The CSDR applies to all European CSDs and to all market operators in the context of securities settlement. Trading parties, central counterparties (CCPs), clearing and settlement agents (which are members of the CCPs and CSDs) and trading venues will also be impacted and will have to directly comply with some of the measures, in particular the introduction of mandatory buy-in regime and cash penalties for settlement failures. It should be noted that members of the European System of Central Banks and other national or public bodies that perform similar services, which would otherwise qualify as CSDs, are exempt from certain requirements under the CSDR, including those relating to authorisation.
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The Central Securities Depositories Regulation No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories (‘CSDR’) is one of the key regulations adopted to harmonise certain aspects of the settlement cycle, to instil settlement discipline and to provide a set of common requirements for Central Securities Depositories (‘CSDs’) operating securities settlement systems across the EU. It provides for:
- Shorter settlement periods;
- Settlement discipline measures (mandatory cash penalties and ‘buy-ins’ for settlement fails, settlement fails reporting);
- An obligation regarding dematerialisation for most securities;
- Strict prudential and conduct of business rules for CSDs;
- Strict access rights to CSD services; and
- Increased prudential and supervisory requirements for CSDs and other institutions providing banking services ancillary to securities settlement.
CSDR affects all market participants, wherever located, which are active in securities that settle within a European CSD (including ICSDs). It will affect both direct and indirect CSD participants (including Central Clearing Counterparties ‘CCPs’ and settlement agents) and both buy and sell-side institutions.
The following instruments will be in scope of the Settlement Discipline Regime (as per Article 5(1) of CSDR):
- Transferable securities
- Money-market instruments
- Units in collective investment undertakings
- Emission allowances
- Transferable instruments
- Money market instruments
Transactions cleared by a central counterparty (CCP)
Transactions not cleared by a central counterparty (CCP) but executed on a trading venue
Transactions not cleared by a central counterparty (CCP) and not executed on a trading venue
The Bank provides settlement services for the following transactions:
- Trade (purchases and sales)
- Securities lending and borrowing
- Portfolio transfer
- Collateral transactions
Currently, the Bank has identified the following areas that have or will have an impact on customers:
- Custody payments (for income proceeds) – IMPLEMENTED
- Custody and income proceeds are no longer advanced to customers on an unsecured basis, i.e. the payment is only effected once it has been confirmed by the issuer CSD/agent.
- Option for segregated account at the market level – IMPLEMENTED
The Bank already allows customers to open segregated accounts at a level of CSD - with justification and as is reasonably required (e.g. tax services, market rules, etc.)
- Settlement discipline regime (as of 1st February 2022)
Under SDR, a settlement fail means the non-occurrence of settlement, or partial settlement of a securities transaction on the intended settlement date, due to a lack of securities or cash and regardless of the underlying cause. Under CSDR, the Bank has an obligation to minimize settlement fails and is therefore introducing certain changes to the current process for dealing with customer settlement instructions. These changes will also help customers reduce the amount of settlement penalties they will incur and the need of a buy-in.
The Bank already supports partial settlement for eligible transactions. Partial settlement can only be triggered in the case of a lack of securities on the delivering customer's account. Partial settlement is not triggered in the case of a lack of cash on the receiving side.
Currently, there are no penalties for late matching and/or settlement if customers or their counterparties do not deliver securities or do not have sufficient cash. Under the new SDR, CSDs will apply cash penalties for settlement instructions that fail to settle on their intended settlement day (ISD) and when the financial instrument is in scope.
Customers are encouraged to analyse their settlement processes, including the practice of instructing back-dated trades, prior to SDR entering into force.
Penalty rates and calculation formulas vary according to liquidity, the transaction type and cause of fail.
There are two types of cash penalties:
- Late Matching Fail Penalties (LMFP) - penalty that applies due to the matching taking place after the ISD
- Settlement Fail Penalties (SEFP) - penalty that applies due to the non-settlement of a matched transaction on or after its ISD
The penalties will be calculated by the CSD based on a daily reference price of the financial instrument to be identified by the CSD; the securities and the daily reference price data must be sourced from suppliers and/ or maintained by CSDs on ISIN level based on MiFID II/ MiFIR rules. The Bank intends to pass on penalties to its customers, as calculated and reported by the CSDs, upon final settlement of the transaction.
Penalties will be collected in EURO only and debited to the customer’s default cash account.
Penalties only apply to matched instructions.
Yes, details are yet to be determined and will be reflected in a revised fee schedule which will become effective with the introduction of SDR in February 2022.
Customers may address appeals regarding their penalties to the Bank within 5 working days from the day the penalty is applied by the Bank, by creating an appeal request. A specific form for lodging an appeal will be provided by the Bank in due course. The Bank will appeal to the CSD, on behalf of the customer, within the CSD’s timeframe. If the appeal is accepted by the CSD, and the CSD reverses/refunds the penalty, then erroneous fees will be reversed from the customer’s account.
The Bank’s General Terms and Conditions for Investment Services and the Service Level Agreement (where applicable) will be updated accordingly.