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(C)SDR results are in- keep on keeping on repapering

On 2 July 2021, the European Commission (EC) released the results of its February 2021 CSDR consultation. The results will guide the areas of focus for the upcoming Q4 2021 CSDR legislative review. The consultation garnered a relatively high response rate of 91 replies, split across both firms and trade associations, identifying the following as key areas of concern:

  • Cross-border provision of services. One of the core objectives of the CSDR is to facilitate intra-EU trading for CSDs by providing a “passport” to allow one Member State CSD authorisation validity across the region. The regime is not working- passporting rules require clarification and simplification and steps need to be taken to enhance cooperation between national competent authorities. In addition, the passport approval process is overly lengthy and burdensome
  • Articles 15 and 54 CSDR require CSDs to obtain authorisation to provide banking-type ancillary services. CSDs argued that this need restricts access to their services and hinders normal procedures such as settlement in foreign currencies
  • The framework for third-country CSDs provoked a response across all classes of participants amongst all categories of stakeholders. Respondents pointed out that third country CSDs are able to access all Member States without the need for passporting, with consequent un-levelling of the CSD playing field and that there is a lack of reciprocity when equivalence is granted
  • Stakeholders were broadly in favour of the clarification and simplification of a range of requirements, including: CSD authorisation, CSD evaluation and annual review, and consideration being given to placing an end-date on CSD grandfathering clauses
  • Unsurprisingly given its materiality, the settlement discipline regime (SDR) provoked responses from nearly all participants. Near-universal support was stated for a review of the buy-in rules, with a majority favouring voluntary vs. mandatory, citing the following (perceived) adverse consequences of mandatory buy-ins: reduction in market liquidity, increased costs and sub-optimal consequences for investors,  creation of an unlevel playing field for EU CSDs, a negative impact on securities lending and repo markets. Although there was support for the application of cash penalties, a majority agreed that the rules should be reviewed

Conversely, a majority opined that the review was not required in respect of: technological innovation- wait for the Pilot review regulation and internalised settlement- the obligation is too recent for the effects to be properly reviewable.

The industry has long been hoping for a cancellation of the SDR requirements. Although entry into force was delayed due to a timetabling conflict with dependent TARGET2 legislation, wholesale abandonment was never on the cards. Following the consultation, some adjustment to the SDR is entirely foreseeable; however, the SDR is set to enter into force prior to any possible amendments. The SDR is due to enter into force on 1 February 2022. The CSDR review will take place in Q4 2021 with amending legislation proposed in Q1 2022. In the absence of any further delay, it is therefore likely that the SDR will be in force prior to any amending legislation.

The industry should continue with plans for timely client outreach in early Q4 2021, to facilitate the incorporation of AFME CSDR Model Contractual Provisions (when published) or similar, into the following documentation:

  • terms of business
  • master agreements- repo, stock lending, FIA (ETD) and ISDA physically settled CDS
  • prime brokerage
  • clearing documentation
  • custody documentation

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