpose and must be significantly altered before it’s belated go-live in February 2022.
In its response, EACH explains that a delay to CSDR’s SDR would provide market infrastructures and other market participants sufficient time to implement and would also avoid unnecessary duplicative implementation costs.
EACH says it remains “concerned” that the market may be implementing an SDR that may experience significant change due to this consultation, leading to “sunk costs and the implementation of redundant technology”.
In order for the market to comply with the SDR by 1 February 2022, EACH recommends the EC provide an indication on the extent of the changes, should there be any, and the implementation timeline by the end of March 2021.
Certain market participants, such as the International Capital Markets Association (ICMA), are advocating a delay only for the buy-in element of SDR to be scrapped.
ICMA’s response argues that buy-ins, whether regulatory or contractual, should be discretionary and not mandatory.
Mandating buy-ins will have adverse impacts for European bond market efficiency and liquidity, ICMA says, noting that a significant body of evidence suggests it will ultimately lead to increased costs for market participants and particularly end investors.
Meanwhile, in a joint response from the International Swaps and Derivatives Association (ISDA), the Futures Industry Association (FIA) and the FIA European Principal Traders Association (FIA EPTA), the associations outline concerns about detrimental effects arising from the application of the CSDR mandatory buy-in regime for the derivatives markets.
The associations also request the EC and co-legislators to clarify whether the mandatory buy-in requirements of the CSDR SDR do not apply in the context of margin transfers, physically settled derivatives and emission allowances.
If the EC follows the recommendations for a delay only to buy ins, EACH requests that the commission keeps the Short Selling Regulation (SSR) in force until buy-ins can be implemented.
The association asks that any delays in the entry into force of CSDR SDR provisions are applied equally to the full market — both the cleared and uncleared space — to prevent an unlevel-playing field.
Elsewhere, EACH has suggested there be an adjustment of CSDR to ensure the buy-in regime can be implemented by reflecting the real functioning of central clearing counterparties (CCPs) where there is no such thing as a ‘receiving clearing member’.
The association also shared its concerns about the ability of CCPs to multilaterally net transactions for settlement significantly improves settlement efficiency.
Netting may involve transactions with parameters containing different values that are required by the regulation to be specified on settlement instructions.
EACH comments: “We request that it is made clear that CCPs can continue to net to the full extent possible and can provide a suitable value of a parameter of their choice on a settlement instruction where the constituents may not all contain the same value.”
Consent for CCPs to do this “is not clear” in current regulation, according to EACH, noting it would welcome either in the regulation or by formal confirmation that this is the case.
Finally, the association has called for the reduction of operational risk, complexity and duplication and an increase in efficiency through the application of a single regime for the collection and distribution of penalties under CSDR SDR Article 17, rather than two regimes under CSDR Article 17 and CSDR Article 19.
It explains that the duality in the SDR regulatory technical standards (RTS) text “leads to contradictions and unnecessary complications with regard to cash penalties involving CCPs”.
“The verbatim implementation of SDR RTS Article 19 would be complex, costly, inefficient and unnecessarily duplicative for CCPs, CSDs and the members and participants of both,” EACH notes.
Discussing the removal of Article 19, EACH suggests that all penalties could be collected and distributed by the CSDs on a single consistent basis with their participants, which the association suggests “would resolve many issues of operational risk, legal risk and development cost”.
Given the consultation deadline of 2 February and the expected period needed by regulators to review all responses, stakeholders are warning that if feedback on amendments only appears in Summer or even Autumn it would leave market participants with very little time to accommodate even minor changes to the regulation before the February go-live date.
EACH states: “We welcome the opportunity provided by the European Commission as this consultation represents an excellent occasion to address some of the issues that can ensure this piece of legislation, and from the EACH point of view its settlement discipline regime, is as robust and efficient as possible.”
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CSDR consultation is over, ICMA underscores need for mandatory buy-in reforms
CSDR consultation is over, ICMA underscores need for mandatory buy-in reforms
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