The European Securities and Markets Authority (ESMA) has published its technical advice to the European Commission on the scope of settlement discipline under CSDR. Released on 26 June, the Final Report is expected to shape the delegated act that will clarify which settlement fails and transactions fall under the regime, and which do not.
At the heart of the advice is the distinction between settlement fails attributable to participants, and those that are not. The updated CSDR Refit allows for exemptions in the latter category, and ESMA now provides a more granular view of what these might be.
Examples include technical failures at the CSD such as outages, cyberattacks or reconciliation issues. Other scenarios mentioned are payment system closures, full-day trading suspensions of a security on its main market, and cases involving sanctioned securities or official blocking orders. Data or system errors at CSD level are also listed, provided they are not caused by the participant.
The report also tackles the grey area of operations that should not be treated as trading, and therefore not subject to settlement discipline. These include collateral mobilisation for Eurosystem credit operations, corporate actions and market claims, the technical creation or redemption of fund units, share registration, and realignment operations between CSDs such as those conducted via TARGET2-Securities.
Split approach
ESMA recommends different mechanisms for applying the exemptions. For fails not attributable to participants, CSDs should apply ex-post claims, unless internal cost-benefit analysis shows that ex-ante filtering would be more efficient. For non-trading operations, where volumes tend to be higher, ex-ante filters are advised.
The implementation timelines also differ. Exemptions for fails should follow the standard regulatory timeline, while the non-trading operations should be given more time, ideally up to the end of Q2 2027.
Prepare
The Commission will now use ESMA’s advice to prepare a delegated act that will supplement the CSDR. Under Article 67 of the regulation, the European Parliament and the Council can object to the act within three months of its adoption, with the possibility of an additional three-month extension.
Also flagged in the report is the longer-term question of how to align these exemptions with the broader framework of cash penalties and the potential return of the mandatory buy-in regime.
