04 November 2013

Joint industry letter on the timing of implementation of settlement discipline in CSDR

The European industry associations conveyed their comments in view of the trilogue discussions on the draft CSD regulation, in particular on article 7 on settlement discipline measures.

European Association of CCP Clearing Houses, European Central Securities Depositories Association, European Banking Federation, European Savings Banks Group, International Capital Market Association and ICMA European Repo Council asked the European co-legislators to take into account the following constraints as regards the timing of article 7 implementation:

The timing for implementing buy-in rules and late settlement penalties will be the same as for most other CSDR provisions, i.e. in the case of article 7 at entry into force of the respective regulatory technical standards. Most probably this will be around Q1-Q2 2015. At the same time, T+2 will apply on 1 January 2015, or between 1 January 2015 and 1 January 2016 if the Council text is adopted.

The signatories believe that such a timetable is far from optimal since buy-ins and penalties would be implemented just after some markets have moved to T+2, and potentially just before some other markets move to T+2. Market participants will need time to adapt to T+2 (from the current T+3) and it is quite conceivable that the number of settlement fails will temporarily increase in the first months following T+2 implementation. Implementing a new discipline regime just in this period could be counterproductive and generate unwelcome disruption in financial markets.

Secondly, CSDs and their participants need sufficient time to make the technical adaptions required by the new discipline regime. Given the crucial developments under way to prepare for TARGET2-Securities implementation in many EU markets, as well as developments to support same day repo and tri-party system interoperability (which will ultimately support higher rates of on-time settlement), the complexity, time and resources required of all actors to implement the future CSDR discipline regime should not be underestimated. The migration onto TARGET2-Securities will take place in the time frame of June 2015 until beginning of 2017.

As a result, the signatories suggest that the European co-legislators could consider the following solution:

The introduction of a transition period, during which settlement fails will be monitored by infrastructures and regulators (perhaps including a special monitoring and reporting regime by ESMA), prior to the full implementation of the new discipline regime. This fixed transition period will serve to monitor the expected effects and benefits from harmonisation of the settlement cycles within the EU. Once harmonisation on T+2 has taken place and TARGET2-Securities is implemented in the participating markets, the effects on settlement efficiency can be reconsidered and provisions for a harmonised settlement discipline can be implemented – if warranted. A transition period could also give market participants at all levels the opportunity to anticipate and correct potential problems in relation to the numerous changes being implemented simultaneously. It will also ensure that infrastructures and their users have had sufficient time to develop robust systems to deal with the new regime and to minimise fails.

Full letter

© EBF