The European Association of CCP Clearing Houses (EACH) has backed the European Securities and Markets Association plan to simplify settlement.
EACH was responding to the consultation launched in July by the European securities regulator over a possible amendment to the cash penalty process under the Central Securities Depositories Regime (CSDR).
The proposals would mean central securities depositories (CSDs) would become responsible for collecting and distributing all types of penalties including those for settlement fails related to cleared transactions.
Under the current regime, implemented in February this year, central counterparties (CCPs) undertake penalty collection and distribution for centrally cleared transactions.
However, according to ESMA, CCPs have expressed strong views that CSDs should take on the responsibility for cleared transactions, citing added costs and complexities around the current structure.
The current regime implemented a separate process for the collection and distribution of penalties for cleared transactions, giving the responsibility to CCPs where they were involved in the transaction.
EACH said, “We believe that the collection and distribution of all penalties should be through a single mechanism, as proposed by ESMA in its consultation.
As stated in previous responses, EACH sees the double penalties systems currently provided by CSDR SDR “as complex, costly, inefficient and unnecessarily duplicative for CCPs, CSDs, CCP members and CSD participants.”
It added that the single penalties mechanism provided by the suggested ESMA amendment would be more efficient and would resolve legal and operational risks posed by running two parallel systems.
It said that routing all penalties via CSDs would resolve many issues of operational and risks and costs.
In addition and equally as important, it noted that the single regime proposed is also supported by CSDs and their respective participants alike, and is regarded by all as a solution to improving CSDR SDR.
“EACH’s statement reinforces why reducing settlement fails must be a primary goal for all market participants,” said Daniel Carpenter, CEO at Meritsoft, a Cognizant company.
He added,”While progress has been made six months on from the CSDR penalty regime coming into force, a more strategic approach clearly needs to be taken. Unforeseen market shocks, such as what happened in Q1, mounts pressure on settlement operations teams – which will only increase with the move to T+1 just around the corner.”
Carpenter said, “What’s needed is a more granular understanding of when, why and with which counterparties trades are failing to settle. All the relevant information from across the financial institution needs to be centralised and accessible to enable any meaningful analysis of fails.
Only then can banks take steps to address the operational inefficiencies and counterparty relationships that are impacting their profitability and, in so doing, reduce their overall fail rates.”