The European Commissions long awaited proposed amendments to the CSDR

The European Commission has a published a legislative proposal to amend the Central Securities Depositary Regulation (“CSDR”). The update to the CSDR is part of the Capital Markets Union Action Plan and follows targeted public consultations and a commission report published in July 2021. Specifically, the proposals aim to streamline numerous parts of the CSDR and address deficiencies / uncertainty in the following areas: settlement discipline, the passporting regime, banking-type ancillary services, cooperation between supervisory authorities and the oversight of third-country central securities depositaries.

See below for a summary of the key proposals:

A. Settlement discipline

• The proposals outline a “two-step” approach to settlement discipline, which allows the Commission to pass an implementing act to apply mandatory buy-in for certain financial instruments or categories, where the cash penalties regime alone does not improve settlement fails. The proposals stipulate that the implementation of mandatory buy-in must be “proportionate” to the use case.
• A measure that stipulates where a settlement fail is caused “by factors not attributable to the participants to the transaction or where a transaction does not involve two trading parties”, such settlement fail is not subject to the penalty mechanism and/or mandatory buy-in.
•  The Commission has proposed “pass-on” mechanism where only the failing participant in the settlement chain will be made responsible for making the buy-in notification. Each intermediate participant involved in the transaction chain would be allowed to pass-on a buy-in notification to the participant. This is intended to avoid a "multiplicity of buy-ins" for transactions on the same financial instrument involving a chain of counterparties.
• The proposals give the power to the Commission to suspend the application of mandatory buy-ins where necessary to avoid or address a serious threat to financial stability or to the orderly functioning of financial markets in the EU.

B. Third-Country

Ensuring local supervisors have better information about the activities of third-country CSDs in the EU, namely by requiring third country CSDs to notify ESMA of the nature of the services they intend to provide in the EU.

C. Passporting

Simplifying the passport regime for CSDs so that they can operate across the EU with one single licence by removing costly and duplicative procedures.

D. Banking-type ancillary services

Adjusting the conditions under which CSDs can access banking services, enabling them to offer settlement services for a broader range of currencies and offering businesses the opportunity to obtain financing from a larger pool of investors, including cross-border.

Market reception and next steps

Market participants and trade bodies in particular, are supportive of the proposals, given most of the new measures specifically reflect the lobbying efforts of both groups. Notably with respect to settlement discipline, where the market have strongly opposed the implementation of mandatory buy-in from the inception of the CSDR, albeit buy-in still features within the Commission’s proposals. However, trade bodies have queried whether the revised settlement discipline focussed measures appropriately address the potential risks flagged by the market during the lengthy lobbying process to amend this aspect of the CSDR. For example, there are segments of the market who consider mandatory buy-in should be completely abolished given the possible risk to market liquidity and settlement efficiency. Similarly, there is an outstanding question as to how the Commission intends to calibrate the "proportionality" elements of the settlement discipline i.e. what would count as an "appropriate level" of settlement efficiency? In lieu of clear guidance from the Commission, we anticipate further lobbying on this front.

The Council of the EU and the European Parliament will now consider the legislative proposal.

Our Divergence Tracker provides a summary of UK/EU divergences, by identifying the changes between the UK and EU approaches to key regulations.