(Bloomberg) -- The European Union’s securities regulator is recommending greater penalties for failed trades as it looks to improve the efficiency of the region’s financial markets.
The European Securities and Markets Authority proposed a “moderate” increase of penalty rates for most asset classes, according to a paper published Tuesday. The regulator stopped short of recommending so-called progressive penalties, which increase based on the length of time the trade fails to settle, after a “vast majority” of respondents pushed back on the proposal.
Since 2022, the EU’s Central Securities Depositories Regulation has imposed cash penalties on traders failing to deliver securities or cash by the intended settlement date. The proposed increase in the charges come as the bloc prepares to halve the settlement period from two days to one, a system known as T+1.
“The advice aims at incentivising all actors in the settlement chain to improve settlement efficiency, also in view of the potential move to T+1 in the EU,” ESMA said.
The European Commission will take into account ESMA’s advice when amending the regulation. ESMA issued related recommendations earlier this week on how the bloc should move to a one-day settlement regime, saying the optimal date would be Oct. 11 2027. That aligns with the UK’s proposed timetable, and follows the US and others making the shift earlier this year.
Read: Clearstream Warns of Failed ETF Trades If Europe Adopts T+1
Failed trade settlements vary depending on the asset classes, ranging from around 2% of the total value of sovereign bond trades to about 15% for exchange-traded funds. The proposed increases include:
- The penalty for failed sovereign bond trades will double to 0.2 basis points
- For most bonds other than sovereign bonds, the penalty increases from 0.2 basis points to 0.3 basis points
- “Other” financial products including ETFs will increase from 0.5 basis points to 0.75 basis points
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