CSDR: settlement discipline regime

The EU legislators finally agreed to amend CSDR to decouple the mandatory buy-in regime from the rest of the Settlement Discipline Regime on 24 November 2021, meaning that the implementation of the mandatory buy-in regime will be delayed beyond 1 February 2022.

ESMA subsequently issued a No Action Letter on 17 December 2021, calling for national competent authorities to deprioritise supervision of the MBI regime pending the amending legislation coming into force (likely post-February 2022).

Ongoing issues re mandatory buy-in rules

Despite the welcome delay to the MBI regime, there is uncertainty as to what any reforms to the proposed MBI regime will look like (as the European Commission’s interim report on CSDR in July did not specify the types of amendments it might consider). The Commission expects to adopt its CSDR REFIT legislative proposal in the first half of 2022, after which we should know more. Therefore, the key challenges for 2022 will be:

• analysing proposed changes to the MBI regime as they are published to assess the extent to which the proposed rules differ from the current rules;
• starting to consider how the amended rules will impact documentation;
• tracking the timeline for implementation of the amended MBI regime to ensure that all repapering exercises are completed ahead of implementation.

A number of trade associations[1] had been working to produce industry standard documentation to facilitate compliance with the MBI regime in connection with (for example) derivatives, stock lending and repo transactions. The associations announced that the project had been put on hold following the publication of ESMA’s No Action Letter, but they may decide to resume this once enough detail on the amended rules is known.

It should be noted that the cash penalties regime will not be delayed and so will apply from 1 February 2022.

UK developments

As the CSDR settlement discipline regime is not being onshored, UK firms will wait to see if 2022 brings any proposals for development of a UK regulatory framework on settlement discipline, although at present this looks unlikely. UK entities will, nonetheless, be indirectly impacted by the EU regime where they settle in-scope transactions on an EU CSD (e.g. Euroclear and Clearstream), irrespective of whether the firm is a direct or indirect participant of that EU CSD, and/or use an EU broker or custodian that seeks to pass on (contractually) its CSDR obligations.

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.

[1]    AFME, AGC, EAPB, EBF, EDMA, EFAMA, FIA, ICMA, ISDA and ISLA.