ICMA: response to ESMA CSD regulation Level 2 Consultation Papers

20 February 2015

ICMA provided a number of recommendations to support the successful implementation of Settlement Discipline measures, as well as suggested enhancements to the draft RTS text.

At a high level, the key ICMA recommendations were:

1. Preventing Settlement Fails

• As much as possible, same day trade matching and allocation should be encouraged
• An automated and standardized matching process
• All CSDs to offer a hold-and-release mechanism and the possibility to opt-in-or out of an automatic partialling settlement facility

2. Settlement discipline

ICMA fully supports initiatives to improve the safety and efficiency of settlement systems in the European Union, whether infrastructure driven, such as the ECB’s Target2-Securities settlement platform, or regulatory such as the CSD Regulation (CSDR). In responding to the Consultation, ICMA decided to narrow its focus to Settlement Discipline, which is the component of CSDR that most directly impacts users and providers of the European capital markets1. In fact, it has been pointed out by a number of ICMA members that Settlement Discipline should not in fact be a feature of CSDR, and would have been more appropriately included in MiFID II/R.

3. Mandatory buy-ins

ICMA’s members, however, have remained vehemently opposed to the inclusion of a provision for mandatory buy-ins, which will not only be detrimental to European bond market efficiency and liquidity (and so a cost borne by investors and issuers), but is unlikely to improve settlement efficiency. Despite the intense efforts of ICMA and others to highlight the inherent flaws in a mandatory buy-in regime, it remained included in the Level 1 text that was passed into European law in September 2014. ICMA and its members remain opposed to the concept of mandatory buy-ins, and in the interest of market efficiency and stability continue to call for the Regulation to be revised to remove this particular provision.

4. Appropriate timeframe for implementation

• Settlement Discipline should not be implemented until after the successful roll-out and testing of T2S
• Adequate time should be allowed for CSDs and participants to develop and implement the required operational and technical builds (likely to be 18 months to three years)
• Cash penalties and mandatory buy-ins should not be implemented at the same time; cash penalties should precede the implementation of mandatory buy-ins by at least 18 months (but after T2S)

Full response

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