The European Securities and Markets Authority (ESMA) has published a final report on the technical advice for the penalty mechanism under the Central Securities Depositories Regulation (CSDR), at the request of the European Commission (EC). The advice aims to incentivise “all actors in the settlement chain to improve settlement efficiency, also in view of the potential move to T+1 in the EU”, the authority shares in a statement.
The report targets the improvement of the application of the CSDR penalty mechanism in three aspects: alternative parameters, when the official interest rate for overnight credit charged by the central bank issuing the settlement currency is not available; the treatment of historical reference data for the calculation of late matching fail penalties; and the design and level of the penalty rates for each asset class.
Some solutions
In consideration of the first issue – the absence of an overnight interest credit rate – ESMA proposes that “other comparable interest rates of the European Central Bank (ECB) and the relevant central bank could be used to calculate a proxy which a CSD can use to calculate the cash penalties due to lack of cash”.
The advice to tackle the second issue takes shareholders’ input into account. Here, ESMA suggests that the EC amend the relevant CSDR Level 2 provisions “to allow CSDs to use the oldest available reference price for the calculation of the related cash penalties, where settlement instructions have been matched after the intended settlement date, and that intended settlement date is beyond 40 business days in the past from the matching date”.
Keep the status quo
The request to examine the third issue was prompted by the potential shortening of the settlement cycle in the EU, but any changes would once again dredge up the contentious issue of progressive penalties for settlement fails, which had the industry mired in debate last year. With this in mind, and the acknowledgement that “a significant increase of penalty rates may divert resources from expected investments and costs for the industry in the context of the move to T+1”, ESMA proposes not making changes to the methods for calculating penalties. An “overall moderate increase” in the penalty rates for most asset classes can, however, be considered.
