CSDR Settlement Penalties checklist: 5 things to do ahead of implementation

Despite a (slightly) misleading name, the Central Securities Depositories Regulation (CSDR) is not just a regulation for CSDs. The potential impact will reach every single participant executing securities across Fixed Income, Repo and Equity transactions. Although an exercise which aims to increase the efficiency of securities settlement, it is also a huge opportunity for the industry to come together and drive best practice.

Settlement penalties are due to be introduced in February 2022. This will have a global impact for any party failing to settle a transaction in a European CSD, irrespective of where the trading party is domiciled. Unlike some of its predecessors like MiFID II, where the location was the driver to inclusion in scope, this is about where the trade settles. If this happens to be a European depository, then no matter where you are - you will be impacted. So, if you’re in Asia trading with an entity in Australia, but trading a security that settles in Europe, you are in scope.

There are plenty of actions you can take now to get ahead. We would urge you to put steps in place today that will help you become more efficient - in the lead up to the implementation, there needs to be a focus on market awareness and post-trade processes.

1. Review your current operations

Use this time to ensure the appropriate post-trade processing is in place. Do you have automated T+0 confirmations in place? Early capture of exceptions will reduce the impact. Do not rely on >T+1 processing, T+0 in near real-time is key. Addressing your solvable problems now will reduce impact of future penalties.

2. Take stock of current settlement efficiency rates

The market must be clear on requirements here; any trades that fail will generate a daily penalty until settlement takes place. Use this time to look at settlement rates and close any gaps that you can. You have time to address weaknesses now.

3. Review resourcing and technology capabilities

Once you have reviewed current processes and have a clear view of post-trade inefficiencies, it is important to reflect on what new systems or controls need to be put in place. New processes will be needed, so make sure you are adequately resourced to do this. Building in the right team and internal processes early on is vital.

4. Planning for potential roadblocks

Review post-trade processing per client., Consider if there is anything you can do to help address challenges. Could your clients benefit from automation of manual tasks that could increase trade failure? Speak to your clients now.

5. Work together as an industry

This is arguably the most important part of preparations. Settlement penalties will drive a change in behavior, but we all have a responsibility. Engage with trade associations. Speak to clients. Share experiences with counterparties. Agree a best practice without delay.

The whole world settles securities trades in European depositories, and with less than 12 months to go, there is work to do.

It’s important firms on both the buy-side and sell-side acknowledge the role they have to play - this should not be viewed as a ‘back office’ regulation as the potential impact of settlement penalties is far-reaching with significant P&L implications.

Remember, regulation can drive organizational change that goes beyond just simple compliance and can deliver greater operational efficiency and decrease costs and risks.

For questions or follow-up, email Camille McKelvey at CMcKelvey@marketaxess.com.