It’s finally happened. The European Securities and Markets Authority (ESMA) has recommended a delay to the entry into force of CSDR’s settlement discipline. While an extension has been expected and certainly hoped for, a degree of uncertainty still exists around what it means for the industry.
Matthew Johnson, Associate Director, ITP product management at DTCC sat down with us to answer the top three questions around the delay.
1. How long is the extension and what does it change?
The European Securities and Markets Authority (ESMA) has actioned a postponement CSDR’s Settlement Discipline Regime (SDR) from September this year to February 1st, 2021. This follows lobbying from market participants who expressed concerns over the industry’s readiness to meet the requirements of the SDR.
It should be noted, the delay – which still needs the endorsement of the European Commission - will not alter any of the new rules within the SDR.
2. How will this extension affect industry participants?
This extension gives the industry an additional four months to prepare operationally for the potential impact of the penalties that will come into play with the implementation of CSDR’s SDR from February 2021, and the related mandatory buy-in process.
The SDR will still put into play cash penalties for transactions that fail to settle within their intended settlement date, following the T+2 timeframe mandated in the EU. It will also introduce mandatory buy-ins where a failing participant does not deliver financial instruments to the receiving participant within a set time frame (e.g. within four business days after the intended settlement date for liquid shares and bonds, or 7-15 days for illiquid instruments and SME Market Trades).
The delay will not alter the fact that this regime will impact all firms that trade with EU counterparts or in securities that settle in the EU, regardless of where they are located geographically.
DTCC strongly advises our clients to use this additional time to review and optimize their post-trade systems and processes to enhance trade efficiency now in order to reduce exposure to penalties under the SDR from next February.
3. How can DTCC clients prepare effectively for the SDR in February 2021?
Automation is encouraged by the CSDR and will be integral to firms that wish to mitigate the penalties proposed under the SDR. Firms with optimized post-trade solutions will minimize the risk of trade failure, penalties and administrative burden of the buy-in process. Just increasing headcount will be costly and will not allow for the necessary scalability. The fewer times you touch a transaction the higher the chance it has of settling on time: firms operating on no-touch workflow will be best positioned to thrive under CSDR.
DTCC’s Institutional Trade Processing (ITP) services provides an optimal no-touch post-trade workflow – an automated process that can help firms conform to the measures mandated by the CSDR and avoid settlement fails.