Mitigating Risk

7 Things You Need to Know About CSDR

By DTCC Connection Staff | Jun 25, 2019

Turning User Feedback Into Improved Market Insights

With CSDR’s Settlement Discipline Regime (SDR) expected to come into force next year, financial market participants are seeking to understand what impact the regulation will have on their post-trade processes.

DTCC Connection spoke with subject matter experts from The Depository Trust & Clearing Corporation (DTCC) to get answers to key questions about CSDR.


1.  What is CSDR?

The Central Securities Depositories Regulation (CSDR) entered into force on 17 September 2014 and aims to increase the safety and efficiency of securities settlement and the settlement infrastructures in the EU. One of the biggest impacts of CSDR was migrating EU Markets to a T+2 settlement cycle.


2.  What are the requirements of CSDR’s Settlement Disciplinary Regime (SDR)?

CSDR’s Settlement Discipline Regime (SDR) will require investment firms to put in place measures to mitigate settlement fails.

Its recommended measures to prevent fails encourage investment firms to offer their professional clients the mechanism to send confirmations and allocation details electronically, using international open communication procedures and standards for messaging and reference data.

It also endorses straight through processing (STP), as this is essential both for maintaining high settlement rates as volumes increase and for ensuring timely settlement of cross-border trades.


3.  What penalties will be applicable for settlement fails under CSDR’s SDR?

Under the SDR, market participants will be liable to pay daily penalties or charges against each transaction that fails to settle within the T+2 timeframe. Mandatory buy-ins will become standard practice, where a failing participant does not deliver the financial instruments to the receiving participant within four business days (or greater depending on the asset classification) after the intended settlement date.

The penalty will be charged daily based on the notional value of the transaction up until the buy-in period.

Under the SDR, buy-ins will become mandatory for all asset classes and trade types.

The SDR is the part of the CSDR regulation that has caused the most concern for market participants.


4.  What types of firms will be affected by CSDR?

CSDR will impact all financial firms that trade in the EU, regardless of where they are located. These include Investment and Asset Managers, Hedge Funds, Banks and Broker Dealers, Custodians, Agents and Central Securities Depositories (CSD’s). The scope is far and wide.


5.  Will CSDR just affect European firms?

No. All firms that are based in the EU, or choose to trade with firms within the EU, or trade in EU domiciled securities will be affected by CSDR. CSDR has a global reach.


6.  Does CSDR have a LEI requirement?

Yes, CSDR will require the CSD’s and Custodians involved in a transaction identify themselves and their clients by a Legal Entity Identifier (LEI) in their reporting architecture.


7.  What do Firms need to focus on to mitigate their penalty and buy-in exposure?

Firms should focus on three areas to help mitigate their exposure to penalties and buy-ins:

  • Post trade automation and electronification of trade confirmations
  • Accuracy of settlement information and automation of its delivery
  • Real time stock inventory oversight at a custody and CSD level.

To learn more about CSDR, please visit www.dtcc.com/csdr.



 

 

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