What is CSDR, and how will you be affected?

The Central Securities Depository Regulation, or CSDR, is on its way. Learn how you can prepare for the new rules and avoid financial penalties.

Tags: Trade, Regulations, Custody, Securities
Published: January 20, 2021

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.


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 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:

  • Shorter cycle periods
  • Discipline measures, such as mandatory cash penalties and buy-ins for settlement fails
  • An obligation regarding dematerialisation for most securities
  • Strict prudential and conduct of business rules for CSDs
  • Strict access rights to CSD services


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 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.
 

Manage your fails exposure

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.”

 

“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 will be 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

In addition, there’s also a mandatory buy-in process for clients who are 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 potential impacts will CSDR have on clients?

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

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.

 


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 registere