The planned reforms to the Central Securities Depositories Regulation (CSDR) were published in the Official Journal on 27 December 2023 (Regulation (EU) 2023/2845).  Most of the reforms take effect from 16 January 2024, with a limited number taking effect from 1 May 2024 and 17 January 2026.

Our previous insights on the European Commission’s May 2022 proposals to revise CSDR, and the provisional political agreement reached in June 2023, are here:

CSDR: Commission proposes targeted changes; Article 3 dematerialisation deadline looms (May 2022)

CSDR: Provisional agreement reached on planned changes (June 2023)

While the reforms cover matters such as passporting, new colleges of supervisors and banking-type ancillary services (detailed in our May 2022 insights), the key focus area has been settlement efficiency and mandatory buy-ins.

As expected, the mandatory buy-in framework will not apply for the time being, with the Commission having an option to re-introduce it (following a cost-benefit analysis by ESMA) via an implementing act if two conditions are met:

• measures such as cash penalties or the suspension of participants who consistently and systematically cause settlement fails do not result in a long-term sustainable reduction of settlement fails in the EU or in maintaining a reduced level of settlement fails in the EU; and
• the level of settlement fails in the EU has or is likely to have a negative effect on EU financial stability.

A further condition proposed by the Commission (settlement efficiency not reaching “appropriate levels”) was not carried through into the agreed text (it had caused industry concern, in particular due to the perceived lack of clarity regarding how the Commission would assess “appropriate levels”).

The reforms regarding passporting, new colleges of supervisors and banking-type ancillary services are as detailed in our May 2022 insights.

The end-dates for the CSDR’s grandfathering provisions have also been confirmed (17 January 2025 for EU CSDs, and 17 January 2027 for third country CSDs).

Other key developments to watch from a CSDR / settlement perspective in 2024 are:

• Collection and Distribution of Cash Penalties: Commission Delegated Regulation (EU) 2023/1626 applies from 2 September 2024. It will amend the existing regulatory technical standards on the penalty mechanism for settlement fails by moving the responsibility for the process of collecting and distributing penalties for settlement fails on cleared transactions from central counterparties to CSDs.
• Penalty Mechanism: ESMA’s December 2023 Consultation Paper on technical advice to the Commission on the penalty mechanism under the CSDR runs until 29 February 2024.  ESMA is seeking evidence and data on the effectiveness of the current penalty mechanism in discouraging settlement fails and incentivising their rapid resolution.  It is also looking for feedback on various preliminary proposals including alternative methods for calculating cash penalties (such as progressive penalty rates).  It plans to give its technical advice to the Commission by the end of September 2024.
• Settlement Cycle: Following its Call for Evidence on the shortening of the settlement cycle (which closed on 15 December 2023), ESMA will carry out a cost/benefit analysis on any reduction of the EU settlement cycle, and identify if regulatory action is needed to ensure that the impact of the planned shortening of the settlement cycle to T+1 in other jurisdictions (such as the US) is as manageable as possible for EU market participants. It will provide feedback to the Commission on these issues in 2024 (looking at the EU settlement cycle is on the Commission’s list of medium-term considerations).  Read our Asset Management and Investment Funds Group’s related insights: Implications of Changes to US Settlement Regime for Irish Funds.