Insights Blog

ESMA has published draft regulatory technical standards (RTS) which will postpone the application of the CSDR mandatory buy-in regime for 3 years.

As mentioned in our recent CSDR update (CSDR: Commission proposes targeted changes; Countdown to application of Article 3), the reporting requirements for settlement fails, and the cash penalties regime, came into force on 1 February 2022, but the application of the mandatory buy-in regime was delayed (informally, following industry lobbing and a December 2021 ‘no action’ letter from ESMA).

As part of its suggested targeted changes to CSDR, the Commission proposed in March 2022 that mandatory buy-ins not apply for the time being, but stopped short of proposing their removal from the settlement discipline framework. The Commission would prefer to have an option to re-introduce mandatory buy-ins via an implementing act in certain circumstances, using a two-step approach (i.e. the exercise of that option is a proportionate step, and that one of three conditions is met (the rate of settlement failures does not improve, settlement efficiency does not reach “appropriate levels”, or the level of settlement fails is likely to impact financial stability within the EU)).

In light of the Commission’s proposals, and the change made to the CSDR this week by the DLT Pilot Regulation which allows ESMA to decouple the application dates for each component part of the settlement discipline regime, today’s draft RTS would formally suspend the application of the mandatory buy-in regime for 3 years from the date that the RTS come into force.

This formal delay would allow EU legislators to avoid triggering significant implementation costs for market participants while they continue to consider how best to improve settlement efficiency. It also takes account of the length of time it might take for the Commission’s proposed changes to CSDR to make their way through the EU legislative process. The Commission’s proposed changes to the settlement discipline framework have been the subject of queries and comments from representative bodies, and are likely to be the subject of considerable debate. The ICMA, while broadly welcoming the proposals, has published its recommendations, in particular regarding the Commission’s suggested ‘two-step approach’ to any decision to reintroduce mandatory buy-ins. As mentioned in our recent CSDR update, AFME has queried how the Commission will assess whether “appropriate levels” of settlement efficiency have been reached, and still believes that mandatory buy-ins risk undermining “the attractiveness and competitiveness of EU capital markets”.

Until today’s draft RTS are published in the Official Journal, ESMA’s December 2021 ‘no action’ letter will continue to apply.

On a related point, the Short Selling Regulation (together with CSDR as originally drafted) required central counterparties who provide clearing services for shares to have buy-in procedures in place. Those procedures were to be repealed once the CSDR mandatory buy-in rules came into force. Today’s draft RTS confirm that this requirement under the Short Selling Regulation will remain in place given the delay in the CSDR mandatory buy-in rules.