The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator, has published its final report on technical advice for the European Commission regarding the penalty mechanism under the Central Securities Depositories Regulation (CSDR). The recommendations aim to enhance settlement efficiency across the EU, particularly as the region considers transitioning to a T+1 settlement cycle.
The report focuses on three key areas for refining the penalty mechanism:
- Penalty Calculations for Cash Shortages: Proposing alternative parameters for calculating penalties when central bank overnight credit interest rates are unavailable.
- Use of Historical Reference Prices: Addressing how late matching fail penalties should be calculated using past reference prices.
- Penalty Rates by Asset Class: Recommending a modest increase in penalty rates across asset classes while maintaining the existing calculation framework.
ESMA has advised against major changes to the design of the current penalty mechanism, which has been in effect since February 2022. The mechanism imposes penalties on participants failing to deliver securities or cash by the agreed settlement date, a measure that has significantly improved settlement efficiency across the EU. ESMA believes these penalties will continue to positively influence market discipline.
Next Steps
The European Commission will consider ESMA’s advice when amending the Commission Delegated Regulation (EU) 2017/389. The updated penalty mechanism will be enforced following adoption by the Commission, scrutiny by the European Parliament and the Council of the EU, and publication in the EU Official Journal.
ESMA’s recommendations come as the EU seeks to streamline settlement processes and prepare for a potential shift to T+1, a shorter settlement timeline expected to further enhance efficiency in financial markets.