Understanding the goal of CSDR

The goal of CSDR is to harmonize 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 put in place measures to mitigate fails.

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What is CSDR?

CSDR is meant to standardize CSD regulations across all EU markets and improve trade settlement time frames through the settlement discipline regime (SDR). From a client impact perspective, this settlement discipline regime will introduce penalties for delayed settlement in the 27 European countries, including trades that settle in the international central securities depositories (ICSDs).

Trade Penalties

As part of the regulation, any failing trade will be charged a penalty. The party at fault of a failing trade through either a Late Matching Fail Penalty (LMFP) or a Settlement Fail Penalty (SEFP) will be responsible for paying the accrued charge.

Penalties are to be calculated by CSDs daily and collected monthly. Reporting of penalties will be provided by the CSDs to their direct participants, and on through the chain of custody to the custodians and their clients.

Clients will be expected to review all penalty charges relating to CSDR through U.S. Bank’s reporting channels.

Partial Settlement

Partial settlement is another key area to support preventative measures. The legislation directly references the use of partial settlement to reduce the impacts of cash penalties and buy-ins and this shows how the use of partial settlement will likely become more of a standard to be used when settling in European markets. Further details as to the steps we are taking to make partial settlement a standard are included in our FAQ.

Buy-In Process – delayed

The mandatory buy-in mechanism was recently delayed from the intended implementation date of February 1, 2022.

Under the buy-in regime, for trades where a client’s broker is unable to make delivery prior to the end of the buy-in extension period, clients must execute the required buy-in through an appointed Buy-In Agent. U.S. Bank will not be offering a Buy-In Agent. It will be the responsibility of the client and their investment manager to appoint a buy-in agent to initiate any market buy-ins. Execution of a buy-in is seen as another standard trading scenario. U.S. Bank will support the appropriate messaging activity with local custodians and CSDs that the buy-in requires. U.S. Bank will forward the client’s instruction to place the original settlement instruction on hold to our sub-custody network, where MT530 instructions will be provided to first hold and later release the original trade instructions, when the buy-in has been successfully completed. Cancellation instructions would be provided by an MT54X cancel SWIFT message.

In the event of an executed buy-in, clients must notify U.S. Bank global custody operations by submitting the trade details of the executed buy-in. U.S. Bank will report any updates to the buy-in effective date as more information becomes available.

Sean Boyle

From our leaders

“With everyone following the same rules and practices, the process will be faster and more efficient.”

Sean Boyle
Head of Global Custody Operations
U.S. Bank Investment Services

Manage cash penalties with U.S. Bank global custody services.

CSDR impacts any securities settlement within an EU or international depository (ICSD), so geography does not matter. Operational control and efficiency are critical to avoid failing transactions and financial penalties. Refer to our updated frequently asked questions section (FAQ) below for more information on how we will support you through the penalty process.

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What is CSDR, and how will you be affected?

Learn how you can prepare for the new rules and avoid financial penalties.

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CSDR Frequently Asked questions (FAQ)

Our core offering contains enhancements to the Pivot online client portal, as well as SWIFT capabilities, as follows:

  • U.S. Bank is updating its online client portal (Pivot) to provide better reporting and views for their trades that are settling outside of the United States (U.S.)
    • Market indicator/Place of Settlement, Broker SSI, and Projected Penalty charges will all be visible when viewing trades in Pivot.
    • Enhancement: Updated reporting is being established so that clients receive a notification whenever a trade is failing and will receive a projected penalty.
      • Reporting can also be customized within Pivot to client needs.
    • Action: If you currently don’t have access to Pivot and would like access, please reach out to your global client service representative (CSR).
    • As impacts of the regulation become realized, U.S. Bank will continue to enhance Pivot on a regular basis to better serve client needs.
  • Daily SWIFT MT537 PENA messages – a new SWIFT message type introduced alongside the CSDR regulation - are now available to our client base as of June 27.
  • SWIFT MT548 messages can be provided to show the latest settlement status of trades.
    • MT548 messages are released any time a trade status is updated on our system.
  • Action: If you currently aren’t receiving MT548 or MT537 PENA messages, and would like to, please reach out to your CSR.
  • You will need to confirm your account numbers and BIC address.
  • With the increased reporting options available to clients, all clients will be expected to monitor their pending/failing trade statuses.
  • Enhancement: Instead of emailing all trade items out to clients, your CSR will begin focusing, and reaching out, on higher risk trades/high value trades and subject to fines/penalties, only. This is being done to allow the CSR to better serve you in resolving trade issues. 

 

For most clients, U.S. Bank is collecting the monthly CSDR penalties via a direct debit or credit facility. At this time, direct debits and credits pertaining to CSDR penalties are not available to our EU client base or Corporate Trust client base.

If you are unsure as to how CSDR penalties are collected from your account(s) at U.S. Bank, please reach out to your CSR.

  • Any charges accrued by an account will be charged monthly after U.S. Bank receives charges from central securities depositories (CSDs).
    • All charges accrued will be passed on to clients as a NET debit or a NET credit.
  • Action: Any charges clients believe they are not at fault for, will need to appeal to their U.S. Bank CSR. Appeals must be received prior to the 7th business day of the following month for the month prior, to be challenged.
  • Enhancement: U.S. Bank will reconcile monthly charges received from CSDs and make a reasonable care effort to identify charges that are not the responsibility of the client.

  • Enhancement: We are working to offer clients visibility of projected charges, and the underlying trades that make up the charge, as they accrue through Pivot reporting and/or SWIFT.
    • Updated reporting is being established so clients receive a notification whenever a trade begins to receive a projected penalty.
  • Enhancement: U.S. Bank will make a reasonable care effort to remove any charges that are deemed to not be the fault of the client.
    • If an item is found to be the fault of U.S. Bank and not a client, then the charge will be removed from the client’s account.
  • U.S. Bank is now able to offer penalty notification to clients via SWIFT MT537 PENA messages:
    • Daily MT537 PENA messages are available as of June 27.
    • They can be sent to clients on a daily basis if a penalty is incurred.
    • If interested in receiving, please reach out to your CSR and have your U.S. Bank account number(s) and BIC address.

Appeals to the CSD against a penalty record will be allowed in limited circumstances. For example, when a security is no longer tradeable or when the CSD may have incorrectly reported a penalty based on a technological error.

  • Enhancement: CSDs will allow appeals from their direct participants. In the case that firms wish to formally appeal a penalty, U.S. Bank will support the communication chain, using our network of sub-custodians to connect with the CSDs to input the appeal and receive the response.

 

Yes. Although our trade submission deadlines are not changing, clients are expected to be aware of the potential impacts of the regulation. Please refer to our trade deadlines document, accessible via Pivot MarketWatch or by contacting your CSR.

Late matching fail penalties could apply if trades are submitted on Intended Settlement Date (ISD) and the trade fails.

  • Fail prevention and settlement efficiency are key in meeting the requirements of CSDR.
  • Automation and data management will become increasingly important to lower the risk of failing trades. If your trades don’t fail, you will not be impacted by the new CSDR rules.

Here are some tips to take into consideration as we approach CSDR:

  • Avoid sending trades manually.
  • SWIFT is highly recommended for all trade transmission, as a secure reliable message transmission method that is widely accepted in the industry.
  • Increased automation will ensure your trades are processed and sent to market on Trade Date.
  • Whenever possible, communicate trades to U.S. Bank as close to execution as possible, or at a minimum on trade date. This will allow a full matching cycle to resolve any potential mis-match issues.
  • Manual trades must be submitted on trade date (T) to ensure timely processing.
  • Ensure all brokers have up to date standing settlement instructions (SSIs) on file for all markets. Mismatched trades in the market will have a much higher risk for getting bought in.
  • Make sure to re-validate your settlement instructions with your counterparties on a regular basis.
  • Enhancement: U.S. Bank is planning to offer updates of client global SSIs through OMGEO Alert via the Global Custodian Direct model (GC Direct) later this year.
    • If you would like to discuss GC Direct in more detail, please contact your CSR.

  • Clients may choose to subscribe to a third-party platform to assist in their day to day fails management.
  • Action: Please contact your CSR if you are considering utilizing a third-party platform or company that will require data to be sent from U.S. Bank.
  • Enhancement: U.S. Bank will work with you and your third-party to ensure the appropriate client data is shared through agreed upon secure channels.

  • Enhancement: To increase settlement and lower penalty risk, U.S. Bank will be enabling all custody accounts to allow partial settlement as a default in CSDR impacted markets. This includes securities lending transactions.
  • Partial settlement will happen automatically if clients remove NPAR given auto-partial settle coding U.S. Bank has in place at the custodian level. There is no need to rebook the trade(s).
    • Better visibility will also be offered. If a trade partially settles over multiple dates, U.S. Bank will be reversing the original trade from your account and re-posting trades for actual settlements in the market.
    • For example: A trade for 1000 shares partially settles for 750 shares on intended settlement date (ISD) and the remaining 250 shares settle on ISD+1. U.S. Bank will reverse the 1000 share trade on ISD and post the 750 share settlement while also pending the 250 share trade to the account.

  • With the limited nature of the appeal process, a bilateral claim process will be required to allow counterparties to request repayment of a penalty that they do not believe is their responsibility.
  • Industry proposals for a best practice are being drafted to apply similar claims principles as there already are in place for processes such as interest claims. U.S. Bank will not be directly engaged in the bilateral claims process.

  • The mandatory buy-in component to the regulation has been postponed and will not be effective as of February 1, 2022. All market participants are awaiting guidance on an amended effective date at this time.
  • When applicable, all clients are expected to appoint their own buy-in agent to execute their buy-ins related to failing transactions beyond four days.
  • There is one official buy-in agent, Eurex, who can support buy-ins prior to effective date, if interested.
  • As a custodian, U.S. Bank will not be engaged directly in the execution of a buy-in, as that is seen as another standard trading scenario. U.S. Bank will support the custody messaging activity that the buy-in requires.
  • Action: All clients are expected to notify U.S. Bank of an executed buy-in through their trade communication process.
    • If buy-in trades are sent to U.S. Bank via SWIFT, the MT54X message must include the “22F::SETR//BYIY” tag to be processed as an execute buy-in.
    • If buy-in trades are sent to U.S. Bank via FTP or Pivot upload, clients must communicate a trade is an executed buy-in. This will be done by utilizing the comments section of the template to notate “BYIY”.
    • If buy-in trades are sent to U.S. Bank via a manual trade ticket process (fax or email), all executed buy-in trades on the trade tickets or trade files must be clearly indicated.

  • Underlying basket security trades for creations and redemptions will be in scope. Thus, parties involved in ETFs (ETF Issuers, brokers and authorized participants (APs)) will need to monitor the underlying security trade settlements in case of potential impact from the Settlement Discipline Regime (SDR).

  • CDSR penalties, if incurred for securities lending clients, should be relatively small (1 basis point (bp) per day) relative to the daily income earned from lending activity.
  • The majority of clients at U.S. Bank which lend securities send their daily trade activity to the bank well after U.S. market close. As European markets have closed earlier in the day, this delay introduces a one-day lag in the recall process of sold securities and places a trade at risk of settlement penalties. The current process of trade communication, if unchanged, recalls a security on T+1 of the sale.
  • Enhancement: U.S. Bank is taking the following steps to mitigate this risk:
    1. U.S. Bank’s securities lending team will adopt the standard practice of restricting 20% of all positions which are subject to CSDR to have shares available to settle trades.
    2. Trades larger than 20% of a position (rebalancing or exiting a position) will require notification to U.S. Bank’s securities lending team prior to the sale, or no later than one hour prior to local market close (roughly 8 a.m. CT/9 a.m. ET) on the trade date (T) in order to avoid the risk of settlement penalties.
    • Clients can direct U.S. Bank to withhold a smaller or larger percentage of securities from lending, based on their view of portfolio turnover.
    • Restricting securities from lending does reduce risk of settlement penalties on sales, however it also reduces the revenue potential from securities lending.
    • Our goal is to ensure the best possible client experience and have taken the above steps in order to protect our clients from additional penalties. We believe this strengthens our program and differentiates U.S. Bank as a securities lending servicer.
    • If you would like to learn more and discuss a customized lending strategy, please reach out to your U.S. Bank relationship manager or the securities lending team.

Questions?

Please contact your CSR or relationship manager with additional questions.

Our core CSDR team remains at your disposal as you prepare for implementation.

  • Anders Akerberg, Global Custody Services Strategy
  • Jeremiah Becker, Global Client Services
  • Laura Cote, Global Custody Services Client Engagement
  • Janine Judge, Global Network Management
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Disclosures

Deposit products are offered by U.S. Bank National Association. Member FDIC.

Investment products and services are:
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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

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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.

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U.S. Bank and its representatives are not providing tax, investment, legal, or any other form of advice by making this information available to you. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation. U.S. Bank will not be responsible for updating any information contained within this material and opinions and information contained herein are subject to change without notice. Any and all implied or explicit opinions or recommendations contained in this information has been written to be informative and does not represent legal, tax, accounting, investment, financial, or other form of professional advice. Investment in global securities markets may involve significant risks of loss and U.S. Bank is not responsible for investment risks or other losses related to such investments made by you or on your behalf. 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 Block F1, Cherrywood Business Park, Cherrywood, Dublin 18, Ireland D18 W2X7. 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: Block F1, Cherrywood Business Park, Cherrywood, Dublin 18, Ireland D18 W2X7. 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.