New settlement disciplines under Central Securities Depository Regulation (or CSDR) are expected in February 2022. CSDR is designed to achieve higher rates of efficiency and liquidity in the European securities markets. Now is the time to start familiarising yourself with this regulation and learn what to do before it becomes effective.
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 will require all parties in the chain including investment firms to put in place measures to mitigate fails.
In Europe, financial penalties will be imposed for failing transactions. This will lead to a change in mindset in the industry.
More specifically, CSDs will pass on financial penalties to their participants (in other words, custodians), who will then pass them on to their clients.
According to Sean Boyle, head of global custody operations at U.S. Bank, CSDR will play a pivotal role in the post-trade harmonisation efforts in Europe. “It will enhance 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 will be accomplished by providing the following:
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 will affect 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.
Boyle says that operational control and efficiency will become 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 and preparations for CSDR,” adds Sullivan. “You need good visibility into the status of your trades, such as through an online portal. Can your custodian provide 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.”
Clients will be responsible for the following with respect to penalties, charges and the appeals process under CSDR:
In addition, there’s also a mandatory buy-in process for clients who are responsible for the following:
Clients may need to make changes before and after the introduction of CSDR, including:
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 CSDR implementation approaches, 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.
To learn more about our comprehensive investment services, visit usbank.com/investmentservices.