CSDR/UK CSDR: settlement discipline – an opportunity for reflection?

The CSDR settlement discipline regime, which sets out measures to minimise settlement fails and to address failures that do occur, has provoked significant lobbying efforts by firms and their industry associations, in particular the mandatory buy-in requirements. In the derivatives context, there is significant concern about the potential application of these rules in the context of margin transfers and physically-settled derivatives transactions.

It was expected that EU market participants would become subject to these rules in September 2020. However, recognising the significant up-front IT, systems and operational burden on market participants created by the new requirements, the Commission has postponed the application of the settlement regime to EU market participants until 1 February 2022.

In the interim, the Commission has launched a public consultation on the operation of CSDR generally, which includes broad and open questions on the settlement discipline regime. The consultation closes on 2 February 2021.

Following the review, the Commission is expected to publish a legislative proposal in Q2 2021, with its adoption expected in Q4. This is very close to the 1 February 2022 application date of the settlement regime. The industry will highlight to the Commission the insufficient time this would allow to be ready for compliance.

In one of the first examples of post-Brexit divergence by the UK, the Chancellor announced in June 2020 that the UK will not implement the EU settlement discipline regime. Instead, the Treasury will engage with the UK industry to work out an alternative proposal, and we understand this process is underway.

Should the UK continue to take a divergent path to its domestic approach to settlement discipline, this does not mean that UK market participants can ignore the EU regime. In-scope transactions and securities financing transactions that settle on an EU CSD (e.g. Euroclear and Clearstream) continue to be subject to the CSDR, irrespective of where the counterparties to the transaction are located and regardless of whether they are direct or indirect participants of the EU CSD.

Achieving compliance with these rules will involve significant legal, operational and administrative efforts, including repapering terms of business, master agreements and other industry-wide documentation like GMRAs and GMSLAs.

Read our client publication for more detail on the impacts for UK firms.

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This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.