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The settlement discipline regime (SDR) is now in force, which introduced cash penalties for late matching and settlement fails for trades that settle at a European central securities depository (CSD) or international central securities depository (ICSD; e.g., Euroclear, Clearstream).

CSDR was designed to achieve higher rates of efficiency and liquidity in the European securities markets. The mandatory buy-in provisions, which were also originally planned for a February 1, 2022, live date, continue to be postponed. ��KY���� continues to monitor the buy-in portion of the regulation closely. In addition, the European Securities and Markets Authority (ESMA) is considering feedback received to the consultation paper dated July 9, 2024, by December 31, 2024. (, which seeks technical advice on the scope of CSDR including the delayed buy-in regime.)

CSDR: Harmonising the cycle

The goal of CSDR is to harmonise certain aspects of the settlement cycle while providing a set of common requirements for any central securities depository (or CSD) that operates securities settlement systems across the European Union (EU). It requires all parties in the chain, including investment firms, to have measures in place that mitigate fails.

In Europe, financial penalties are now imposed for late matching and failing transactions. The goal in introducing these penalties was to change the mindset and client behavior when it comes to settlements in the industry and, in turn, increase efficiency.

CSDs pass on financial penalties to their participants (e.g., custodians), who pass them on to their clients.

According to Sean Boyle, head of custody Europe at ��KY���� Europe DAC, CSDR plays a pivotal role in the post-trade harmonisation efforts in Europe. “It enhances the legal and operational conditions for cross-border settlement while increasing the safety and efficiency of securities and CSDs in the EU,” he says.

This is accomplished by the following:

• Shorter cycle periods
• Discipline measures, such as mandatory cash penalties
• An obligation regarding dematerialisation for most securities
• Strict prudential and conduct of business rules for CSDs
• Buy-ins (delayed)

Following the same rules

Boyle explains that all EU countries have had different standards in the past and followed their own practices for settling securities transactions, which has made executing cross-border transactions more difficult. “This is why the harmonising aspect of CSDR is so important,” he says. “With everyone following the same rules and practices, the process will be faster and more efficient.

A common misconception about CSDR is that it applies only to companies in the EU, notes Breda Sullivan, head of Depositary Services – Europe for ��KY����. “The regulation ultimately impacts any securities settlement within an EU or international CSD, so geography does not apply,” she says.

CSDR affects all financial firms that trade in EU-issued securities, regardless of where they’re located. These include banks and broker-dealers, hedge funds, investment and asset managers, custodians, agents and CSDs. “The regulation truly has a global reach,” says Sullivan.

Boyle stresses that even though the regulation is directed at CSDs, every party in the chain will be affected by CSDR. “Everyone needs to know what their responsibilities are within the chain,” he says.

Manage your fails exposure

Boyle says that operational control and efficiency are paramount to avoid failing transactions and financial penalties associated with CSDR.

“If you don’t manage your fails exposure in a timely manner, it’s going to cost you from this point forward,” he says. “So, you should make sure you’ve got strong visibility reporting and you’re partnering with custodians and brokers that can handle fails reporting on buy-ins and penalty risk at any given time. All parties in the chain must continue to evaluate their current fails management processes by analysing behaviors, patterns and root causes.”

Who’s responsible for what?

Clients are responsible for the following with respect to penalties, charges and the appeals process under CSDR:

• Reviewing all charges both internally and with any subsequent underlying clients
• Ensuring an appeals process is in place and appeals are requested in line with the ECSDA rules
• Ensuring funding is in place to pay charges on a monthly basis
• Creating a partial settlement process in line with your custodian’s requirements
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While there is a continued delay in terms of the buy-in regime, a mandatory buy-in process could be enforced at a later date. In this scenario, clients would be responsible for the following:

• Placing or requesting the transaction “on hold”
• Cancelling the original failing transaction once the buy-in is completed
• Appointing a buy-in agent to source shares for the buy-in
• Making payments as required to the receiving party to cover the costs of the buy-in

What impact does CSDR have on clients?

Clients should consider the following:

• Repapering contracts to include provisions for buy-in responsibilities
• Increasing headcount to manage financial exposure risks to fails management
• Increasing partial settlements
• Requiring improved visibility of fails and reporting
• Increasing securities lending activities to cover failing obligations
• Ensuring you understand your custodian’s billing process for collecting CSDR penalties

At ��KY����, we employ a partial trade settlement functionality to reduce fails exposure. We support daily processes to review and transmit charges to the responsible party and create a monthly process for payment of penalties to the CSD or sub-custodian. Our in-house trade services group’s fails/pending transaction process will aid clients and reduce the number of failing transactions, thus reducing the cost of penalties to clients.

As more CSDR provisions are implemented, be sure to ask your custodian about how they’re preparing and how they will work with you to ensure you remain compliant. Major regulatory changes like this one demand a true partnership.

At ��KY����, our experts serve as trusted partners to keep you updated on regulatory changes so you can focus on reaching your business goals. To learn more about our comprehensive investment services, visit usbank.com/investmentservices.