Central Securities Depository Regulation (CSDR) Penalties 

The Role of CSDR Penalties

The Central Securities Depositories Regulation (CSDR) was introduced to enhance settlement efficiency and reduce settlement failures in EU markets. To achieve this, CSDR’s Settlement Discipline Regime (SDR) imposes financial penalties for trades that fail to settle on time, encouraging market participants to complete transactions as intended. These penalties ensure that firms and financial institutions monitor, report and take corrective action on settlement fails.

Since the regulation took effect in 2022, settlement efficiency has improved across the EU, and regulators continue to refine the framework. The 2024 CSDR Refit and recent ESMA recommendations introduced moderate penalty rate increases and adjustments to penalty calculation methods to ensure fairness and compliance.

How do CSDR Settlement Penalties Work?

CSDR’s Settlement Discipline Regime (SDR) applies to all transactions settling on a CSD within the European Economic Area (EEA). This covers transferable securities, money-market instruments and emissions allowances, and introduces the following:

• • • Daily cash penalties for late settlement
    • Harmonised settlement rules including partial settlement and hold & release mechanisms

Types of Settlement Penalties

CSDR penalties are applied relevant to the cause of the settlement failure:

• • • Settlement Fail Penalty: is imposed when a trade does not settle on the intended date, with daily charges applied until the trade is completed or cancelled
    • Late Matching Fail Penalty: is applied retroactively when trade instructions are matched after the intended settlement date, leading to increased costs for delayed processing

For cross-border transactions involving multiple CSDs, penalties are determined by a single “Calculating-CSD,” ensuring consistency across jurisdictions.

Penalty Calculations and Adjustments under ESMA Guidance

The European Securities and Markets Authority (ESMA) has introduced refinements to ensure fair and effective penalty calculations. When the official overnight interest rate for a settlement currency is unavailable, alternative parameters will be used to determine penalties. Historical reference prices may also be applied to late matching fail penalties, preventing price distortions in liquid markets.

To strengthen settlement discipline, ESMA also proposed a moderate increase in penalty rates across different asset classes. These adjustments aim to reduce persistent settlement failures while ensuring that penalties remain proportionate to market conditions.

How do CSDR Penalties Affect Transaction Reporting?

CSDR penalties create a direct reporting obligation for financial institutions and firms, requiring them to track, document and disclose settlement failures. CSDs provide daily penalty reports to participants, detailing the cause of each failed settlement and the penalties applied. Firms must reconcile these reports and, where applicable, pass penalty charges to their clients.

In addition to daily reporting, CSDs redistribute collected penalties on a monthly basis to the affected counterparties. For transactions involving central counterparty clearing houses (CCPs), CSDs must calculate and report the penalties, while the CCP handles collection and redistribution among counterparties. This structured reporting framework enhances transparency and strengthens regulatory oversight, allowing authorities such as ESMA to monitor settlement efficiency across EU markets.

With strict reporting requirements and possible financial penalties, firms must ensure their settlement processes are accurate and fully compliant with evolving CSDR requirements.