CSDR Refit – Where do things stand since it came into force at the beginning of 2024?

However, the content of the text will not allow the changes adopted to be immediately implemented; delegated acts (also known as level 2 acts) will need to be adopted in order to supplement the measures. This is the purpose of the mandates granted under CSDR Refit to the European regulator. ESMA has been asked to provide technical advice and draft proposals and has scheduled three consultations over the 2024-2025 period.

CSDR Refit in a few dates

CSDR, like MiFID2 (for markets) and EMIR (for Central Counterparties), provides a European framework for market infrastructures, in this case central securities depositories (CSDs). It defines their obligations and those of their participants.

While various parts of the original text have been revised, the one that has attracted the most attention is undoubtedly the settlement disciplines and their two flagship measures: mandatory buy-in (MBI) and penalties.

Mandatory buy-in

The new version of the MBI clearly represents a major step forward, since the 2024 version of the buy-in obligation may target only certain types of financial instrument and/or types of transaction among those eligible for the MBI. Above all, the European Commission will only be able to open discussions on the merits of implementing the MBI if the penalty system is not sufficiently effective and if the level of fails may have an impact on the European Union's financial stability.

To enable legislators to define the contours of the MBI under the CSDR Refit, the European Commission had previously, via the Pilot Regime Regulation, postponed the introduction of the initial MBI until November 2025, so that it should never see the light of day.

Penalties

Unlike the proposals on the mandatory buy-in, the proposals on penalties raise several concerns. The penalty principle under CSDR, which has been in place since February 2022, aims at driving parties to the transaction to respect the settlement date agreed between them. The penalty is calculated at instruction level for each day that the instruction fails to settle, at least partially¹. The penalty paid by a participant is passed on to its counterparty. Accordingly, in a chain of settlements, only the participants truly in default are penalised (the "immunisation" principle).

The first of the ESMA's three consultations focused on the penalty system itself, with a number of proposals that would result in the current mechanism being overhauled (progressive rate, minimum amount, penalty rate based on the type of transaction, the amount that fails to settle, etc.). The responses were almost unanimous in pointing out that (i) the system must remain simple, effective, easy to understand and, above all, must not become unfair, (ii) improving the level of settlement on the correct date is a short-term objective which no non-minor changes could meet (the changes could take 2 to 3 years to become operational), (iii) the current model is still very recent and, above all, must not be seen as the only means of improving the situation.

The forthcoming consultations, and in particular the consultation on the CSDR Refit proposal to exempt transactions that are not considered to be trading transactions, will provide an opportunity to reiterate the need to not undermine the "immunisation" principle. It is clear that settlement chains are generally made up of various types of transaction (sale and recall of loaned securities, etc.). Applying penalties selectively would break the chains of associated penalties and participants in the middle of chain would wrongly be seen as at the origin of the fail. Let us hope that CSDR Refit will approach this exemption cautiously and limit it to cases that justify it.

CSDR Refit raises the possibility of shortening the settlement/delivery cycle

A presentation of CSDR Refit would not be complete without a reference to "T+1". For the first time in European regulations, CSDR Refit introduces the option of reducing the settlement cycle to T+1. However, this is only the first step. The legislator has asked ESMA to submit, by 17 January 2025 and every two years thereafter, a report detailing the desirability, costs, benefits and implementation methods of such a shortened period.

Anticipating the entry into force of CSDR Refit, the European regulator launched its Call for Evidence in autumn 2023. On 21 March, the ESMA published its feedback statement summarising the more than 80 responses received. The final report is expected at the end of 2024, by which time they will have analysed the US and Canada changeover to T+1 in May 2024.