Over the next eight months, trading firms of every description, from asset managers to corporate treasury vehicles, will need to prepare for the implementation of settlement discipline rules set to be phased in under the Central Securities Depositories Regulation ("CSDR"). From 1 February 2021, any entity that settles trades on an EU Central Securities Depository ("CSD") will fall within scope of these new rules, whether directly or indirectly (i.e. through contractual measures imposed by others in the settlement chain).

Whilst the UK has now confirmed that it will not be implementing the settlement discipline regime, the effect of this decision will be limited to trades settling through UK settlement systems. Thus, without further relief from EU regulators, the market is now on a tight timescale to put in place the documentation and operational adjustments required for compliance with the new rules, and we expect proposed documentary amendments from custodians and others to emerge in the coming weeks and months.

In order to help firms navigate this new regime and required documentary updates, we have set out in this briefing paper:

  • background and scope of application relating to the settlement discipline rules;
  • the timelines and triggers that apply to each aspect of the rules;
  • some tips on structuring a compliance plan and approaching documentary amendments; and
  • a deeper dive into issues around buy-ins and the key ways in which the mandatory buy-in regime under the CSDR will diverge from traditional buy-ins.

CSDR

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Update on timing (17 January 2022):

In January 2021, implementation of the CSDR settlement discipline measures was further postponed to 1 February 2022, due to the impact of the COVID-19 pandemic. In late November 2021 the European Commission indicated that political agreement had been reached on changes to the CSDR that will allow for a deferral of mandatory buy-ins, to provide further time for the industry to prepare. ESMA then issued a statement in December 2021 calling on national competent authorities not to prioritise supervisory actions in relation to the application of the buy-in regime until the provision for postponing the application of the buy-in regime is formally in place. Although the formal postponement is still awaited, it is expected that mandatory buy-in requirements in the current CSDR will not go live on 1 February 2022.

With respect to all other CSDR settlement discipline measures, it is expected that market participants will proceed with implementation in accordance with the relevant regulatory deadline of 1 February 2022. These requirements include rules relating to cash penalties for settlement fails, and requirements relating to the allocation and confirmation process.

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