How Does the Central Securities Depositories Regulation (CSDR) Impact Transaction Reporting?

What is the Central Securities Depositories Regulation (CSDR)?

The Central Securities Depositories Regulation (CSDR) was introduced to strengthen settlement discipline, reduce market risk from failed trades and enhance post-trade transparency. A key component of the CSDR is the Settlement Discipline Regime (SDR) which enforces penalties for late settlements and mandates the reporting of failed trades.

Since taking effect in 2022, CSDR penalties have encouraged firms to monitor and resolve settlement failures more effectively. Regulators such as the European Securities and Markets Authority (ESMA) continue to review and refine the penalty framework to ensure fairness and compliance. Changes such as the CSDR Refit and recent ESMA recommendations removed the mandatory buy-in requirements, which eased the compliance burden while also introducing moderate penalty rate increases.

How Does CSDR’s Settlement Discipline Impact Transaction Reporting?

The Settlement Discipline Regime (SDR) under CSDR introduces measures to enhance settlement efficiency and reduce transaction failures. These measures each have direct implications for transaction reporting:

• • • Trade Confirmations and Allocations
    • Additional Settlement Instruction Fields
    • Tolerance Matching and Partial Settlement

Trade Confirmations and Allocations

Under SDR, investment firms are mandated to send trade confirmations to clients promptly. Clients must then confirm their acceptance of the terms of the transaction and provide allocation details in a timely manner.

If the trade is executed after 16:00 CET or if there is a time zone difference of more than 2 hours between the investment firm and the client, this deadline extends to 12:00CET the following business day. These stringent timescales ensure that all necessary information is available well before the intended settlement date, facilitating smoother settlements.

Additional Settlement and Instruction Fields

Firms are required to include specific details in their settlement instructions, such as transaction type, place of trade and place of clearing. The accurate completion of these fields is important for timely and accurate transaction reporting.

Tolerance Matching and Partial Settlement

SDR introduced tolerance matching and partial settlement mechanisms to enhance settlement efficiency and reduce the number of failed transactions. Tolerance matching allows minor discrepancies in settlement amounts within defined thresholds, and partial settlement allows for a trade to be partially settled even if the full quantity of securities is not available on the intended settlement date.

What are the Penalties under CSDR for Failed Settlements?

The Settlement Discipline Regime (SDR) applies to all transactions settling on a Central Securities Depository (CSD) within the European Economic Area (EEA). This includes transferable securities, money-market instruments and emissions allowances. The regulation introduced:

• • • Daily cash penalties for late settlement
    • Mandatory buy-ins (initially introduced but later revised under CSDR Refit)
    • Harmonised settlement rules, including partial settlement and hold & release mechanisms

Types of Settlement Penalties

CSDR penalties are applied based on the cause of the settlement failure, ensuring accountability and consistency across the financial system:

• • • Settlement Fail Penalty: A charge imposed when a trade fails to settle on the intended date, with daily penalties applied until the trade is completed or cancelled
    • Late Matching Fail Penalty: A charge is applied retroactively when trade instructions are matched after the intended settlement date, increasing costs due to delayed processing

For cross-border transactions involving multiple CSDs, penalty calculations are centralised under a single “Calculating-CSD,” ensuring consistency across jurisdictions.

Penalty Calculations and Adjustments Under ESMA Guidance

ESMA has implemented refinements to ensure fairness in penalty calculations:

• • • Alternative Penalty Parameters: If the official overnight interest rate for a settlement currency is unavailable, ESMA allows for alternative parameters to be used to determine penalties
    • Historical Price References: To prevent price distortions in liquid markets, historical prices may be used in penalty calculations for late matching fail penalties
    • Moderate Penalty Rate Increases: ESMA has adjusted penalty rates across different asset classes, with the aim of reducing persistent settlement failures while keeping penalties proportionate to market conditions

What are the CSDR Buy-In Requirements?

CSDR initially included a Mandatory Buy-In (MBI) requirement as part of its Settlement Discipline Regime (SDR). Under this requirement, if a trade failed to settle within a specified period, the receiving party was obligated to initiate a buy-in process to purchase the undelivered securities from the market to fulfill the transaction.

ESMA announced in November 2021 that it was postponing the MBI requirements as it acknowledged industry concerns about the potential impact of market liquidity and stability. Under the CSDR Refit, significant amendments were made to the original CSDR framework, including the MBI requirements

• • • Conditional Implementation: The activation of MBIs is now conditional on the ineffectiveness of existing measures such as cash penalties or the threat to financial stability posed by the prevailing level of failed settlement
    • Role of the European Commission: The European Commission now holds the authority to introduce MBIs through an implementing act which specifies the financial instruments or transaction categories to which the MBIs will apply
    • Pass-on Mechanism: Under the CSDR framework, if a trade failed to settle, the receiving party would be required to buy the securities from another source and cover any difference in price. The CSDR Refit addresses these previous imbalances by introducing a pass-on mechanism for buy-ins and a symmetrical payment structure to ensure fair price adjustments in the event of a buy-in

The implementation of SDR’s preventative measures mandates that firms provide accurate and timely data submissions and adhere to strict deadlines for trade confirmations. Firms must also maintain comprehensive records of all transaction details, including amendments and corrections, and must continuously monitor settlement status to promptly identify and resolve any issues. By integrating these measures into their operations, firms can enhance settlement efficiency and maintain compliance with SDR’s transaction reporting requirements.

As regulatory updates continue to shape settlement discipline, firms must ensure compliance by regularly reviewing transaction reporting processes and staying informed on future ESMA guidance.

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