suffient grounds could not be found to exercise discretion??

Hi there,
My kids MN1, section 3(1), application is refused by home office.

Home office letter says..

The registration of minors under this provision is at the secretary of state's discretion. Normally a minor will not be registred if, as appears in this case, he/she is not 'settled' in the UK as defined by immigration laws. A minor who is, or is the dependant of, a EEA national is not 'settled' in the UK until he/she has either been granted indefinte leave to remain here or acquired permanent residence under EU law, neither of which is so at present. The application has neverthless, been carefully considered to see whether there were sufficient grounds for treating it exceptionally. However, suffient grounds could not be found to exercise discretion in this case. The application has therefore been refused

We met all the required criteria as below :

1. I am a british citizen ( by naturalisation)
2. my wife on ILR
3. kids completed 2 years residence in UK
4. Kids are on depended visa. we have NOT applied ILR for them as this is NOT required if they meet other criteria as stated below in

SECTION 3(1) CHAPTER 9.17.24, CHAPTER 9.17.25 AND CHAPTER 9.17.26 OF VOLUME ONE (1) OF THE BRITISH NATIONALITY ACT 1981 ARE AS FOLLOWS:

https://www.gov.uk/government/uploads/s ... apter9.pdf

I clearly mentioned the above quotes in my MN1 application. It seems the case worker did not bother to look at it at all.

Could someone please explain what grounds they look to excercise discreation ?

I am thinking of going for reconsideration. Please help.

Best Regards
Raj