What is CSDR, and how are you affected?

November 21, 2022

The Central Securities Depository Regulation, or CSDR, is now live as of February 1, 2022. Learn how the new rules function in practice so you can work to avoid financial penalties.

The settlement discipline regime (SDR) is now in force, which introduced cash penalties for late matching and settlement fails for trades that settle at a European central securities depository (CSD) or international central securities depository (ICSD, e.g., Euroclear, Clearstream). The mandatory buy-in provisions, which were originally planned for a February 1, 2022 live date, are postponed for the time. A revised effective date has not yet been announced. U.S. Bank continues to monitor the buy-in portion of the regulation closely.

CSDR was designed to achieve higher rates of efficiency and liquidity in the European securities markets. With nearly six months of the SDR regulation now in force, ensure you are up to date on how current and future rules will impact you and your teams.

CSDR: Harmonising the cycle

The goal of CSDR is to harmonise certain aspects of the settlement cycle while providing a set of common requirements for any central securities depository (or CSD) that operates securities settlement systems across the European Union. It requires all parties in the chain, including investment firms, to have measures in place that mitigate fails.

In Europe, financial penalties have now been imposed for late matching and failing transactions. The goal in introducing these penalties is to change the mindset and client behavior when it comes to settlements in the industry and, in turn, increase efficiency.

CSDs pass on financial penalties to their participants (e.g., custodians), who pass them on to their clients.

According to Sean Boyle, head of global custody operations at U.S. Bank, CSDR plays a pivotal role in the post-trade harmonisation efforts in Europe. “It enhances the legal and operational conditions for cross-border settlement while increasing the safety and efficiency of securities and CSDs in the EU,” he says.

This is accomplished by the following:

  • Shorter cycle periods
  • Discipline measures, such as mandatory cash penalties
  • An obligation regarding dematerialisation for most securities
  • Strict prudential and conduct of business rules for CSDs
  • Buy-ins (delayed) 

Following the same rules

Boyle explains that all EU countries have had different standards in the past and followed their own practices for settling securities transactions, which has made executing cross-border transactions more difficult. “This is why the harmonising aspect of CSDR is so important,” he says. “With everyone following the same rules and practices, the process will be faster and more efficient.

“We’ve all done things differently in the past,” he adds, “and now we’re going to try to do them the same way.”

A common misconception about CSDR is that it applies only to companies in the EU, notes Breda Sullivan, head of Depositary Services – Europe for U.S. Bank. “The regulation ultimately impacts any securities settlement within an EU or international CSD, so geography does not apply,” she says.

This means CSDR affects all financial firms that trade in EU-issued securities, regardless of where they’re located. These include banks and broker-dealers, hedge funds, investment and asset managers, custodians, agents and CSDs. “The regulation truly has a global reach,” says Sullivan.

Boyle stresses that even though the regulation is directed at CSDs, every party in the chain will be affected by CSDR. “Everyone needs to know what their responsibilities are within the chain,” he says.

Manage your fails exposure

Boyle says that operational control and efficiency are paramount to avoid failing transactions and financial penalties associated with CSDR. “If you don’t manage your fails exposure in a timely manner, it’s going to cost you from this point forward,” he says. “So, you should make sure you’ve got strong visibility reporting and you’re partnering with custodians and brokers that can handle fails report on buy-ins and penalty risk at any given time.”

Boyle says that operational control and efficiency are paramount to avoid failing transactions and financial penalties associated with CSDR. “If you don’t manage your fails exposure in a timely manner, it’s going to cost you from this point forward,” he says. “So, you should make sure you’ve got strong visibility reporting and you’re partnering with custodians and brokers that can handle fails report on buy-ins and penalty risk at any given time.”

Boyle continues: “All parties in the chain must evaluate their current fails management processes to ensure they’re fit for the new environment by analysing behaviors, patterns and root causes,” he says.

“Check in with your custodian about their approach to CSDR,” adds Sullivan. “You need good visibility into and timely updates on the status of your trades, such as through an online portal. Is your custodian providing it? This is where they should bring added value in this changing environment. In addition, custody or depositary contracts may require updating to capture the new requirements.”

“You should make sure you’ve got strong visibility reporting and you’re partnering with custodians and brokers that can handle fails report on buy-ins and penalty risk at any given time.”

Who’s responsible for what?

Clients are responsible for the following with respect to penalties, charges and the appeals process under CSDR:

  • Reviewing all charges both internally and with any subsequent underlying clients
  • Ensuring an appeals process is in place and appeals are requested in line with the ECSDA rules
  • Ensuring funding is in place to pay charges on a monthly basis
  • Creating a partial settlement process in line with your custodian’s requirements
     

While there is a known delay in terms of the buy-in regime, a mandatory buy-in process could come into force in the near future. In this scenario, clients would be responsible for the following:

  • Placing or requesting the transaction “on hold”
  • Cancelling the original failing transaction once the buy-in is completed
  • Appointing a buy-in agent to source shares for the buy-in
  • Making payments as required to the receiving party to cover the costs of the buy-in

What impact does CSDR have on clients?

Clients may need to make changes before and after the introduction of CSDR provisions, including:

  • Repapering contracts to include provisions for buy-in responsibilities
  • Increasing headcount to manage financial exposure risks to fails management
  • Increasing partial settlements
  • Requiring improved visibility of fails and reporting
  • Increasing securities lending activities to cover failing obligations
  • Ensuring you understand your custodian’s billing process for collecting CSDR penalties

At U.S. Bank, we employ a partial trade settlement functionality to reduce fails exposure. We support daily processes to review and transmit charges to the responsible party and create a monthly process for payment of penalties to the CSD or sub-custodian. Our in-house trade services group’s fails/pending transaction process will aid clients and reduce the number of failing transactions, thus reducing the cost of penalties to clients.

As more CSDR provisions are implemented, be sure to ask your custodian about how they’re preparing and how they will work with you to ensure you remain compliant. Major regulatory changes like this one demand a true partnership.

 

At U.S. Bank, our experts serve as trusted partners to keep you updated on regulatory changes so you can focus on reaching your business goals. Visit our CSDR resource center to learn more. To learn more about our comprehensive investment services, visit usbank.com/investmentservices.

Related content

What is CSDR, and how will you be affected?

Bank vs. brokerage custody

Middle-market direct lending: Obstacles and opportunities

How RIAs can embrace technology to enhance personal touch

IRC Section 305(c): Deemed distributions and related regulations

The unsung heroes of exchange-traded funds

The ongoing evolution of custody

5 questions you should ask your custodian about outsourcing

10 ways a global custodian can support your growth

Preparing for your custodian conversion

Delivering powerful results with SWIFT messaging and services

Sophisticated investors reduce costs with block trading

How to choose the right custodian for your managed assets

Employee benefit plan management: Trustee vs. custodian

Renewing your custody contracts? Negotiate the fees.

Case study: U.S. asset manager expands to Europe

The reciprocal benefits of a custodial partnership: A case study

5 risks you need to manage when expanding your global footprint

4 questions you should ask about your custodian

Protecting cash balances with sweep vehicles

Avoiding the pitfalls of warehouse lending

Alternative assets: Advice for advisors

Refining your search for an insurance custodian

The benefits of a full-service warehouse custodian

Webinar: Recording of the Central Securities Depository Regulation and Pivot

U.S. Bank Global Fund Services is a wholly owned subsidiary of U.S. Bank, N. A. Custody and lending services are offered by U.S. Bank, N.A. 
 
U.S. Bank Global Fund Services (Ireland) Limited is registered in Ireland with the Companies Registration Office Reg. No. 413707 and Registered Office: 24-26 City Quay, Dublin 2, Ireland. U.S. Bank Global Fund Services (Ireland) Limited is authorised and regulated by the Central Bank of Ireland under the Investment Intermediaries Act, 1995
 
U.S. Bank Global Fund Services (Guernsey) Limited is licensed under the Protection of Investors Law (Bailiwick of Guernsey), 1987, as amended by the Guernsey Financial Services Commission to conduct controlled investment business in the Bailiwick of Guernsey.
 
U.S. Bank Global Fund Services (Luxembourg) S.a.r.l. is registered in Luxembourg with RCS number B238278 and Registered Office: Floor 3, K2 Ballade, 4, rue Albert Borschette, L-1246 Luxembourg. U.S. Bank Global Fund Services (Luxembourg) S.a.r.l. is authorised and regulated by the Commission de Surveillance du Secteur Financier.
 
U.S. Bank does not guarantee products, services or performance of its affiliates and third-party providers. Investment and Insurance products and services including annuities are:
 
U.S. Bank Global Corporate Trust is a trading name of U.S. Bank Global Corporate Trust Limited, U.S. Bank Trustees Limited and Elavon Financial Services DAC (each a U.S. Bancorp group company). U.S. Bank Global Corporate Trust Limited is a limited company registered in England and Wales having the registration number 05521133 and a registered address of 125 Old Broad Street, Fifth Floor, London, EC2N 1AR. U.S. Bank Global Corporate Trust Limited, Dublin Branch is registered in Ireland with the Companies Registration Office under Reg. No. 909340 with its registered office at Building 8, Cherrywood Business Park, Loughlinstown, Dublin 18, Ireland D18 W319. U.S. Bank Trustees Limited is a limited company registered in England and Wales having the registration number 02379632 and a registered address of 125 Old Broad Street, Fifth Floor, London, EC2N 1AR. Elavon Financial Services DAC  (a U.S. Bancorp Company), trading as U.S. Bank Global Corporate Trust, is regulated by the Central Bank of Ireland.  Registered in Ireland with the Companies Registration Office, Reg. No. 418442. The liability of the member is limited. Registered Office: Building 8, Cherrywood Business Park, Loughlinstown, Dublin 18, Ireland D18 W319. Directors: A list of names and personal details of every director of the company is available for inspection to the public at the company’s registered office for a nominal fee. In the UK, Elavon Financial Services DAC trades as U.S. Bank Global Corporate Trust through its UK Branch from its establishment at 125 Old Broad Street, Fifth Floor, London, EC2N 1AR (registered with the Registrar of Companies for England and Wales under Registration No. BR020005). Authorised and regulated by the Central Bank of Ireland. Authorised by the Prudential Regulation Authority and with deemed variation of permission. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website.
 
All banking services are provided through Elavon Financial Services DAC. U.S. Bank Global Corporate Trust Limited and U.S. Bank Trustees Limited are Trust Corporations and not banking institutions and are not authorised to carry on banking business in the United Kingdom, Ireland or any other jurisdiction.
 
U.S. Bank National Association is not responsible for and does not guarantee the products, services, performance or obligations of its affiliates.
 
Elavon Financial Services DAC, trading as U.S. Bank Depositary Services, is regulated by the Central Bank of Ireland and is registered in Ireland with the Companies Registration Office Reg. No. 418442. The registered office is Building 8, Cherrywood Business Park, Loughlinstown, Co. Dublin, D18 W319.
 
Elavon Financial Services DAC Luxembourg Branch (trading as U.S. Bank Depositary Services Luxembourg) is registered in Luxembourg with RCS number B244276 and Registered Office: Floor 3, K2 Ballade, 4, rue Albert Borschette, L-1246 Luxembourg, regulated and authorised by the Central Bank of Ireland (CBI) as well as by the Commission de Surveillance du Secteur Financier (CSSF). Details about the extent of our authorisation and regulation by the CBI and the CSSF are available from us on request.
Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.