A Focus on Regulation Readiness
Based on the additional technical rules outlined in the Official Journal in March 2017, we have summarised the elements of CSDR that will likely have the most impact. Please be sure to bookmark this page as we will continue to update it with new information and commentary.
By 30 September 2017, existing EU CSDs must have applied for authorisation under CSDR from their national competent authorities. This entered into force on 30 March 2018; however, the actual date of authorisation may vary by CSD.
Most CSDs will have to modify elements of their processing to become CSDR compliant before they can be granted the necessary authorisation. The resulting changes may have operational impacts on CSD participants and their clients. Also, when a CSD has received its authorisation, Article 38 of CSDR mandates that the CSD and the participants of the CSD offer to their clients a choice between using different types of securities accounts at the CSD.
The Article further requires that the CSD and its participants disclose to their clients the level of protection and the costs associated with the different types of securities accounts.
From 30 March 2019, all custodians and other intermediaries located in the EU will have to provide to their national competent authorities a quarterly report that includes data as to the volumes and values of internalised settlement that they have effected during the past quarter.
The European Securities and Markets Authority (ESMA) published a consultation paper on proposed additional guidelines on internalised settlement reporting on 10 July 2017, and published finalised guidelines on 28 March 2018. As set out in the consultation paper, the first internalised settlement report will be due for submission to the competent authorities in July 2019.
On 13 September 2018, the last remaining piece of CSD Regulation (CSDR), a delegated regulation setting out regulatory technical standards on Settlement Discipline, was published in the Official Journal of the European Union (EU). This delegated regulation will enter into force on 13 September 2020.
The delegated regulation has three main parts: a set of measures to prevent settlement fails by improving matching and settlement rates, and then two sets of discipline measures, cash penalties for late settlement, and mandatory buy-ins with cash compensation.
The first part, fail prevention, requires trading parties to include a full set of transaction information on a written confirmation and within set timeframes, and to ensure that full details are passed onto custodians in the settlement instructions. CSDs will have a number of new functionalities to implement too, including major services such as bilateral cancellation, hold and release mechanisms, and partial settlement release. CSDs will be reviewing the changes that they need to make over the coming months in preparation.
The second part, cash penalties, requires that EU CSDs calculate penalties for late settlement that results either from late matching or – for matched transactions – from a lack of securities or cash. In both cases, the penalties will be charged to the party at fault i.e. the party that sent the second instruction, or that had insufficient resources, and then credited to the other party of the transaction. CSDs will provide reporting of the penalty amounts to their participants on a daily basis for each transaction. On at least a monthly basis CSDs will pass on a net amount to the participant’s cash account, on behalf of their underlying clients. SWIFT will play an important role in facilitating new messaging and is making changes to MT548 Settlement Status and Processing Advice and MT537 Statement of Pending Transaction message types in November 2019. T2S will build a mechanism to calculate penalties for late settlement on T2S.
The third part is mandatory buy-ins and cash compensation. If a transaction is still failing on intended settlement date plus four (ISD+4) (for equities trading on a liquid market), ISD + 7 for less liquid securities, and ISD +15 (for securities traded on SME Growth markets), then there is an obligation for partial settlement for any holdings on the account. On the following business day, the Receiving Trading Party must appoint a buy-in agent to purchase the securities from elsewhere. The Failing Trading Party must place the original settlement instruction on hold and once the buy-in transaction settles, then the original transaction will be cancelled. Any price variation, foreign exchange rates, corporate events and buy-in agent fees should be captured as part of the buy-in costs to be paid by the Failing Trading Party. If the buy-in cannot be executed, for example, due to a lack of liquidity in the market, then a cash compensation amount must be paid.
This content is part of BNY Mellon’s Focus on Regulation Readiness, a dedicated section on bnymellon.com that showcases regulatory and policy related content. BNY Mellon understands the regulatory realities and can help you keep pace with the changing environment.
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