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CSDR: The Final Hurdles

CSDR: The Final Hurdles

The final, yet most operationally intensive, phase of the Central Securities Depositories Regulation (CSDR) went into effect on February 1st. The Settlement Discipline Regime (SDR) mandates faster securities and cash settlement to reduce the associated risks and imposes daily penalties and mandatory buy-ins for every trade settlement failure in EEA CSDs and ICSDs. Avoiding penalties demands a new level of vigilance and efficiency on the part of asset owners and managers.

Settlement Discipline applies to all market participants – regardless of domicile – involved in transactions settling at European and International Central Securities Depositories, like Clearstream and Euroclear. The measures govern transactions in transferable securities, money market instruments, units in collective investment undertakings and carbon emission allowances.

Preventing and Addressing Settlement Failures

The SDR creates expectations for preventing and addressing settlement failures when they occur. Prevention centers on requiring asset owners to promptly communicate allocations, confirmation of allocations and confirmation of acceptance or rejection of multiple terms of the transaction. To facilitate the prevention measures, CSDs will provide participants with an automated, continuous, real-time system for matching of settlement instructions, but the participants must populate mandatory matching fields, including trade date, transaction type, place of trade, place of clearing, etc.

Anticipating the technical and operational complexity of certain trades, the CSD systems will include facilities for trade cancellation, hold/release of settlement instructions and partial settlement. At the very least, the new systems from the CSDs demand that asset managers establish new workflows to ensure compliance and avoid penalties.

For failures, the SDR requires CSDs to report participants that consistently experience settlement failure to the competent authority. In addition, cash penalties will be imposed and distributed to participants that suffered net failed settlements. Finally, a buy-in process gives recourse to buyers when assets are not delivered within specified time periods.

Architecture for Avoiding Penalties

Participants need to assess the potential impact of the SDR and calculate expected penalty debit and credit interest and the number of buy-ins. This includes an end-to-end review of trade execution, booking, and settlement to identify and remediate inefficiencies.

Having a centralized view of settlement status and failed trades across counterparties, custodians, prime brokers, CSDs and CCPs is critical to achieving real-time monitoring of trade and settlement status.

Tracking and managing penalties is another new workflow that participants must adopt. Firms need to reconcile reported penalties with their own view of expected penalties. Penalties should be assigned to the relevant settlement instruction and the firm’s daily calculations reconciled with monthly amounts debited/credited by each CSD.

Data management and reporting round out an advanced compliance response to the SDR. The ability to extract reports and create dashboards from real-time and historic data are keys to identifying and resolving issues in order to avoid penalties.

CSDR has created a series of operational hurdles for participants of all types since 2015. Now, as we approach the full implementation date, the industry must act efficiently and decisively to establish new workflows and data management systems to optimize trade booking, matching, allocations and settlement operations.

To learn how IVP can help, contact sales@ivp.in.

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