CSDR Refit: the future penalty mechanism
The consultation launched by the European Markets Authority (ESMA) in the winter of 2023 provided an opportunity for the European regulator to propose a wide range of possible changes to the penalty regime, ranging from a simple change in the rates applied to complete overhauls of the system through the simple or convex introduction of progressive rates, additional measures such as the introduction of a minimum, rates linked to the countervalue of the fail or the type of transaction, or the introduction of an additional penalty for the largest failing participants.
Responses to the consultation showed that some measures would undermine the immunisation principle introduced by ESMA itself, while others, because of their scale, could not be implemented for several years, whereas the arrival of a T+1 settlement cycle requires measures that can be implemented quickly..
On 19 November 2024, ESMA published its final report and recommendations on the penalty regime. Finally, it should essentially involve a moderate revision of certain rates. It is interesting to note that ETFs, identified as the financial instruments with the highest fail rate, will not benefit from a dedicated scheme; they remain attached to the ‘other’ category, which will see its rate increase from 0.5 basis point (bp) to 0.75bp. Finally, ESMA opens the door to a possible suspension of the regime in the context of a T+1 changeover. The question of charging of penalties to clients remains open and will be the subject of further analysis.
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