The Settlement Discipline Regime (SDR) is a central aspect of the CSDR that will impact clients upon the entry into force on 1 February 2022.
One of the objectives of the CSRD is to...
...improve the safety and efficiency of securities settlement, particularly for cross-border transactions, by ensuring that buyers and sellers receive their securities and money on time and without risks. To achieve this objective, the SDR provides for a set of measures to prevent and address failures in the settlement of securities transactions (‘settlement fails’)...
...which include cash penalties, mandatory buy-ins and monitoring and reporting measures to be taken by the CSDs.
According to CSDR and the final Regulatory Technical standard from ESMA, the following principles must be applied by all EU CSDs:
- A CSD shall provide for a cash penalty mechanism for participants that caused settlement fails.
- Cash penalties are to be calculated on a daily basis for each business day that 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 cash.
- 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 as 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.
- The full amount collected as a penalty shall be redistributed to the participant that suffered from the fail 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.