ECSDA issues proposal on settlement discipline

22 May 2014 – European CSDs make concrete proposals for building a workable European settlement discipline framework.
In the first part of its response to the ESMA public consultation on technical standards on the CSD Regulation, ECSDA puts forward detailed proposals on the features of an efficient European framework for settlement discipline.

Here are just some of the recommendations:

The future European standards must be proportionate given that the level of settlement efficiency in Europe is already high. Today, on average, more than 98% of instructions settle on the intended settlement date. The objective should be to give CSDs the necessary tools to promote efficient settlement, rather than to “punish” every market participant failing to settle on the agreed date. For example, a late matching fee should not be imposed on all CSD participants, given that penalties for late settlement already provide a strong incentive for early matching;
The timing for rolling out settlement discipline measures under the CSD Regulation should be phased. As stressed in a joint industry letter sent to regulators in November 2013, the parallel implementation of TARGET2-Securities and of the move to a T+2 settlement cycle need to be taken into account. ESMA should not underestimate the changes required in CSD systems to accommodate for a harmonised settlement discipline regime (e.g. database changes, introduction of new messages, new billing mechanism…), as well as the impact these changes will have on CSD users. A transition period of up to 3 years (2015-2017) would allow market participants and infrastructures to make the necessary adaptations before the new rules fully apply;
There should be a single European methodology for CSDs to report settlement fails to regulators and a harmonised template for the aggregated data made available to the public;
The matching of settlement instructions should be compulsory (with some limited exceptions), but regulation should not go as far as specifying mandatory matching fields;
Straight-through-processing (STP) and the use of ISO standards should be promoted, but regulation should not seek to explicitly limit the cases when manual intervention is acceptable, given the need to retain flexibility in case of crises and exceptional processes;
CSDs cannot be expected to identify the underlying cause of unmatched instructions or the ultimate counterparties responsible for settlement fails, but they should give their users access to the status of their pending instructions (i.e. whether these are matched, unmatched, settled or unsettled);
ESMA and/or the European Commission should consult the market on the modalities of penalty fees for late settlement, which are to be imposed by CSDs on their participants. Although this important aspect of the European standards is not included in the current ESMA consultation, ECSDA decided to issue preliminary suggestions in order to stimulate a discussion with all actors involved;
European standards should take into account the specific situation of so-called ‘direct holding markets’ where beneficial owner accounts are maintained in the CSD. For example, account allocation movements between the accounts of end investors managed by the same CSD participant should be exempt from late settlement penalties, as the equivalent account allocation in omnibus account markets is internalised within the books of the banks and is thus not even visible to the CSD;
CSDs, given their low risk profile, should not be involved in the execution of buy-ins. We recognise that a solution must be found for enforcing buy-ins in the absence of a CCP, but point out that imposing a segregation of the accounts of all trading and clearing members at CSD level will not solve the problem. Instead, further discussions between ESMA, market infrastructures and their users are needed to develop workable solutions before the technical standards are finalised.
Finally, the suspension by a CSD of a market participant repeatedly failing to deliver securities should never be triggered automatically. Given the serious consequences such suspension could have for financial stability, it should only be seen as the ultimate punishment in extreme cases.

Download the full ECSDA paper “Building a European Settlement Discipline Framework that works”