The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has published its Final Report on the Technical Advice for the European Commission on the Penalty Mechanism under the Central Securities Depositories Regulation (CSDR). The advice aims at incentivising all actors in the settlement chain to improve settlement efficiency, also in view of the potential move to T+1 in the EU.

The report outlines ESMA’s advice to improve the application of the CSDR penalty mechanism on three main aspects:

alternative parameters to calculate the penalties due to lack of cash, when the official interest rate for overnight credit charged by the central bank issuing the settlement currency is not available;
the treatment of historical reference prices for the calculation of late matching fail penalties;
the design and level of the penalty rates for each asset class.
Regarding the last point, ESMA proposes to maintain the design of the current penalty mechanism, for example not introducing fundamental changes to the methods for calculating penalties, and to introduce an overall moderate increase of the penalty rates, in full alignment with the current types of settlement fails and targeting most asset classes.

Since its application as of February 2022, the penalty mechanism under the CSDR has improved settlement efficiency in the EU by ensuring that participants failing to deliver securities or cash by the intended settlement date incur a penalty. ESMA believes that cash penalties can continue to have a positive impact on settlement efficiency overall.