The Settlement Discipline Regime (SDR) represents a pivotal component of the Central Securities Depository Regulation (CSDR), which came into effect on February 1, 2022.
A primary aim of the CSDR is to bolster the safety and efficiency of securities settlement, particularly concerning cross-border transactions. This is achieved by guaranteeing timely and risk-free delivery of securities and funds to both buyers and sellers.
To realize this objective, the SDR introduces a comprehensive framework of measures designed to prevent and rectify settlement failures ('settlement fails'). These measures include cash penalties, mandatory buy-ins, and monitoring and reporting obligations mandated for Central Securities Depositories (CSDs).
In accordance with the CSDR and the final Regulatory Technical standards from ESMA, all EU CSDs must adhere to the following principles:
- A CSD shall implement a cash penalty mechanism for participants that cause settlement fails.
- Cash penalties are to be calculated on a daily basis for each business day wherein a matched (free of, with or against) payment settlement instruction fails to settle on or after its Intended Settlement Date (ISD), including those instructions that are “on hold” or failing due to a lack of funds.
- Penalties shall also apply to instructions that matched in the securities settlement system after their ISD (“late matching”, e.g. due to instruction entry after ISD).
- Cash penalties are calculated from the ISD until the actual settlement or bilateral cancellation date of the instruction, considering*:
- Settlement Fail Penalty (SEFP): once the instruction is matched, penalties apply earliest from the ISD or the matching date (when matching took place after ISD and no settlement occurred on the matching date) to the date of actual settlement or cancellation of the instruction, in addition to Late Matching Fail penalties, when applicable;
- Late Matching Fail Penalty (LMFP): penalties apply retroactively from the ISD until the actual matching date
- For settlement fails involving multiple CSDs (cross-CSD settlements), SDR penalties, if applicable, shall be calculated only by one CSD (the “Calculating-CSD”, i.e. the CSD where settlement is actually taking place based on the “actual place of settlement” concept). This also means that an Investor-CSD being a participant in another CSD (e.g. Issuer CSD) shall comply with the Terms & Conditions of the latter CSD.
- Daily reports shall be provided to the CSD participants in order to allow them to reconcile and calculate the recharge of the penalty to their underlying clients where applicable.
- Full penalty amounts collected shall be redistributed to the participant affected from the fail, on at least on a monthly basis.
- CSD must a) calculate and report penalties for participants that are CCPs but not actually collect/ distribute any penalties and b) ensure that CCPs collect and redistribute fails penalties from/ to the relevant clearing members and provide a monthly report to the CSDs.
These stringent measures are instrumental in fortifying the integrity and reliability of securities settlement processes, fostering confidence and stability within the financial ecosystem.