CSDR SDR in lockdown
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ESMA has confirmed its intention to extend its delay of the CSDR’s Settlement Discipline Regime (SDR) until February 2022. An initial delay from the 13 September 2020 until 1 February 2021 was awaiting non-objection by the Parliament and Council to an earlier “Final” Report. This will now be superseded by a Final(er) Report on postponing the date of entry into force of the SDR, to be published by September. ESMA cites the burden of the pandemic on regulatory project implementation, referencing a postponement request from the Commission.
The one year postponement will bring some relief, but will cause little surprise. The first delay was expressly granted to allow time for CSD IT systems to incorporate new ISO messaging protocols and the TARGET2-Securities penalty mechanism, both scheduled for 22 November 2020. Although coincident with the global spread of the pandemic, the short relief was of limited utility in dealing with COVID-19 imposed resource constraints, as well as associated market disruption which trade bodies argued would only be exacerbated by additional SDR obligations.
The longer delay will allow more time for preparation and compliance, it will also give market participants more opportunity to continue vociferous advocacy against the SDR in its entirety. While well-drafted argument will no doubt continue, it is likely to be unsuccessful. A 24 January letter to ESMA from Trade Associations requested that buy-in should be optional on the part of the receiver rather than mandatory. ESMA firmly rejected the request, replying that the regime’s compulsory feature was a “clear policy choice by the co-legislators when adopting the CSDR and it is meant to protect the securities buyers”. Postponement without alteration, would also be consonant with the pandemic-prompted action taken with respect to other key Regulatory programs such as Initial Margin Phases 5 and 6. Even absent alteration, there are a number of vital questions that require clarification. It remains to be confirmed whether the exchange of initial margin is within the scope of the SDR. While margin payments clearly do not present the questions to which the SDR seeks to be the solution, they are not explicitly excluded from the RTS. Industry bodies expect clarification in the Level 3 Q&A.
While we believe the SDR will eventually be implemented in full, delay has already been consequential- the deferral until February 2021 allowed the Chancellor the option to exclude the UK from its implementation. Although this raises some interesting questions as to future divergence and EU grants (or recissions) of equivalence, UK-based firms will still be subject to SDR for all transactions that are settled with European CSDs. The UK intent to self-isolate is very far from an exemption. The delay is a pragmatic and proportional response to increasingly unprecedented times. It should be regarded as a welcome breathing space rather than a potential get out of SDR free card.