CSDR Settlement Discipline Regime

Trade Allocation and Confirmation Requirements

CSDR Article 6 provides a set of pre-settlement measures to improve Straight-through processing (‘STP’) and limit the number of settlement fails. It requires investment firms to offer their professional clients the possibility of sending confirmations and allocation details electronically and CSDs to use processes designed to work on an automated basis by default. The RTS on Settlement Discipline further elaborates on specific details that must be included as part of the written allocation and confirmation process and sets out timeframes in which the allocation and confirmation process must be completed.

Settlement Processing and Matching Requirements

Delegated Regulation (EU) 2018/1229 requires CSDs to establish procedures that facilitate the settlement of transactions in financial instruments on the intended settlement date with a minimum exposure of its participants to counterparty and liquidity risks and a low rate of settlement fails. 

A suite of CSD facilities are to be made available to ensure timely settlement of trades.

• Matching & population of settlement instruction: CSDs will provide participants with automated, continuous real-time matching throughout the day
• Settlement instruction field requirements: Participants need to provide mandatory matching fields to CSDs in their settlement instructions (Trade Date, Transaction Type, Place of Trade, Place of Clearing)
• Tolerance Levels: CSDs shall set settlement matching tolerances of €2 for settlement amounts of upto €100K and €25 for settlement amounts of more that €100K
• Cancellation Facility: CSDs shall set up a bilateral cancellation facility
• Hold and release mechanism: Ability to put a settlement instruction on hold, and then subsequently release from hold to allow settlement
• Recycling: CSDs shall recycle settlement instructions that have resulted in a settlement fail until they have been settled or bilaterally cancelled
• Partial Settlement:  CSDs shall allow for partial settlement of settlement instructions

SWIFT Release 2020 due on 22nd November is expected to introduce changes to the MT Category 5 (Securities Markets) messages, which are required to enable compliance with Central Securities Depository Regulation.

Monitoring and Reporting Requirements

CSDs are required to monitor settlement fails and report participants that consistently and systemically fail to their competent authority. CSD shall establish a system that monitors settlement fails and provide regular reports to the competent authority and relevant authorities, as to the number and details of settlement fails and any other relevant information, including the measures envisaged by CSDs and their participants to improve settlement efficiency.

CSDs shall establish working arrangements with the direct participants which have the most significant impact on their securities settlement systems and, where applicable, with relevant CCPs and trading venues to analyse the main reasons for the settlement fails.

A CSD Participant will be deemed to consistently and systemically fail when its settlement efficiency is at least 15% lower than the rate set by the settlement system.

Cash Penalties

CSDR Article 7 provides for the application of a daily cash penalty to all transactions that remain failing past the intended settlement date (ISD). Settlement fails penalties shall be calculated for all settlement instructions, free of, against or with payment, that are:

• matched (prior, on or after their Intended Settlement Date (ISD)), and
• failing to settle on and after their ISD

The cash penalties will be calculated and applied by CSDs at the end of each business day from ISD through to actual settlement date. CSDs shall collect Penalties from failing CSD participant (at least) monthly for redistribution to the receiving CSD participant. CSDs will not retain any part of the cash penalties but may charge participants separately for the costs of the penalty mechanism.

Two types of penalties will exist, and participants will be notified of penalty details on a daily basis:

1. Late Matching Fail Penalty (LMFP) – to be applied on any instruction which is matched after the relevant cut-off of its intended settlement date
2. Settlement Fail Penalty (SEFP) – to be applied on any matched instruction, which has reached its intended settlement date, and which fails to settle (including when being on hold)

Some exemptions may apply, the industry trade associations and ECSDA are seeking clarifications from ESMA. E.g.: Settlement transactions that do not represent transfer orders, Corporate actions on stocks, T2S automatic realignments.

Mandatory Buy-Ins

CSDR Article 7 provides for the introduction of a mandatory buy-in process where a failing participant does not deliver the financial instruments to the receiving participant within 4 business days after the intended settlement date (‘extension period’). Where the transaction relates to a financial instrument traded on an SME[1] growth market the extension period shall be 15 days unless the SME growth market decides to apply a shorter period.

There are exemptions:

(a) Based on asset type and liquidity of the financial instruments concerned, the extension period may be increased from four business days up to a maximum of seven business days

(b) For operations composed of several transactions, including securities repurchase or lending agreements, the buy-in process shall not apply if the intended settlement date (ISD) of the second transaction is set within 30 business days after the ISD of the first transaction.

The exemptions shall not apply to transactions for shares cleared by a CCP.

The Buy-In shall be initiated by the concerned receiving participant depending on the type of transaction:

• For cleared activity, the buy-in will be initiated and managed by the CCP
• For non-cleared activity, the buy-in will be initiated and managed by the receiving trading venue member or the receiving trading party for off-exchange transactions

CSDR has been implemented in a phased manner since 2015, with the Settlement Discipline Regime going live on 1 February 2022 as the final step of the implementation process.

The SDR will impact all market participants that are involved in transactions settling at European and International Central Securities Depositories (ICSDs) such as Clearstream and Euroclear. It is important to note that the geographical location or domicile of the trading parties is irrelevant when determining scope. There is no exemption for non-EU trading parties for transactions settling at an EU CSD, even when the non-EU trading party is an indirect CSD participant.

Participants involved in a transaction for EU issued securities are required to take measures to ensure that they settle securities by the ISD or face penalties from ISD+1 and subsequent mandatory buy-ins or cash compensation where the buy-in is not successful.

In view of ESMA’s statutory role to build a common supervisory culture by promoting convergent supervisory approaches and practices, ESMA has adopted a Q&As document which relates to the consistent application of CSDR. The latest version of the Q&A document was published on 17 February 2020 and can be found by following this link.

ESMA Q&As aim to promote common supervisory approaches and practices in the application of CSDR. The Q&A document provide responses to questions posed by the general public, market participants and NCAs in relation to the practical application of CSDR and is expected to be continually edited and updated as and when new questions are received.

Article 25 of the Delegated Regulation 2018/1229 requires parties in the settlement chain to establish contractual arrangements with their relevant counterparties that incorporate the buy-in process requirements set out in Article 7 of CSDR and the RTS on Settlement Discipline. Parties are required to ensure these contractual arrangements are enforceable in all jurisdictions to which parties in the settlement chain belong.

Standard Chartered is currently reviewing its contractual provisions to comply with this regulatory requirement and is working with the industry trade associations who are developing standardized settlement discipline annexes that could potentially be incorporated into the existing custody and master trading agreements with clients and counterparties.

If you have any specific questions on this legal requirement or would like to discuss in further detail, you can reach our dedicated legal team directly at CSDR.repapering@sc.com

Standard Chartered recognises the importance of this regulation to harmonise securities settlement processes in the EU (including cross border transactions) and the impact it will have on our clients and industry in general if not implemented in a streamlined manner. Accordingly, the Bank has established a central CSDR Programme to ensure we are ready to comply with the complex regulatory requirements and assist our clients through this landmark change.

The Settlement Discipline Regime will require significant changes to the way we currently manage our front, back and middle office functions. Several internal workstreams have been kicked off under the central programme to ensure all aspects of the regulatory requirements are addressed ahead of the implementation date.

Standard Chartered strongly recommends that clients commence performing their own assessment of the impact this regulation might have on their current business strategies and evaluate the efficiency of their trade booking, pre-matching and settlement operating models. We also recommend that clients stay tuned into industry developments on implementation of the settlement discipline regime and periodic updates from ESMA on clarifications pertaining to the regulatory technical standards.

Please reach out to your Relationship Manager for any CSDR related queries or to discuss the regulatory requirements in further detail.