AFME Welcomes CSDR Political Agreement

Regulation, Liquidity Top Bond-Trader Concerns

Commenting on the agreement reached between the European Council and European Parliament on the Central Securities Depositories Regulation (CSDR), Peter Tomlinson, Director of Post Trade at the Association for Financial Markets in Europe (AFME) said:

“AFME welcomes the political agreement in the trilogue negotiations, which views mandatory buy-ins as a measure of last resort, to be activated subject to assessment and only in the case where the level of settlement fails in the EU has not reduced and is deemed to pose a financial stability risk. AFME supports further focus on all other tools that would be more appropriate to support settlement discipline and efficiency in Europe.

“The CSDR Refit legislation in the EU will include a mandate for ESMA to undertake an assessment on the possibility of shortening the settlement cycle in the EU. AFME looks forward to engaging with European authorities and market participants on this topic as part of the new European industry Task Force which was established by AFME earlier this year. The task force will examine all aspects in this debate, including direct economic costs and savings to the industry, as well as factors relating to global alignment and market attractiveness.”

Source: AFME

The Council has reached a provisional agreement with the European Parliament on an update to the rules on central securities depositories (CSDs). The new law will reduce the financial and regulatory burden on CSDs and improve their ability to operate across borders, while also strengthening financial stability.

Elisabeth Svantesson, Swedish Minister for Finance: Central securities depositories are vital to the EU’s financial system and for the Capital Markets Union, yet they still face obstacles in terms of high costs and excessive red tape. Today’s agreement will help us unlock the full potential of the EU’s capital markets, making them more attractive to investors.

Aim of the review

CSDs are national or international financial organisations that manage the ‘settlement’ (transfer of ownership) of securities such as shares and bonds. They play a key role in the EU’s capital markets and financial system.

The new regulation will improve the efficiency of securities settlement in the EU by reducing compliance costs and regulatory burdens for CSDs. It will make it easier for CSDs to offer services across borders, while also improving cooperation among supervisors.

Today’s agreement updates the Central Securities Depositories Regulation adopted in 2014, which established a set of common requirements for CSDs operating securities settlement systems across the EU.

A simpler passporting regime

‘Passporting’ refers to the procedure via which a CSD based in one EU member state can provide services in another member state. The current passporting regime is lengthy and burdensome and discourages cross-border services. The text agreed on today clarifies and simplifies the rules, thus reducing the barriers to cross-border settlement and easing the administrative and financial burden.

Better supervision

The agreement reached today will also make supervision of CSDs more effective by improving cooperation between supervisors. In cases where a CSD’s activities in at least two other member states are considered to be of substantial importance to the functioning of the securities markets and investor protection, a college will be set up to facilitate cooperation and information exchange between member state authorities. Supervisors will also have access to better information about the activities of non-EU CSDs operating in the EU.

Improved settlement efficiency

While ‘settlement efficiency’ (the rate at which securities transactions settle on the intended date) has slowly improved since the adoption of the 2014 regulation, it is still lower than in other developed capital markets.

The new regulation contains measures to improve efficiency by amending certain elements of the settlement discipline regime, including the preconditions for applying so-called mandatory buy-ins. These occur when a transaction has failed to settle at the end of an agreed period and the buyer of the securities is forced to repurchase them elsewhere. Under the revised regulation, such buy-ins will only be introduced as a measure of last resort, where the rate of settlement fails in the EU is not improving and is presenting a threat to financial stability.

Banking-type ancillary services

The text agreed between the Council and the Parliament also includes provisions adjusting the conditions under which CDSs can access banking-type services, including through other CSDs. As a result, offering services for a broader range of currencies as well as across borders will be facilitated.

Next steps

Today’s provisional agreement still needs to be formally approved by the EU’s member state ambassadors. It will then be adopted by the Council at a forthcoming meeting following legal and linguistic revision of the text. The regulation will enter into force following publication in the EU’s official journal.


The Central Securities Depositories Regulation was adopted in 2014 in the wake of the financial crisis. Its aim was to improve the safety and efficiency of settlements and provide a set of common requirements for CDSs across the EU.

In July 2021 the Commission reported that, while the regulation was broadly successful in achieving its objectives, feedback from stakeholders indicated that significant barriers continued to exist in a number of areas, including passporting and settlement discipline.

As a result, on 16 March 2022 the Commission published a proposal for a review of the CSDR, focusing on five main areas: the passporting regime, cooperation between supervisory authorities, banking-type ancillary services, settlement discipline and the oversight of third country CSDs.

The Council agreed its negotiating position on 22 December 2022, and negotiations with the European Parliament began on 18 April 2023.

Source: EU Council

Comment from ICMA

On June 28, the European Council and Parliament reached a provisional interinstitutional agreement on the CSDR Refit. A critical element of the Refit is the revised settlement efficiency regime, in particular the highly controversial application of the mandatory buy-ins in the event of settlement fails. ICMA has long opposed the introduction of a mandatory buy-in (MBI) regime in the EU bond markets, and challenged their inclusion in the original CSD Regulation, pointing to the risks to market liquidity and stability, and noting that existing, contractual buy-ins already provided an effective and well-designed tool for managing settlement risk.  Despite being passed into law in 2014, mandatory buy-ins have never been implemented.

While ICMA and the broader industry saw the CSD Refit as an opportunity to remove the MBI framework from EU law, the European Commission decided to keep the regime as a “last resort” in the event that the cash penalty mechanism, introduced in February 2022, did not result in improving settlement efficiency rates for certain financial instruments. The Commission further suggested some enhancements to the mandatory buy-in process, which are more in line with existing contractual buy-ins, such as symmetrical payments of the buy-in price differential (thereby preserving the economics of the original trade) and the possibility for a pass-on mechanism (allowing for the settlement of multiple linked fails by means of a single buy-in).

During the subsequent regulatory process to finalise the text, ICMA engaged with the co-legislators on some of the more technical issues related to the application of buy-ins as well as the buy-in mechanism.

While we await the finalised text, ICMA understands that the co-legislators have agreed on very strict conditions for applying mandatory buy-ins, requiring that cash penalties have been shown not to have resulted in sustaining settlement efficiency, even after considering adjusting the penalty rates, and that this also presents a risk to financial stability in the EU. As part of this process, the authorities would also be expected to consider the market impact of mandatory buy-ins as well as whether contractual remedies already exist. ICMA also expects the revised regulation to provide that ESMA look at alternative, more proportionate and targeted tools to improve settlement efficiency, such as “shaping” (splitting large trades into smaller tickets), “partialing” (the partial settlement of failing trades), as well as the use of CSD auto-borrowing and lending programs: all of which are already incorporated into ICMA’s best practice for both bond and repo trading.

While ICMA and the industry more broadly would have preferred that mandatory buy-ins were removed from EU regulation completely, ICMA welcomes their de-prioritisation as a settlement discipline mechanism. ICMA will continue to work with its members and market authorities to improve settlement efficiency in international bond and repo markets, helping to underpin effective and stable financial markets.

ICMA looks forward to providing more commentary once the final technical discussions are concluded and the final draft is published.

Source : ICMA

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