ESMA consults on potential changes to the CSDR penalty mechanism

ESMA has initiated a consultation on potential modifications to the penalty mechanism outlined in the CSDR. The CSDR, established in 2014, aims to enhance securities settlement in the EU and regulate central securities depositories. Settlement fails, where transactions are not completed as intended, are addressed through reporting requirements, cash penalties, and mandatory buy-ins under the CSDR.
ESMA’s consultation, open until 29 February 2024, seeks input from stakeholders on the current penalty mechanism’s effectiveness in deterring settlement fails and promoting prompt resolutions. ESMA is particularly interested in feedback on alternative parameters for penalty calculation in the absence of an official interest rate, treatment of historical data for late matching fail penalties, and alternative methods for computing cash penalties, including progressive rates.
The background to this consultation includes requests from the EC for technical advice on specific aspects. These requests involve alternative parameters when the official interest rate is unavailable, treatment of historical reference data for late matching fail penalties, and alternative methods for calculating cash penalties. The review is part of ongoing efforts to assess and potentially refine the penalty mechanism’s structure and severity to ensure its effectiveness in preventing settlement fails.
ESMA emphasizes the importance of settling transactions promptly, as persistent settlement fails can negatively impact market functionality and competitiveness, contradicting the goals of the Capital Markets Union. Cash penalties are designed not only to deter settlement fails but also to incentivize the prompt resolution of such failures.
In response to these considerations, ESMA has proposed amendments to DelReg (EU) 2017/389 and is soliciting views, comments, and data from stakeholders to inform its technical advice to the EC. The consultation covers various topics, and ESMA intends to consolidate feedback into a comprehensive document. The consultation process is expected to contribute to the finalization of ESMA’s technical advice, which is slated to be submitted to the EC by 30 September 2024, after considering the feedback received during the consultation period.