Regulating securities settlement
The settlement discipline regime, a key element of the Central Securities Depositories Regulation, has been delayed until 1 February 2021. Emma Johnson explains the changes required of market participants to meet their new post-trade obligations
To achieve this, the regulation provides a set of measures to prevent and address failures in the settlement of securities transactions in Europe. These include: new requirements for allocation and confirmation; cash penalties; mandatory buy-ins; and monitoring and reporting measures to be taken by the central securities depositories (CSDs).1 Market participants should be aware of their obligations and treat these as a ‘call to action’ to be operationally more efficient. From timely and accurate trade bookings through to allocation, confirmation, settlement and inventory management, front, middle and back offices are impacted.
Protecting the market
The European Securities and Markets Authority (ESMA) requested that the European Commission delay SDR for the following reasons:
- The development and industry testing of the penalty mechanism for TARGET2- Securities (T2S), the European Central Bank platform for pan-European securities settlement in participating markets, is due to go live from 21−22 November 2020. Since a fully functioning penalty mechanism underpins SDR, it necessitates a delay of the regime implementation to February of the following year.
- The annual SWIFT ISO messaging standard release, which includes new messaging to support the SDR, is also due over the 21−22 November 2020. SWIFT requires time to implement these new messaging standards.
- The mandatory buy-in regime requires time to implement changes to current market practice, contractual arrangements and technical development, including new ISO messaging.
Given the delay, participants have more time to make the extensive IT system changes at a market level – including at the CSDs, central counterparties and trading venues, and at a messaging and reporting level including SWIFT – and conclude adjustments to legal arrangements between all parties. The delay – SDR was originally due to come into force in September 2020 – lends more time for the front, middle and back offices to implement their new procedures, including heightened trade fails management and the implementation of the buy-in regime.
Since the Central Securities Depositories Regulation (CSDR) will call out and penalize poor processes, steps towards prevention should be started now. The requirement for mandated discipline at the trade and pre-settlement level solidifies the dependency on trade booking efficiency, timeliness and accuracy. The inclusion of standard settlement instructions and the total cash amount – both common matching and settlement points of failure – in the allocation and confirmation process is a step towards eliminating trade date inefficiency and ensuring cohesion between trade, post-trade and the often siloed operational processes that occur between trading and settlement.
Penalising poor performance
Settlement instructions that are matched either before, on or after the intended settlement date (ISD), and fail to settle on and after the ISD in a CSD subject to CSDR, will be hit with cash penalties. This will apply to all failed settlement instructions, including cleared transactions with the assumed exemption of corporate actions and T2S realignments (subject to confirmation by ESMA). CSDs will impose a penalty by debiting the CSD participant who causes the fail and crediting the CSD participant affected by the fail. This process, which is detailed in the European Central Securities Depositories Association’s CSDR Penalties Framework, is still subject to clarification from ESMA, the CSDs and the central counterparties.
Buy-ins are slightly different. The Level 2 text of the regulation makes reference to the “failing trading party” and the “receiving trading party” as the participants in the transaction.
Given the delay, participants have more time to make the extensive IT system changes at a market level
Ringing in the changes
Given CSDR will drive settlement performance, Deutsche Bank is offering real-time data and settlement analytics to provide participants with a risk view of their settlement horizon, including a view of trades at risk of penalty and buy-in. These dashboards will provide performance-related insights – such as where and why trades are failing – and suggest remedial action.
Head of Securities Services Market Advocacy
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