FIA EPTA Response to ESMA’s Consultation Paper on Technical Advice on the CSDR Penalty Mechanism

29 February 2024

FIA EPTA members are supportive of effective measures to improve settlement discipline and efficiency in Europe, particularly in light of discussions concerning shortening settlement cycles. However, we urge ESMA to further consider their proposals put forward in the Consultation Paper on Technical Advice on the CSDR Penalty Mechanism, particularly regarding application of progressive penalty rates.

FIA EPTA members have concerns with the impact of progressive penalty rates specifically on European ETF markets. We believe the majority of ETF settlement failures in Europe are caused by structural issues rather than behavioural ones and therefore if ESMA does consider it timely and necessary to substantially revise the CSDR penalty mechanism, its proposals should focus on addressing actionably avoidable fails. Extra penalizing of unavoidable, inadvertently failed settlements only does extra harm to the markets as a whole, especially to the end-investor, and will not effectively address settlement discipline.

The existing penalty mechanism under CSDR has only been in force for a relatively short period of time and over that time, European markets have gone through significant periods of volatility and change, including in response to the Covid-19 crisis and the ensuing higher interest rate environment. We ask that ESMA take a conservative and measured approach to proposing changes to the European Commission and allow sufficient time to assess the impact of the current regime before making dramatic changes to the design or rate of penalties applicable under CSDR.

If ESMA believes that it is necessary to increase penalty rates, we believe a proportional approach should be adopted which takes into account structural factors impacting settlement failure rates of particular financial instruments by including a different treatment for ETFs and market makers. We strongly recommend that ESMA does not implement progressive penalty rates due to the likely detrimental impact on liquidity and costs in European ETF markets. Instead, we consider a flat penalty rate, subject to review and revision by ESMA, to be more appropriate at incentivizing settlement discipline whilst supporting ongoing growth and investment in EU capital markets. We welcome the opportunity to work with ESMA and the industry more broadly to develop a solution suitable to cater for the unique characteristics of ETF markets.

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