The ESMA forbearance statement, published on 17 December 2021, follows political agreement at EU level to delay application of MBI rules in order to allow time for the regime to be reviewed.

As currently drafted, the MBI rules under CSDR are due to apply from 1 February 2022. However, the process for formally effecting the delay is not expected to be completed until later in 2022.  Therefore, the ESMA forbearance statement is intended to apply during the timing 'gap' between 1 February 2022 and the formal delay to MBI rules via amendments to CSDR itself and the related regulatory technical standards on settlement discipline (SD RTS).

ESMA does not have formal powers to disapply MBI requirements, so following similar forbearance statements, ESMA states that "to take into account the future amendment of the RTS on settlement discipline to postpone the date of application of the buy-in measures and to avoid potential additional costs linked to any additional later change of the systems and processes of market participants implementing these measures, ESMA would expect NCAs not to prioritise supervisory actions in relation to the application of the CSDR buy-in regime."

Various industry association have welcomed ESMA's clarification in a joint statement, emphasising the need for a consistent approach by national competent authorities (NCAs).

The MBI rules cover however only one aspect of CSDR settlement discipline measures, which otherwise include the implementation of cash penalties for settlement fails and an obligation on CSDs to monitor, analyse and report settlement fails and the participants' settlement efficiency. Further, under the SD RTS, EEA investment firms have a direct obligation to require their clients to send them written allocations and/or settlement information.

Market participants engaging in transactions involving financial instruments settled at EEA CSDs must be aware that, unlike the MBI rules in line with the ESMA's forbearance statement, these settlement discipline measures will apply from 1 February 2022.

In particular, the provisions on cash penalties are likely to have a broad impact on market participants, including buy-side firms and their underlying clients. Whilst the rules require CSDs (or in some cases CCPs) to charge cash penalties to their participants or members that cause settlement fails, in practice, CSD participants or clearing members may seek to pass on the economic impact of cash penalties to clients who were responsible for the settlement fail. Market practice is also expected to develop around bilateral claims mechanisms in case cash penalties are imposed on the 'wrong' party for technical reasons, due to the prescriptive nature of the rules.

In the meantime, an amendment to CSDR has been introduced in the final compromise text of the proposed DLT pilot regime Regulation, enabling different application dates to be set for the various settlement discipline measures. Once published in the Official Journal of the EU (expected in Q1 2022), this will allow ESMA to propose amendments to the SD RTS formally delaying the MBI application date. As such, the industry will need to rely on the ESMA forbearance statement for several months, until the MBI application date is formally delayed under the SD RTS.

Authors: Laura Douglas and Kerstin Schaepersmann