Regulation (EU) 2023/2845 of the European Parliament and of the Council of 13 December 2023 amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories and amending Regulation (EU) No 236/2012 (Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Central Bank (1),

Having regard to the opinion of the European Economic and Social Committee (2),

Acting in accordance with the ordinary legislative procedure (3),

Whereas:

(1) Regulation (EU) No 909/2014 of the European Parliament and of the Council (4) standardises the requirements for the settlement of financial instruments and the rules on the organisation and conduct of central securities depositories (CSDs) to promote safe, efficient and smooth settlement. That Regulation introduced shorter settlement periods, settlement discipline measures, strict organisational, conduct of business and prudential requirements for CSDs, increased prudential and supervisory requirements for CSDs and other institutions providing banking services that support securities settlement, and a regime allowing authorised CSDs to provide their services across the Union.

(2) A simplification of the requirements in certain areas covered by Regulation (EU) No 909/2014 and a more proportionate approach to those areas would be in line with the Commission’s Regulatory Fitness and Performance (REFIT) programme, which emphasises the need for cost reduction and simplification so that Union policies achieve their objectives in the most efficient way and aims in particular to reduce regulatory and administrative burdens.

(3) Efficient and resilient post-trading infrastructures are essential elements for a well-functioning capital markets union and increase the efforts to support investment, growth and jobs in line with the political priorities of the Commission. For that reason, a review of Regulation (EU) No 909/2014 is one of the key actions of the Commission Capital Markets Union Action Plan set out in the communication of the Commission of 24 September 2020 on a Capital Markets Union for people and businesses-new action plan.

(4) In 2019, the Commission carried out a targeted consultation on the application of Regulation (EU) No 909/2014. The Commission also received input from the European Supervisory Authority (European Securities and Markets Authority) (ESMA) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (5) and the European System of Central Banks (ESCB). The feedback received indicated that stakeholders support and consider relevant the objective of Regulation (EU) No 909/2014 to promote safe, efficient and smooth settlement of financial instruments, and that no major overhaul of that Regulation was necessary. The report submitted by the Commission to the European Parliament and the Council in accordance with Regulation (EU) No 909/2014 was published on 1 July 2021. Although the provisions of that Regulation are not yet all fully applicable, the report identified areas for which targeted action is necessary to ensure that the objective of that Regulation is reached in a more proportionate, efficient and effective manner.

(5) CSDs should be able to specify, in their internal rules, which events other than insolvency proceedings constitute the default of a participant. In general, such events relate to a failure to complete a transfer of funds or securities in accordance with the terms and conditions and the internal rules of the securities settlement system.

(6) Regulation (EU) No 909/2014 introduced rules on settlement discipline to prevent and address failures in the settlement of securities transactions and therefore ensure the safety of transaction settlement. Additional measures and tools to improve settlement efficiency in the Union, such as shaping of transaction sizes or partial settlement, should be explored. Accordingly, ESMA should, in close cooperation with the members of the ESCB, review industry best practices, both within the Union and internationally, with a view to identifying all relevant measures that could be implemented by settlement systems or market participants, and develop updated draft regulatory technical standards on measures to prevent settlement fails in order to increase settlement efficiency.

(7) The rules introduced by Regulation (EU) No 909/2014 include, in particular, reporting requirements, a cash penalties regime and mandatory buy-ins. Currently, only the reporting requirements and the cash penalties regime apply. The accumulated experience in applying the cash penalties regime as well as the development and specification of the settlement discipline framework, in particular in Commission Delegated Regulation (EU) 2018/1229 (6), have allowed all interested parties to better understand that framework and the challenges its application gives rise to. In particular, the scope of the cash penalties and of the mandatory buy-in process set out in Regulation (EU) No 909/2014 should be clarified. In order to distinguish the requirements relating to cash penalties from those relating to mandatory buy-ins, such requirements should be laid down in separate articles.

(8) Settlement fails the underlying cause of which is not attributable to the participants and operations that are not considered as trading should not be subject to cash penalties or mandatory buy-ins, since the application of those measures to such settlement fails and operations would not be practicable or could lead to detrimental consequences for the market. For mandatory buy-ins, that is likely to be the case for certain primary market transactions, securities financing transactions, corporate actions, reorganisations or the creation and redemption of fund units, realignment operations or other types of transactions that render the buy-in process unnecessary. Similarly, the settlement discipline measures should not apply to failing participants against which insolvency proceedings have been opened, or where central counterparties (CCPs) are the failing participants, except for transactions entered into by a CCP where it does not interpose itself between counterparties.

(9) Cash penalties should be calculated for each business day for as long as the fail persists. The possibility of a negative interest rate environment should be taken into account when defining the parameters for the calculation of cash penalties. Eliminating any adverse incentives to fail that could arise in a low or negative interest rate environment is necessary in order to avoid unintended effects on the non-failing participant. The Commission should, on a regular basis, review the parameters used to calculate cash penalties and should, as a result, consider potential changes to the method used for the calculation of those penalties, such as setting progressive rates.

(10) Mandatory buy-ins could have negative effects, both in normal and stressed market conditions. Therefore, mandatory buy-ins should be a measure of last resort and should apply only where the following two conditions are met at the same time: first, the application of other measures, such as cash penalties or the suspension, by CSDs, CCPs or trading venues, of participants that cause settlement fails consistently and systematically, has not resulted in a long-term sustainable reduction of settlement fails in the Union or in maintaining a reduced level of settlement fails in the Union; and, second, the level of settlement fails has or is likely to have a negative effect on the financial stability of the Union.

(11) When considering whether to introduce mandatory buy-ins, the Commission should, in addition to consulting the European Systemic Risk Board, request ESMA to provide a cost-benefit analysis. Based on that cost-benefit analysis, the Commission should be able to introduce mandatory buy-ins by means of an implementing act. That implementing act should specify to which financial instruments or categories of transactions mandatory buy-ins are to be applied.

(12) Applying buy-ins to a chain of transactions on the same financial instrument carried out by counterparties that are participants of a CSD could trigger unnecessary duplicative costs and affect the liquidity of the financial instrument. To avoid such consequences, a pass-on mechanism should be available to participants in such transactions. Each participant involved in the transaction chain should be allowed to pass on a buy-in obligation to the next participant.

(13) Mandatory buy-ins allow for the payment of the difference between a financial instrument’s buy-in price and its original trade price to be made by the seller to the purchaser only where that buy-in reference price is higher than the original trade price. That asymmetry would unduly benefit the purchaser in the event that the buy-in reference price is lower than the original trade price. It would also make the pass-on mechanism impossible to apply since, notably, the amounts to be paid can differ between each step in the chain of transactions, depending on when each intermediary executes the buy-in. Therefore, that asymmetry should be removed to ensure that the trading parties are restored to the economic terms that would have applied had the original transaction taken place.

(14) The mandatory buy-in procedures under Regulation (EU) No 236/2012 of the European Parliament and of the Council (7) ceased to apply on 1 February 2022, as a result of the entry into force of Delegated Regulation (EU) 2018/1229. However, the mandatory buy-in procedures under Regulation (EU) No 236/2012 were independent of the regime under Regulation (EU) No 909/2014 and should have continued to apply. Therefore, it is appropriate to reinstate in Regulation (EU) No 236/2012 the provision governing mandatory buy-ins. Transactions that will fall within the scope of that provision should not be subject to mandatory buy-ins under Regulation (EU) No 909/2014.

(15) Transactions not cleared by a CCP might be uncollateralised and therefore each trading venue member or trading party bears the counterparty risk. Moving that risk to other entities, such as participants of a CSD, would force the participants to cover their exposure to counterparty risk with collateral, which could lead to a disproportionate increase in the costs of securities settlement. The failing trading venue member or the failing trading party, as applicable, should therefore bear responsibility for the payment of the price difference, the cash compensation and the buy-in costs.

(16) Where mandatory buy-ins apply, it should be possible for the Commission to temporarily suspend their application in certain exceptional situations. Such a suspension should be possible for specific categories of financial instruments where necessary to avoid or address a serious threat to financial stability or to the orderly functioning of financial markets in the Union. Such a suspension should be proportionate to those aims.

(17) ESMA should develop updated draft regulatory technical standards in order to take into account the amendments introduced by this Regulation to Regulation (EU) No 909/2014. That would enable the Commission to make any necessary corrections or amendments with a view to clarifying the requirements set out in such existing regulatory technical standards. ESMA should also develop draft regulatory technical standards to specify the details of the pass-on mechanism, which types of transactions render the buy-in process unnecessary and how to take into account the specificities of retail investors when executing mandatory buy-ins.

(18) Where a CSD does not carry out a settlement activity before the beginning of the authorisation process, the criteria determining which relevant authorities should be involved in such authorisation process should take into account the anticipated settlement activity to ensure that the views of all relevant authorities potentially interested in the activities of that CSD are taken into account.

(19) Where a new CSD applies for authorisation, but compliance with certain requirements cannot be assessed because the CSD is not yet operational, the competent authority should be able to grant the authorisation where it can reasonably be assumed that that CSD will comply with Regulation (EU) No 909/2014 when it effectively commences its activities. That assessment is particularly relevant as regards the use of distributed ledger technology and the application of Regulation (EU) 2022/858 of the European Parliament and of the Council (8).

(20) While Regulation (EU) No 909/2014 requires national supervisors to cooperate with and involve relevant authorities, national supervisors are not required to inform those relevant authorities whether or how their views have been considered in the outcome of the authorisation process or whether additional issues have been identified in the course of regular reviews and evaluations. The relevant authorities should therefore be able to issue reasoned opinions on the authorisation of CSDs and the review and evaluation process. The competent authorities should take into account such opinions or explain why such opinions were not followed. The competent authorities should inform the relevant authorities, as well as other authorities consulted, of the results of the authorisation process. The competent authorities should inform the relevant authorities, ESMA and the college of the results of the review and evaluation process.

(21) The provisions regarding the timelines for the authorisation of a CSD to outsource core services to a third party or to extend its activities to certain other services should be amended to remove unintended inconsistencies between those timelines and the timelines of the general authorisation process.

(22) Regular reviews and evaluations of CSDs by competent authorities are necessary to ensure that CSDs continue to have in place appropriate arrangements, strategies, processes and mechanisms to evaluate the risks to which CSDs are, or might be, exposed or which could constitute a threat to the smooth functioning of securities markets. Experience has, however, shown that an annual review and evaluation is disproportionately burdensome for both CSDs and competent authorities and of limited added value. Subject to a minimum frequency of once every three years, competent authorities should be able to set a more appropriate frequency for the review and evaluation of each CSD in order to alleviate that burden and avoid a duplication of information from one exercise to the next. Furthermore, in assessing what would be the appropriate frequency and depth of the review and evaluation, the competent authority should consider what would be proportionate, taking into account the size, systemic importance, risk profile, nature, scale and complexity of the CSD. The supervisory capacities of competent authorities and the objective of safeguarding financial stability should, however, not be undermined. Therefore, competent authorities should continue to have the possibility to perform any additional review and evaluation. CSDs providing banking-type ancillary services are also subject to review and evaluation under Directive 2013/36/EU of the European Parliament and of the Council (9).

(23) A CSD should be prepared to face scenarios that could potentially prevent it from being able to provide its critical operations and services as a going concern and should assess the effectiveness of a full range of options for recovery or orderly wind-down in those scenarios. Regulation (EU) No 909/2014 introduced requirements in that respect, providing in particular that a competent authority is to require the CSD to submit an adequate recovery plan and is to ensure that an adequate resolution plan is established and maintained for each CSD. No harmonised resolution regime on which a resolution plan could be based, however, currently exists. CSDs that are authorised to offer banking-type ancillary services fall within the scope of Directive 2014/59/EU of the European Parliament and of the Council (10). However, no specific provisions exist for CSDs which are not authorised to provide such services and therefore are not considered credit institutions under Directive 2014/59/EU with the obligation to have recovery and resolution plans in place. Clarifications should therefore be introduced with a view to better aligning the requirements applicable to CSDs taking into account the absence of a Union framework for the recovery and resolution for all CSDs. In order to avoid a duplication of requirements, where a recovery and resolution plan has been drawn up for a CSD under Directive 2014/59/EU, that CSD should not be required to prepare plans on recovery or orderly wind-down under Regulation (EU) No 909/2014, insofar as the information to be included in those plans has been already provided. However, such CSDs should provide their competent authority with the recovery plans drawn up under that Directive.

(24) The procedure set out in Regulation (EU) No 909/2014 regarding the provision by a CSD of notary and central maintenance services in relation to financial instruments constituted under the law of a Member State other than the law of the Member State where the CSD is authorised has proven to be burdensome and some of its requirements are unclear. That procedure has resulted in a disproportionately costly and lengthy process for CSDs. The procedure should therefore be clarified and simplified to better dismantle the barriers to cross-border settlement so as to enable authorised CSDs to fully benefit from the freedom to provide services within the Union. Without prejudice to the measures that CSDs need to take to allow their users to comply with national law, it should be clear which is the relevant legal framework for the assessment that a CSD is required to perform under Regulation (EU) No 909/2014 in relation to the measures that it intends to take to allow its users to comply with the law of another Member State and that the assessment be limited only to shares. The competent authority of the host Member State should be offered the possibility to comment on the assessment related to the law of that Member State. The final decision should be left to the competent authority of the home Member State.

(25) In order to allow for better cooperation regarding the supervision of CSDs providing cross-border services, the competent authority of the home Member State should be able to invite staff from the competent authorities of the host Member States and from ESMA to participate in on-site inspections in branches. The competent authority of the home Member State should also transmit to ESMA and the college the findings of the on-site inspections and information on remedial actions or penalties decided on by that competent authority.