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In one of the first examples of post-Brexit divergence to hit the financial regulatory world, the UK Government has announced that it will not adopt the settlement discipline regime contemplated by the Central Securities Depositories Regulation (CSDR) that is due to come into force in February 2021.
Of particular relevance to participants in the securities and securities finance markets is that the UK will not be adopting the settlement discipline regime contemplated by the CSDR that is due to come into force in February 2021.
This decision does not mean, however, that UK market participants can simply ignore it now.
The settlement discipline regime is set out in Articles 6 and 7 of CSDR as well as the accompanying regulatory technical standards1 and includes various measures designed to prevent and address settlement failures. The measures apply to central securities depositories (CSDs), trading venues and investment firms and, in particular, include:
(i) the mandatory buy-in regime;
(ii) the requirement for CSDs to implement penalty mechanisms; and
(iii) the cash compensation mechanism for failed buy-ins.
Instead, the statement envisages that market participants will continue to rely on the existing industry-led settlement discipline contractual frameworks for securities transactions and securities financing transactions (SFTs) that settle via a UK CSDs (i.e., CREST).
Certain aspects of the settlement discipline regime – most notably the mandatory buy-in regime – have been the subject of much criticism by market participants and trade associations.
This statement by the UK government has already been described as a "positive step" by ICMA2 and it is likely that this opinion will be shared by other participants and trade associations.
Importantly, however, UK market participants cannot now disregard the CSDR settlement discipline regime and its implications in its entirety. Any in-scope securities transactions and SFTs that settle via an EU CSD – which includes both the Euroclear and Clearstream settlement systems – will still be subject to the CSDR requirements, regardless of where the counterparties to the transaction are located and whether they are direct or indirect participants of the EU CSD.
As a result, UK market participants that enter into such transactions will still need to repaper their terms of business, global master repurchase agreements (GMRAs), global master securities lending agreements (GMSLAs) and other documentation accordingly, and will still need to update their systems and processes.
If you would like to discuss the implications of this, or CSDR more generally, please get in touch with your usual Fieldfisher contact.
Guy Usher
Edward Miller
Jenny Warren
Gary Walker
Steven Burrows
Simon Lafferty
1 Commission Delegated Regulation (EU) 2018/1229
2 See ICMA's statement of 24 June 2020
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