Industry voices disagreement with CSDR resolution actions

ESMA has released comment letters on their “Consultation Paper on Guidelines on participant default rules and procedures under CSDR.” The letters show repeated questions about the rules, in particular the resolution actions. These issues are not trivial, and CSDR promises to cause significant challenges both domestically and internationally. Part of the issue is simply the complexity of processes, regulations and practices that abound across payment and settlement platforms.

Most of the critical comments focused on question 3: “Do you consider that the actions listed are appropriate or that other actions should be listed? Should certain actions be mandatory, depending for instance on the type or size of default, the characteristics of the participant or the CSD or any other criteria?” Here’s what the market had to say:
Deutsche Bank: We do not consider that the potential actions available to a central securities depository (CSD) are appropriate in all circumstances. In particular, the proposed CSD power to suspend or terminate a defaulting participant’s access could impede an orderly wind-down and generate significant legal and commercial challenges.
The European Banking Federation disagreed with several of ESMA’s proposed actions. Of note to SFM readers, “The EBF has [concerns] in relation to specific transactions to which the defaulting participant is a party and for which the parties to the transaction have agreed on the consequences of the participant’s default. Typically, this would be the case for e.g. repurchase agreements (repo). The potential actions taken by the CSD should not interfere with the contractually agreed remedies of the parties to the affected transaction.”
Both Clearstream and Euroclear also disagreed with the proposed actions. “In Clearstream’s view, no actions should be mandatory; they should be decided by the Executive Board of the CSD depending of the specific situation of the participant’s default, and based on the agreed rules. In our experience, it neither possible to foresee and pre-define all possible consequences of the measures applied (as required by guideline 20), nor helpful to act in the event of a default in an overly pre-defined way.”
Euroclear: “It is essential for a CSD to be able to manage a default event within the limits of applicable insolvency legislation, local legislation implementing the SFD and the contractual rules of the CSD. As a consequence, we do not believe any of the actions listed in the Guidelines should be mandatory.”
Commenters noted the potential difficulties that could arise if a T2S payment bank defaulted. The European Banking Federation had the clearest description: “we would like to make ESMA aware of the fact that a default of a T2S payment bank may also impact a CSD and its participants even though such a payment bank does not have a securities account and is thus not a participant of the CSD. A default of a T2S payment bank would cause difficulties since a participant using such payment bank would be left with no funding in T2S which would impact the participant’s ability to settle purchase instructions. It should therefore be considered that the CSD default rules and procedures take into account the potential default of a T2S payment bank and the consequences of this.”
Interestingly, Amundi noted their strong interest that CSDs have no commercial activity in financial markets other than safekeeping of assets: “As far as CSDs are concerned, we have a strong view that they should be limited to their role of safe keeper of assets and not have any other activity, especially of a commercial nature. We want to be totally ensured that CSDs are safe and have no position opened on any market.” This will be a conversation for another day however.
All of the response letters can be found at

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