EU CSDR Settlement Discipline Regime: Penalties and buy-ins - update

25.02.2021

Note: This announcement, originally published on 26 May 2020, and updated on 2 December 2020, has been further updated to provide new dates and information on testing and dry-runs. The changes have been highlighted.

One of the objectives of Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on Central Securities Depositories Regulation (CSDR) is to foster settlement discipline and improve settlement efficiency across the European Union.

The Regulatory Technical Standards (EU) No 2018/1229 of 25 May 2018 with regard to regulatory technical standards on settlement discipline (Settlement Discipline Regime or SDR) specifies requirements for the prevention of settlement fails and measures to address these settlement fails once occurred.

LuxCSD plans to activate the functionalities relating to the identification, calculation and reporting of cash penalties on14 September 2021in a dry-run mode and in line with the T2S schedule. The dry-run will be available until the end of January 2022. In addition, LuxCSD plans to provide customers with testing facilities as of 1 July 2021 until 17 September 2021.

Further information on the testing and dry-run test will be communicated later. The penalties payment functionalities (that is, monthly collection and distribution of net amounts of cash penalties) will only be activated as of 1 February 2022, not considering any cash penalties calculated and reported by Clearstream Banking before this date.

Note: In October 2020, the European Commission accepted the proposal from the European Securities and Markets Authority (ESMA) and issued a Delegated Regulation postponing the entry into force of SDR to 1 February 2022.

As various aspects of the CSDR settlement penalties regime are still subject to ESMA guidelines and clarifications, this announcement may be subject to further changes.

Cash penalties

Cash Penalties on settlement fails on the T2S platform will be calculated by the T2S penalty mechanism. The T2S Penalty Mechanism will calculate and apply cash penalties on matched settlement instructions that failed to settle (in full or in part) on and after the intended settlement date (ISD) when both the settlement instruction and the relevant financial instrument are subject to cash penalties in T2S. LuxCSD will use the T2S_semt_044_001_01 penalties reporting received from the T2S penalty mechanism to provide its customers the relevant cash penalties information in SWIFT ISO 15022 MT537 format.

For the penalties processing aspects outside the T2S penalty mechanism (that is, mainly the monthly payment processing), LuxCSD intends to comply with the “ECSDA CSDR Settlement Fails Penalties Framework” unless stated otherwise. The latest version of the document can be found on the ECSDA website.

Scope

T2S will calculate cash penalties on any settlement instructions whose types and instruments are in scope of the SDR.

Instructions subject to cash penalties

Any free of and against/with payment matched settlement transactions of LuxCSD customers that fail to settle in accordance with Article 16 of the SDR RTS 2018/1229, settlement instructions reported by T2S and LuxCSD as “pending – failing” (SWIFT settlement status code “PENF”) will be considered for penalties calculations.

Exceptions

T2S will exclude only the following transactions from its penalty mechanism:

  • Instructions related to corporate actions on stock generated by CSDs and containing ISO transaction code “CORP”;
  • settlement Instructions automatically generated by T2S for realignment purposes.

Note: Discussions are still ongoing at the ESMA about specific instruction types and events to be excluded from the scope of the SDR. We will inform you as soon as ESMA has confirmed the list of instruction types, for which no penalty should apply.

Instruments subject to cash penalties

Any financial instrument listed in the Financial Instruments Reference Data System (FIRDS) database maintained by ESMA will be subject to cash penalties. However, for shares also listed in the Short Selling Regulation (SSR) exemption list, cash penalties will not apply.

Application

Cash penalties will be calculated by the T2S penalty mechanism and reported by LuxCSD to customers when an instruction matches at T2S after the ISD with the execution of the T2S event “Late Matching Fail Penalties” (LMFP) or/and when the transaction fails to settle on and after its ISD (T2S event “Settlement Fail Penalties” (SEFP)).

The T2S penalties for ICPs and DCPs will be applied and reported on T2S Party BIC level.

Late Matching Fail Penalty (LMFP)

LMFPs will be applied if the transaction matches after the ISD. The LMFP will be calculated only once, will be applied on the day the instruction matches, and will be charged to the last party who sent their settlement instruction.

If both parties send their respective settlement instruction after the ISD, only the last customer to send their instruction will be charged the LMFP.

Where settlement instructions match before the end of the relevant settlement period on any business day after ISD, the T2S penalty mechanism will consider all T2S business days as from the ISD until and excluding the business day that the instruction is matched.

Where settlement instructions match after the end of the relevant settlement period, the T2S penalty mechanism will consider all T2S business days as from the ISD until and including the business day that the instruction is matched.

Settlement Fail Penalty (SEFP)

SEFPs will be applied on matched T2S settlement instructions and will be calculated on each business day when the transaction failed to settle in part or in full on and after the ISD. For partial settlement, the T2S penalty mechanism will calculate the SEFP based on the residual amount  to be settled. LuxCSD will charge the SEFP to the customer whose instruction is not fully settled at the end of the relevant settlement period of the ISD as the instruction:

  1. Is put on “party hold”;
  2. Is failing due to lack of securities (if 1 does not apply);
  3. Is failing due to lack of cash (if 1 and 2 do not apply).

If both settlement instructions are on “hold” status at the end of the relevant settlement period, both customers will be charged with the SEFP.

Calculation

Penalties for free of, with and against payment settlement transactions will be calculated by the T2S penalty mechanism only in the T2S-eligible currencies (EUR or DKK2) and using the following formulas depending on the failing settlement instruction type:

Settlement instruction type

Calculation formula

Delivery against Payment (DvP)a

Security Penalty Rate

multiplied by Quantity of non-delivered securities

multiplied by Reference Price

Free of Payment (DFop and RFoP)

Receipt against Payment (RvP)

Cash Discount Penalty Rate

 multiplied by Quantity of non-delivered securities

 multiplied by Reference Price

Payment Free of Delivery (PFoD)

Cash Discount Penalty Rate

multiplied by Amount of cash to be delivered

Delivery with Payment (DwP)

Receipt with Payment (RwP)

Security Penalty Rate

multiplied by Quantity of non-delivered securities

multiplied by Reference Price

Plus Cash Discount Penalty Rate

Multiplied by Amount of cash to be delivered

a. Including fails in the T2S BATM cycle. The same applies for receipts against payment.

The Security Penalty Rate designates the applicable rate of penalty to be applied, based on:

  • The financial instrument type classification (CFI code of the ISIN according to the T2S reference data);
  • Whether the financial instrument is a liquid or illiquid share (considering the financial instrument type classification, information is derived by LuxCSD from the ESMA FITRS database for equities and provided to the T2S penalty mechanism on a daily basis for those ISINs for which LuxCSD serves as the Securities Maintaining Entity in T2S); or
  • Whether the financial instrument was traded on an EU SME Growth Market (as shown on the (optional) “place of trading” Trading Venue MIC information in both legs of the settlement transaction).

Depending on the combination of the above attributes, the T2S penalty mechanism will determine the applicable Penalty Rate as defined by ESMA and displayed in the following table:

Type of fail

Type of securities

Liquidity Indicator

SME Growth Market

Penalty Rate (in bps)

Lack of securities

(Applicable Penalty Rate is called “Security” Penalty Rate)

Share

Liquid

No

1.00

Illiquid

0.50

n/a

Yes

0.25

Sovereign debt

n/a

0.10

Corporate debt

Money-market instruments

No

0.20

Yes

0.15

Other instruments (including Exchange traded funds, units in collective investment undertakings, emission allowances, etc.)

No

0.50

Yes

0.25

Lack of cash

(Applicable Penalty rate is called “Cash Discount” Penalty Rate)

n/a

n/a

n/a

Official interest rate for overnight credit charged by the central bank issuing the settlement currency with a floor of 0

For “lack of cash” penalties in EUR, the Cash Discount Penalty Rate will be "the marginal lending facility rate" as provided by the European Central Bank (ECB) divided by 360. For “lack of cash” penalties in DKK, the rate to be used is currently reviewed with the Danish National Banks.

The Reference Price designates the price of the financial instrument used by the T2S penalty mechanism to calculate the cash penalties; such price is provided by LuxCSD to T2S on a daily basis for those ISINs for which LuxCSD serves as the Securities Maintaining Entity in T2S. The Reference Price will be the closing price of the financial instrument at the relevant MiFID II/MiFIR trading venue for the day the cash penalty applies, when available. If no trading venue price is available, a market or default price as determined by LuxCSD will be applied.

Reporting

For LuxCSD transactions failing in T2S, the respective penalties will be reported daily and monthly by the T2S penalty mechanism to CSDs and T2S DCPs in ISO20022 format (T2S_semt_044_001_01; please refer to T2S CR654 for message details).

Customers will receive the daily and monthly reports from LuxCSD (via MT537 or Xact Web Portal). The Xact Web Portal will allow LuxCSD customers to query and monitor the cash penalties related information. The receipt of the penalties reports through the Xact via SWIFT and Xact Web Portal requires customers to actively subscribe to these new reports. Samples of the daily and monthly MT537 reports related to LuxCSD transactions are available here.

LuxCSD will report cash penalties related information to customers via MT537 only. Two new reports will be developed, one to report cash penalties on a daily basis, including details of the calculation (Statement of Cash Penalties), and one monthly report, including the global net amount of cash penalties to be paid or received by the customer (Monthly Aggregated Report). In addition, the Xact Web Portal will be enhanced to enable customers to query and monitor the cash penalties related information.

Daily statement “Statement of Cash Penalties”

T2S as well as LuxCSD distinguish newly calculated penalties from penalties already calculated and modified or removed afterwards. Therefore, new and amended cash penalties will be reported separately.

Customers will have the possibility to schedule their respective reports directly in Xact Web Portal, selecting one or multiple times (among a selection of thirteen available times, between 8:30 and 18:00 CET). All reports are “delta” reports (i.e. contain penalties information received by LuxCSD after the previous report was sent) including, for instance, new or amended cash penalties since the last report sent. If no cash penalty is to be reported at a scheduled time, then Clearstream Banking will provide customers with a “no activity” report.

Monthly statement “Monthly Aggregated report”

On the 14th penalties business day (PBD), for each customer account, LuxCSD will aggregate and net the cash penalties from the previous month, per currency and per counterparty (I)CSD. The resulting net amount will constitute the amount to be paid (if negative) or to be received (if positive) and will be reported in real-time to customers in a MT537 Monthly Aggregated Report, once received and successfully reconciled with the T2S Monthly Report.

Customers will be able to identify the “net“ credit/debit payment amount per CSD/market and currency in the monthly report (or via the PFOD), i.e. no additional “payment pre-advice“ will be sent by LuxCSD.

Note: for customers acting in DCP mode: the T2S penalty mechanism´s monthly T2S_semt_044_001_01 report will not contain such aggregated net amount information but only ”bilateral nets” per counterparty (please refer to T2S CR654 for details).

Appeals

From the date when the cash penalty was reported until the 10th PBD of the next month (the “appeal period”), customers may (exceptionally) address “appeals” regarding their penalties to LuxCSD exclusively via the Xact Web Portal; accepted appeals will lead to the provision of a MT537 "modified penalties" report.

Collection and distribution of net amounts

Upon reporting to customers, in a MT537 Monthly Aggregated Report, of a net amount to be paid or received, LuxCSD will generate already matched “payment free of delivery” PFOD instructions for such net amount versus the customer (default) T2S (EUR) DCA.

These PFoD instructions will be generated with a trade date of the 15th PBD, and an intended settlement date of the 17th PBD of the month, using a single dummy ISIN LU2128008567 for all T2S penalties and the settlement transaction type indicator “PAIR”.  These PFoD instructions itself are not subject to settlement fails penalties.

Note: in line with SDR RTS Article 19, settlement fails involving a CCP will be flagged by the T2S penalty mechanism to allow LuxCSD to exclude such penalties from its actual PFOD collection and distribution process as such penalties payments shall be handled by the CCPs towards their clearing members.

Mandatory buy-ins

The objectives of CSDR and of the SDR are to foster settlement discipline and to improve settlement efficiency across the European Union but also to define precise rules if the delivering party cannot deliver the securities at the end of the extended period following the intended settlement date. For such aged fails, trading parties and CCPs will have to initiate mandatory buy-ins after a certain time period (“extension period”). For non-cleared transactions, the receiving trading party will be required to take the necessary actions to receive the expected securities and shall trigger a mandatory buy-in process with a buy-in agent.

Subject to ongoing “buy-in market practice” discussions by AFME and pending clarifications from ESMA, for non-CCP cleared transactions, where the buy-in is possible, the receiving party shall appoint a buy-in agent on the business day following the expiry of the relevant extension period and will notify the failing delivering party thereof. The delivering party will be requested to put his instruction “on hold” (the instruction will continue to be subject to SEFP).

The receiving party shall notify the results of the buy-in to the delivering party at the end of the business day on which the receiving party receives the bought-in securities and:

  • The initial settlement instructions relating to the settlement fail are cancelled by both parties;
  • In case of partially successful buy-ins, new settlement instructions are created by both parties for the remaining quantity. In line with SDR RTS Article 16.3, to avoid LMFP, reference to the buy-in is required in the new settlement instruction sent to LuxCSD by populating the MT54x settlement instruction sequence E “Settlement Details” with field “22F:: STCO/REGL/BSSP”.

At the end of the buy-in period, if there are non-delivered securities, the receiving party can decide to defer the execution of the buy-in to a later date or to be paid cash compensation.

In relation to the failing instructions in LuxCSD´s settlement system that are subject to buy-in or cash compensation, customers shall notify LuxCSD of the buy-in or cash compensation results.

The information shall be provided once the buy-in or cash compensation has been executed by the CSD participant to the CSD via a specific “buy-in” MT530 message (see SWIFT fast track change request 001614 development implemented in the SWIFT Release November 2020).

LuxCSD technically accepts these SWIFT MT530 messages since implemented in the November 2020 SWIFT Release but does not process them any further. Alternatively, proprietary communication means may be offered by LuxCSD for this purpose (for example, .csv file upload to Xact Web Portal; a template is currently defined by ECSDA).

Detailed information about the notification of the buy-in or cash compensation results will be communicated at a later stage.

Monitoring of settlement fails and “working arrangements” with relevant failing customers

As per Article 7 of CSDR, LuxCSD has an obligation to:

  • Monitor settlement fails;
  • Implement “working arrangements” with relevant failing customers;
  • Report fails and measures to improve settlement efficiency to its competent authorities on a monthly basis; and
  • Publicly disclose anonymised statistics on an annual basis.

In this context, LuxCSD will implement a “Settlement efficiency monitoring system”, in order to monitor settlement fails in volume and value.

Customers subject to the highest settlement fail rates (based on LEI) in number or values will be contacted by their respective Relationship Officer to discuss measures to improve their overall settlement efficiency.

Further information

Detailed technical specifications about the Xact Web Portal, the reporting of cash penalties and net amounts and the notification of the buy-in or cash compensation results will be communicated at a later stage.

For further information, customers may consult the CSDR Customer readiness and FAQ on the LuxCSD website or contact LuxCSD Client Services or their Relationship Officer.

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1. LuxCSD refers to LuxCSD S.A., registered office at 42, Avenue J.F. Kennedy, L-1855 Luxembourg, registered with the Luxembourg Trade and Companies Register under number B-154.449.

2. LuxCSD does not currently offer T2S against payment settlement in Central Bank money in DKK currency, hence, no “lack of cash” penalties in DKK will occur and T2S penalties in DKK will be limited to free of payment settlement fails when the denomination or reference price currency = DKK and CSD VP DK is part of the failed transaction (as per T2S Fasttrack CR 745) LuxCSD will process DKK when the denomination or reference price currency = DKK and CSD VP DK is part of the failed transaction (as per T2S Fasttrack CR 745). LuxCSD will process DKK penalties payments on the LuxCSD customers´ Creation accounts for the benefit of its customers to not having to open a DKK DCA only for penalties purposes.