The Securities and Markets Stakeholder Group (SMSG) published advice to the European Securities and Markets Authority related to Central Securities Depositories Regulation (CSDR) and the draft RTS on the substantial importance of a CSD.
One of the sections outlines SMSG’s advice on the proposals on the exceptions to the penalty regime. In order to incentivize the settlement of transactions in financial instruments by their intended settlement date, CSDR introduced settlement discipline measures in the form of cash penalties for market participants that cause settlement fails and a mandatory buy-in regime to force the settlement of transactions still failing after a determined extension period.
SMSG suggested that ESMA’s proposal to exclude free-of-payment (FoP) securities transfers to securities accounts at CSDs in the context of the (de)mobilization of collateral should be further clarified. It is not clear which market operations should be considered as FoP transactions in the case of (de)mobilization of collateral.
“If FoP collateral transfer transactions are excluded, there could be a fundamental risk that, for example, in cases of late recalling of a securities lending transaction due to a sale, the cash claiming process vis-à-vis the lending counterparty could no longer be carried out,” according to the advice.
Both lending instructions and transactions for bilateral collateralization are mainly transmitted as FoP transactions via SWIFT. Exempting FoP security collateral transfers may sometimes break the immunization principle. Therefore, the SMSG encourages ESMA to further clarify what is meant by a free-of-payment security transfer to securities accounts at CSD’s in the contact of the (de)mobilisation of collateral.