ESMA To Delay Settlement Rules To 2022 Amid COVID-19

By Lucia Osborne-Crowley
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Law360, London (July 28, 2020, 4:44 PM BST) -- Europe's top securities watchdog said Tuesday it could delay the enforcement of new rules clamping down on securities trades that fail to clear, in a bid to give finance firms more time to deal with the chaos of COVID-19.

The European Securities and Markets Authority said it is considering holding off from enforcing rules designed to protect investors in the securities market by penalizing companies when trades fail until February 2022. The authority hopes to allow companies to manage the economic devastation caused by the COVID-19 outbreak.

The rules are designed to prevent trades failing and will impose financial penalties on transactions that fail to settle — the procedure that takes place after securities are traded. They impose cash penalties on companies when trades fail to settle and require monitoring and reporting of failed trades.

The watchdog announced the potential delay after the European Commission, the bloc's executive arm, wrote to request that it consider giving firms extra leeway.

The regulator said the delay is "due to the impact of the COVID-19 pandemic on the implementation of regulatory projects and IT deliveries by [central securities depositories] and came as a request from the European Commission." The depositories, known as CSDs, are financial organizations that hold shares so that traders can easily buy and sell them.

ESMA has already delayed implementing the new settlement rules, citing concerns about how long it would take to update IT systems to facilitate the new reporting regime.

John Berrigan, a director general at the European Commission, wrote to ESMA asking the watchdog to consider delaying the rules in light of the COVID-19 outbreak.

The letter said the commission had "received many urgent representations asking for a further postponement."

"Stakeholders argue that the COVID-19 pandemic has seriously impacted the overall implementation of regulatory projects and IT deliveries by CSDs and their participants. During this unprecedented time, these financial institutions have had to focus their efforts on the implementation of effective contingency plans," the letter continued.

The delay must be approved by the European Council and the European Parliament, the watchdog said.

The commission's letter to the watchdog also said it has received complaints about the regulation's mandatory buy-in provisions — rules that require companies to guarantee certain trades to protect investors if they fail to clear.

"Other stakeholders have also noted that market developments during this crisis would have been significantly worse in terms of available market liquidity… if the mandatory buy-in regime was in place," the letter said.

The settlement rules were proposed in late 2016 as part of a set of technical updates to settlement discipline under the Central Securities Depositories Regulation.

The CSDR, which entered into force in September 2014, regulates the timing and conduct of securities settlement.

--Additional reporting by Richard Crump. Editing by Rebecca Flanagan.

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