The Central Securities Depositaries Regulation (“CSDR”) is an EU regulation which came into force in 2014 with the aim of increasing the safety and efficiency of securities settlement and settlement infrastructure in the European Union. CSDR was introduced in response to the global financial crisis with the intention of harmonising the standards of securities settlements, alongside other EU regulations such as the European Market Infrastructure Regulation (“EMIR”) and the Markets in Financial Instrument Directive (“MiFID II”).
CSDR applies to all central securities depositories (“CSDs”) in the European Economic Area (“EEA”) in the context of securities settlement. A CSD is an institution that holds financial instruments, including equities, bonds, money market instruments and mutual funds. It allows ownership of those instruments to be transferred in electronic form.
The CSDR requirements are being implemented on a phased basis. Phase 1 which was implemented in 2017, required providers to offer their clients the choice between omnibus and individual segregated accounts and, phase 2 which was implemented in 2019, introduced the requirement to report internally settled trades, which are trades settling outside CSDs.
Another cornerstone of CSDR and phase 3 of its implementation is the Settlement Discipline Regime (“SDR”) which is effective from February 2022. The SDR is designed to improve the safety and efficiency of securities settlement, particularly for cross-border transactions, by ensuring that buyers and sellers receive their securities and money on time and without risk. The SDR provides a set of measures to prevent and address failures in the settlement of securities transactions (‘settlement fails’), including cash penalties, mandatory buy-ins and monitoring and reporting measures to be taken by the CSDs.
The mandatory buy-in provision creates a mandatory obligation for trading parties to execute buy-ins against counterparties who fail to settle their trades within a required period. In late November 2021, following intense industry engagement with the European Securities and Markets Authority (“ESMA”), it was announced that the mandatory buy-in requirement would be delayed until 2024 at the earliest.
SDR – Cash Penalties Regime
The SDR applies to all transactions intended to settle on an EEA CSD which are traded on an EU trading venue or cleared by an EU central counterparty. Such transactions could include equities, bonds, money market instruments and mutual funds.
The cash penalty regime imposes cash penalties for transactions that are not settled on the intended settlement date (“ISD”). Cash penalties are to be calculated on a daily basis for each business day that a matched payment settlement instruction fails to settle on or after its ISD. Cash penalties are calculated from the ISD until the actual settlement or bilateral cancellation date of the instruction.
Where the settlement fail is due to a failure to deliver financial instruments, the penalty rate which must be applied by the CSD is determined by the type of instrument in question and is related to the value of the financial instrument that failed to be delivered. However, where the settlement fail is due to a lack of cash, the penalty rate applicable to the transaction is calculated on the basis of costs of borrowing cash.
Download a copy of the CSDR – February 2022 Update