Industry Updates

ESMA launches consultation on CSDR cash penalty process

CSDs could assume responsibility for collecting and distributing all cash penalties

Theo Andrew


The European Securities and Markets Authority (ESMA) has launched an industry consultation 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.

This runs alongside a parallel framework for penalties managed by CSDs.

Highlighting the CCP’s concerns, ESMA said: “CSDs can identify and access participants for uncleared and cleared transactions, as all clearing members participate, directly or indirectly (through a settlement agent) in CSDs.

“The parallel framework for collection and distribution of cash penalties relating to cleared transactions only imposes additional costs and burdensome processes on the CSDs (to calculate cash penalties amount for cleared transactions separately, to liaise with the CCPs and ensure they collect and distribute the cash penalties).”

It added the current framework increases operational risk and liquidity needs for CCPs.

“Interacting with a single entity (the CSD) with regards to the single net amount of cash penalties to be paid or received each month would allow to improve that,” ESMA said.

Respondents to the consultation have been asked to submit their views by 9 September, with a view to publishing a final report on amendments in Q4 2022.

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