Giovanni Sabatini

Sabatini has a wealth of experience working in securities markets, both in the private and public sector. He has served as a member of the European Economic and Social Committee and held roles within the International Organization of Securities Commissions – IOSCO, the European Banking Federation and the European Central Securities Depositories Association (ECSDA).  

In his role, Sabatini will coordinate the work of the industry, acting as the link between market participants.  

ESMA announced last month that it would prepare for a move to T+1 in the EU by Q4 2027 – in line with the UK. Published in the watchdog’s final T+1 recommendations, ESMA recommends that the migration to T+1 occurs simultaneously across all relevant instruments – with a coordinated approach across the continent “desirable”.   

The watchdog recommends 11 October as the optimal date for the switch   – considering the difficulties of going live of such a substantial project in November and December. The regulator also wishes to avoid the first Monday of October as the transition date, as it is the first Monday after quarter-end.   

The UK taskforce has, too, selected 11 October as the recommended date for the switch – due to be confirmed when the final report is published in January 2025.  

In a report, ESMA highlighted the increased efficiency and resilience of post-trade processes that a move to T+1 would facilitate, “achieving the objective of further promoting settlement efficiency in the EU, contributing to market integration and to the Savings and Investment Union objectives”.   

Shortening the settlement cycle in the EU “will undoubtedly change the way in which markets function today”, the report stated, affecting entities throughout the transaction and settlement chains with varying levels of impact.   

A separate report, published by the T+1 technical group of the UK accelerated settlement taskforce, outlines 43 ‘principal recommendations’, covers critical post-trade activities that firms must be able to complete efficiently in a T+1 environment. They cover the areas of success criteria, settlement, FMIs, static data, corporate actions, securities financing and FX.   

There is also 14 ‘additional recommendations’, which assess environmental issues that need to be addressed if the UK is to maximise the efficiency gains that T+1 could deliver – but are not essential to successful implementation.   

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Both the idea of an increase in the penalty rates and a change in design of the mechanism were in play – with the latter potentially including progressive rates – under changes to the Central Securities Depositories Regulation (CSDR).

However, the European Securities and Markets Authority (ESMA) said this week that in light of market feedback it would not recommend fundamental changes to the methods for calculating penalties, in its final report on the Technical Advice for the European Commission.

ESMA said it recognised that a significant increase of penalty rates may divert resources from expected investments and costs for the industry in the context of the move to T+1.

Instead, a moderate increase has been recommended, which ESMA said was “in full alignment with the current types of settlement fails and targeting most asset classes.” 

While the highest rate would remain one basis for settlement fails due to lack of liquid shares, there could now be an increase by 50% to 0.75 basis points if the reason is a lack of illiquid shares, bonds other than sovereign bonds and all other financial instruments including ETFs.

ESMA also raised the floor for settlement fail due to a lack of cash.

In addition, the EU watchdog’s technical advice included that, in the absence of an overnight interest credit rate due to the monetary policy of the central bank issuing the settlement currency, other comparable interest rates of the ECB and the relevant central bank could be used to calculate a proxy which a CSD can use to calculate the cash penalties due to lack of cash. 

In order to prevent the accumulation of reference data over time and to ensure the efficient operation of securities settlement systems, ESMA has recommended to amend the relevant Level 2 provisions to allow CSDs to use the oldest available reference price for the calculation of the related cash penalties, where settlement instructions have been matched after the intended settlement date, and that intended settlement date is beyond 40 business days in the past from the matching date.

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Published in the watchdog’s final T+1 recommendations, ESMA recommends that the migration to T+1 occurs simultaneously across all relevant instruments – with a coordinated approach across the continent “desirable”.  

In a report, ESMA highlighted the increased efficiency and resilience of post-trade processes that a move to T+1 would facilitate, “achieving the objective of further promoting settlement efficiency in the EU, contributing to market integration and to the Savings and Investment Union objectives”.  

Shortening the settlement cycle in the EU “will undoubtedly change the way in which markets function today”, the report stated, affecting entities throughout the transaction and settlement chains with varying levels of impact.  

Regarding potential dates, ESMA recommends 11 October 2027 as the optimal date – considering the difficulties of going live of such a substantial project in November and December. The regulator also wishes to avoid the first Monday of October as the transition date, as it is the first Monday after quarter-end.  

ESMA said it will continue to work with the European Commission and the European Central Bank on work related to rules on settlement efficiency, adding that “all actors of the financial system will need to work on harmonisation, standardisation, and modernisation to improve settlement efficiency”.  

It is expected that existing CSDR and settlement discipline regulation will need to be amended, in order to “have the legal certainty and to foster the necessary improvements in post-trading processes”, the watchdog said.  

The move aligns with the proposed move to T+1 in the UK – which was announced in September. Last month, the European T+1 Industry task force voiced support for a co-ordinated move to T+1 in the EU, acknowledging the benefits of an aligned approach across the entire European region, including the EEA, the UK and Switzerland.   

“T+1 will allow EU capital markets to keep up with the evolution of other markets, putting an end to costs linked to the current misalignment of settlement cycles,” the report stated. “This will directly benefit the EU asset management industry, will contribute to the harmonisation of corporate event standards in the EU and will more generally contribute to the competitiveness of EU capital markets.” 

ESMA added that the costs and benefits related to the shortening of the settlement cycle have been difficult to quantify, however the benefits of risk reduction, aligning with global markets and margin savings represent key objectives for the EU capital markets.  

Andrew Douglas, chair of the T+1 Taskforce Technical Group, commented on the announcement, stating: “The UK Taskforce has always promoted a combined migration with UK, EU and CH moving together as our preferred solution and so on behalf of the UK Taskforce, I welcome this announcement of the European migration date for 11 October 2027. 

“We have worked closely with ESMA over the past 12 months sharing our progress and I am confident that this relationship will continue to develop as we look at how we can develop joint migration plans.”

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The European Securities and Markets Authority (ESMA) acknowledged the benefits of reducing settlement times but highlighted how harmonisation, standardisation and modernisation will be needed and will require investments.

Harmonisation within Europe is a top regulatory priority at present as the continent looks to improve its competitiveness on the global stage. Subsequently, ESMA has concluded that in the context of needing an efficient and competitive market “it is urgent to act if the EU wants to avoid prolonging and amplifying the negative impacts of the misalignment with major jurisdictions internationally.”

ESMA noted that Europe would likely need to amend CSDR to mandate a harmonised shortening of the settlement cycle in the EU.

With regards to a timeline ESMA acknowledged the high level of interconnectedness between the EU capital markets and those in other jurisdictions in Europe, highlighting how a coordinated approach across Europe is “desirable”.

The regulator added that alongside other European groups, it considers it “necessary to accelerate every aspect of the technical work needed to pave the way to any future move to T+1 in the EU.” 

ESMA, in close coordination with national competent authorities, and sub-groups from the European Commission and European Central Bank, have therefore agreed to establish a governance structure, incorporating the EU financial industry, as soon as possible to oversee and support the technical preparations of any future move to T+1.  

“In order not to lose momentum, details of the governance structure will follow shortly. It will be important that this governance is inclusive and ensures balanced sectorial and geographical representation,” said ESMA in its statement.

ESMA’s public stance was revealed just a day after the European T+1 Industry Task Force voiced support for a co-ordinated move to T+1 in the EU, acknowledging the benefits of an aligned approach across the entire European region, including the EEA, the UK and Switzerland.   

The task force stated that this followed a range of views being expressed as to whether the date identified for the UK transition, H2 2027, could also be a feasible implementation date for the EU. 

The task force did, however, emphasise that depending on the exact definition of what regulatory, technical and operational changes will be required, a transition period of between 24 and 36 months will be required to accommodate the complexity of the market infrastructure in Europe.  

Established in 2023, the European T+1 Industry Task Force comprises of 21 trade associations involved in European capital markets, bringing together a range of industry stakeholders who would be impacted by a move to T+1 settlement for securities traded and settled in the EU.

The post All signs point towards Europe aligning T+1 move with UK and Switzerland appeared first on The TRADE.

The CTP for shares and exchange traded funds ETFs will initiate in June 2025 with plans for a decision on by the end of 2025.

This in keeping with the previously confirmed timeline wherein ESMA confirmed it would be no more than six months after the launch of the selection procedure for bonds.

“Today’s announcement on the launch dates of the first selection procedures for the CTP for bonds and equities aims to foster a successful competition with multiple solid offers in transparent and fair selection procedures,” said ESMA.

Specifically, the “reasoned decision” on the selected applicant will adhere to the rules applicable to concession contracts (outlined in the Financial Regulation – EU, Euratom 2018/104636), which prescribes the steps and timelines to follow.

Read more: ESMA publishes new public consultations as Mifir review continues

Contract notice and procurement documents will be published on the EU Funding & Tenders Portal on the respective launch dates.

“Prospective applicants are invited to register and familiarise themselves with the Portal. In the coming weeks, ESMA intends to share additional guidance on the assessment of exclusion criteria,” confirmed the watchdog. 

Last December, Etrading Software confirmed plans to bid to become the consolidated tape provider (CTP) for both the UK and EU as the UK’s Financial Conduct Authority and European Securities Markets Authority (ESMA) continued with data consolidation plans.

The move followed news that the Bloomberg, MarketAxess and Tradeweb JV for a CTP bid had been scrapped due to “various developments”.

Following confirmation, it would enter the tender process to become the UK’s consolidated tape provider for fixed income, Ediphy has also confirmed its intention to bid for the European fixed income tape as well.

Last year a JV between major exchanges across Europe announced the incorporation of the new company, EuroCTP, through which the participants aim to bid to become the EU’s equities and ETF consolidated tape (CT) provider.

Read more: Battle lines are drawn over European consolidated tape project

Throughout the application periods, ESMA has confirmed it will be available to field questions from prospective bidders with applicants “granted as much time as possible, within the boundaries of EU procurement rules, to provide details on their projects”.

The post ESMA to pick bond CTP by July 2025 appeared first on The TRADE.

The consultation package includes five key focuses; the standards once approved are set to facilitate consolidated tape provider (CTP) appointment for the EU as well as increased transparency across market factions including more informative pre- and post-trade regimes.

“The new rules also aim to foster efficiency and competitiveness in European financial markets, thanks to streamlined reporting requirements,” said ESMA.

Read more – Will the European equities tape tender process end up as a one-horse race?

The package is specifically focused on: rule amendments for liquidity assessment for equity instruments (transparency and volume cap); new drafts for ‘implementing technical standard’ on SI’s; clear specifications around the equity CTP including data considerations; and the flags to be used in post-trade transparency reports for non-equity instruments. 

In addition, ESMA confirmed that part of the consultation package will include new rules for specifying the organisational requirements of trading venues, “adding new provisions on circuit breakers and with targeted amendments to adapt to the DORA framework”. 

Read more – The TRADE predictions series 2024: Regulation – Mifid/Mifir

ESMA confirmed that they will prepare a final report for submission to the European Commission in December 2024, with the remaining mandates to be submitted in March 2025. 

All comments should be received by 15 September 2024 for sections 3, 4 and 8. For sections 5, 6, and 7 the deadline is 15 October 2024.

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Christine Lagarde

Verena Ross, ESMA’s chair speaking at the launch event for the position paper today, detailed the motivations behind the proposals: “EU capital markets remain underdeveloped and fragmented in comparison to global peers. In the face of a changing world and new challenges, renewed momentum and greater commitment is needed to boost the role of capital markets in supporting growth, innovation and competitiveness in the European economy.

“Neither public budgets nor banks will be able to support this large scale investment effort alone. Private and public market-based financing must play a more fundamental role. This underlines the critical importance and urgency of developing a better European capital market ecosystem.”

The regulator made clear that the proposals are directed towards capital market supervisors, EU member states, the European Commission and to co-legislators, the rest of the financial industry, and to ESMA itself.

ESMA’s proposals are split in three, with points under different dimensions, specifically addressing: citizens (seven proposals), companies (seven proposals) and the EU regulatory and supervisory framework (6 proposals).

For EU citizens, this focus will understandably be on empowering individuals and increasing financial education in order to foster long-term investments. For companies across the EU, diversity and sustainability of financing options is at the fore, set to enhance the notion of a Pan-European market. 

For the EU’s regulators and supervisors it is all about aligning, withmodernisation and consistency of protocols being key, ESMA said. In addition, further centralisation of supervision at an EU level has also been flagged. 

Read more: Unpacking the 20 most impactful financial regulations from the last 20 years 

Christine Lagarde, president of the European Central Bank, highlighted that currently Europe is arguably unprepared and shared her support for ESMA’s proposals.

“At this pivotal moment for Europe, we are confronted with new challenges stemming from geopolitical fragmentation, slowing productivity growth and mounting climate change. Meeting these challenges will require unprecedented investments and create financing needs that far exceed the capacity of our fragmented markets.

“We have the opportunity to anchor our capital market union in a unifying project encompassing green, digital and geopolitical transitions […] we must move from a bottom up to a bold top down approach.”

Specifically, this approach entails two crucial elements, to shift from fragmented legislation to a single rule book with a unified set of “directly-applicable” rules for capital markets and enforcing this through a supervisor with a broad mandate.

These moves will work to effectively facilitate cross-border trading and competition, as well as extending ESMA’s powers to directly supervise systemic firms, explained Lagarde. 

Looking at the details of the position paper, key points include: creating an EU-label for basic and simple investment product suitable for retail investors; re-evaluating tax incentives for retail investors; stimulating equity funding to support innovation and growth; reviving the securitisation market in the EU; creating conditions for Pan-European partnerships.

In addition, when it comes to ‘improving regulatory agility, supervisory agility and global competitiveness,’ ESMA’s recommendations link to key structural changes, such as: reviewing financial regulation with a more holistic vision; improving supervisory consistency amongst EU NCAs; and accounting for the EUs global competitiveness in policy making.

Speaking to the potential of ESMA’s position paper, Lagarde enthused: “These opportunities, if seized, would empower innovative European firms, boost diffusion of technology and enhance Europe’s competitiveness and strategic autonomy in a changing world. We need all parties to rally around building a genuine capital market union. 

“Our prosperity, our future depends on it, so let’s embrace this historic opportunity together.”

The post ESMA unveils 20-point plan for ‘more effective and attractive capital markets’ appeared first on The TRADE.

These first rules regarding crypto asset service providers (CASP) are aimed at “[fostering] clarity and predictability,” as well as “[promoting] fair competition between crypto-asset service providers and a safer environment for investors across the Union”.

The proposals cover what information will be required to authorise a CASP and when financial entities notify intent to provide these services. 

Further, the ESMA report includes what information will be required when it comes to instances of acquisitions of a qualifying holding in a CASP, and also how CASPs should address complaints.

Depending on feedback from the EC following submission of the report, ESMA confirmed that they would move to provide further advice and technical guidance in the area if required by the commission.

Read more: Evolving regulation expected to push crypto derivatives trading volumes onshore

MiCA covers crypto-assets that are not regulated by existing financial services legislation, based on the principle of passporting, requiring operators in the space to obtain a single licence to provide crypto-asset services across member states of the European Union.

Set to take effect this year, the regulation, developed by the EU, came off the back of a lack of uniform rules around the asset class despite the market seeing increased demand for crypto products. The goal is for a comprehensive regulators framework which effectively reflects the nuanced scope of trading in digital assets. 

Also this week, ESMA has launched its third, and final, consultation package under MiCA. Specifically, the watchdog is seeking input on the proposed rules and guidelines across four areas: detection and reporting of suspected market abuse in crypto-assets, policies and procedures for crypto-asset transfer services, suitability requirements for certain crypto-asset services and portfolio management formats, and ICT operational resilience for certain entities under MiCA.

Read more: ESMA publishes first consultation on Markets in Crypto-Assets regulation

Feedback to the consultation is required before 25 June 2024, with a final report based on the feedback set to be submitted to the European Commission for endorsement by 30 December at the latest. 

Speaking during the launch of the first consultation package, ESMA explained: “We are determined to ensure entities involved in crypto-asset related activities understand that the EU is not a place for forum-shopping. We also want to remind consumers that, even with the implementation of MiCA, there will be no such thing as a safe crypto-asset.” 

Earlier this year, in January, the regulator released a specific consultation paper seeking feedback from the market on the classification of crypto assets under MiCA.  

Through this initiative, the regulator is aiming to facilitate consistency across the European Union by bridging the gap between MiCA regulation and Mifid II.

According to ESMA: “The proposed guidelines aim at providing national competent authorities (NCAs) and market participants with structured but flexible conditions and criteria […] to do so, the draft strikes a balance between providing guidance and avoiding establishing a one-size-fits-all approach.” 

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The European regulator published the report on the feedback received to its call for evidence on shortening the settlement cycle, where it received 81 responses from associations.

Among the responses, the issue of reduced time for post-trade processes was highlighted by respondents, with varying viewpoints on how this can be addressed.

According to ESMA, several associations and individual respondents questioned extending trading hours to accommodate any accelerations of settlement times, with one highlighting that there may be an advantage if there was an earlier official closing time for EU exchanges.

However, one association warned that reduced trading hours would result in a greatly reduced window in which European and American markets would remain open simultaneously – highlighting that EU market volumes are significantly higher during that window.

The possibility of extending market hours is something participants have expressed concern over in recent years. In 2020, buy- and sell-side traders called on the London Stock Exchange and other European venues to shorten equity market opening hours to 9 am to 4 pm GMT, highlighting that the shift could improve the culture and diversity on trading floors and boost intraday liquidity, in response to several industry consultations.

However, exchanges later rejected these bids, following extensive debate, stating that the move would not act as a silver bullet solution for the complex issues around diversity and mental health.

In its report on Thursday, ESMA also stated that a number of respondents, mainly on the buy-side, indicated that T+1 might make pre-matching impossible for them or that they will not be able to afford the extra cost on human resources to get sufficient operational coverage to accommodate T+1 settlement.

Another major takeaway from ESMA’s consultation was that respondents were “almost unanimous” regarding T+0 and have suggested ESMA focus its assessment on T+1. The watchdog said therefore it will focus its work on shortening the settlement cycle on T+1.

With the T+0 window conversation closed, for now, the focus turns to T+1 – which still remains a unique beast in terms of an entire region moving simultaneously.

While many of the concerns raised by market participants mirror those voiced with the US transition, Europe has its own additional challenges due to the sheer number of markets, CSDs, exchanges and CCPs in the region.

In addition, associations highlighted some of the significant time shifts, with one calculating that the available time for post-trade processes in a T+1 environment would be reduced by 82%, from 12 hours to two hours. Another association saw the reduction of the “common working hours” available to finalise the settlement of a transaction drastically reduced up to 92% (from 26 hours to two hours).

Despite these divergent views, many respondents agree on the need to delay the start of T2S night-time settlement (NTS) currently starting at 8pm CET. 

Andrea Gentilini, head of market infrastructures division at ESMA, noted in a social media post that there is strong demand for a “clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry”.

ESMA did note that, overall, views on whether T+1 should be pursued are “quite mixed”.

“Respondents have highlighted a number of operational impacts that go beyond simple adaptations of post-trade processes,” ESMA said. “From a cost and benefit perspective, while respondents have clearly identified the main areas of focus and have clearly highlighted the negative aspects and the costs, together with a number of benefits resulting from shorter settlement cycles, ESMA has received limited quantitative evidence due to forecasting complexities.”

In order for the regulator to produce its assessment on the appropriateness of shortening the settlement cycle and of the costs and benefits of doing so, ESMA stated that several questions remain to be “further assessed and better understood”. These include – but are not limited to – the impacts on securities lending and borrowing, market making, and the repo market; FX trading; cross-border activities; corporate actions standards; and benefits resulting from margin reductions for cleared transactions.

ESMA said it will also aim to clarify the possible implications of T+1 for retail investors and smaller market players.

The regulator will continue to engage with the industry and has been strongly encouraged to consult with investors located in the APAC region.

ESMA said it will seek to publish the report before 17 January 2025.

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The European Securities and Markets Authority (ESMA) published a consultation paper in December 2023 on the CSDR penalty regime seeking input on amendments which may include cash penalties that increase with the length of the settlement fail.

Cash penalties for settlement fails were introduced in February 2022, however rates were not immediately impacted and continue to be a concern for regulators. Still, many associations believe it is too soon to take stock and that there isn’t enough data and evidence to support increased penalties, while the drawbacks are many.

Among those to have responded have been the International Capital Market Association (ICMA), International Securities Lending Association (ISLA) and the Association of Global Custodians (AGC).

ISLA wrote that “there has not been sufficient time since the implementation of the regime in 2022 to be able to accurately determine its effectiveness on reducing settlement fails”.

ICMA pushed hard on the fact that there is no “logical or economic basis” for progressive penalties pointing to an “absence of any data or cost-benefit analysis to support” the proposal.

“Progressive penalties would introduce an unnecessary level of complexity, with the associated cost and resource drain, not only for implementing CSDs, CCPs, and custodians, but also market participants who need to reconcile penalty credits and debits, as well as pass these on to clients. Furthermore, this would put additional stress on an already dysfunctional claims process that has been born out of the EU’s CSDR penalty mechanism,” the association said.

Unintended consequences

AGC also believes the proposal would be a significant and costly undertaking not only for CSDs but also for the wider industry, including custodians. The association also believed some of ESMA’s options were not progressive but represent “major increases in overall penalty rates and significant increases in the complexity and operational costs of running the penalty regime for all intermediaries in the custody chain.”

Complexity, costs and liquidity issues came up repeatedly, along with the lack of justification for progressive penalties. ICMA commented that progressive penalties introduces unnecessary stress to a market that is most likely already facing liquidity challenges.

“Accordingly, progressive penalty rates would not provide an additional motivation to settling trades, but rather an incentive to avoiding trades, thereby becoming counterproductive,” the trade body added. “Increasing the cost of failing will not make an illiquid security any less illiquid…this will only make illiquid securities more illiquid.”

In addition, the move was put into the context of a possible shift to T+1 in Europe, along with the Capital Markets Union. On the latter, some associations felt the proposal would make Europe a less attractive market.

On T+1, introducing more complexity into the penalty regime coupled with such a significant undertaking means that the proposal needs the most careful of consideration.

ISLA noted: “It should be noted that an overhaul to the penalty regime would take considerable resource away from a focus on T+1, although it is acknowledged by the industry that in order to be successful in accelerating the settlement cycle, there must also be high settlement rates across the EU.”

ESMA said the feedback it receives will feed into its technical advice, which is expected to be sent to the European Commission by the end of September 2024.

Background to the proposal

The regulator’s latest consultation appeared to be looking at removing the economic incentives to letting the trade fail but adding in the progressive fines. ESMA said the penalties need to be “unequivocally more expensive than remedial action, like borrowing the securities or funding the cash” and “certain in terms of calculation and forecasting, to facilitate cost/benefit calculations in terms of remedial investments”.

Another reason the fines may not be as impactful is due to the sell-side absorbing the costs rather than passing them onto the buy-side.

“The proposed amendments to the structure and severity of the mechanism should effectively discourage settlement fails, incentivise their rapid resolution and improve settlement efficiency,” the report said.

Cash penalties for settlement fails were introduced in February 2022, however rates were not immediately impacted and continue to be a concern for regulators.

According to data from ESMA, fails peaked at around 12% of total settlement instructions in May/June 2021, and again spiked following the introduction of CSDR’s Settlement Discipline Regime in February 2022, which introduced penalties for late or failed trades.

The number of fails saw a steady increase until the end of Q2 2022, accounting for around 10% of total trade values. However, since then, efficiency in the market has steadily improved, with the latest figures (April 2023) placing the share of failed instructions at around the 5% mark.

The latest data in February showed equities settlement fails across CSDs within the European Union fell to a monthly average of below 6% during the second half of 2022, a vast improvement on rates witnessed over the past two years.

On social media however, some experts questioned the consistency of the data. Pete Tomlinson, director, head of post-trade at the Association for Financial Markets in Europe (AFME) commented on a post about the data saying: “Frustratingly, this bears little resemblance to the last TRV report (in which EQ fail rates for 2022 were always below 10%). how can the industry track progress without consistent data?”

Much like their response to the notion of mandatory buy-ins under CSDR, the industry is firmly against the use of progressive penalties in any form.

Mandatory buy-ins are still looming over the industry – they were not removed entirely in the CSDR refit proposal – but ESMA has reiterated that the aim should be to build a cash penalty mechanism that reduces the need for more drastic measures, rather than turn to the contentious buy-in regime.

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