The industry’s current focus lies with the upcoming implementation of CSDR’s settlement discipline regime. Delays or failures in the settlement of securities transactions settled at a European CSD will lead to penalties starting from 1 February 2022.

The requirements include a three-step escalation mechanism consisting of the following points:

• Measures to prevent settlement fails
• Cash penalties for late matching or settlement
• Mandatory buy-ins

There are still a number of open points which, in the opinion of the industry, are worthy of discussion or require clarification by the supervisory authorities. The main friction points are:

• Unclear product scope
• Obligation to initiate the buy-in process instead of a voluntary decision. Furthermore, the Buy-in process needs to be closely reviewed
• A more workable extension period

Due to these open points and the implication of COVID-19 enter into force of the settlement discipline requirements is postponed to February 2022.

Based on our current experience, we are convinced that there are important and time-consuming topics that are slipping out of focus in the latest discussions, which pose a real threat to a successful implementation.

Besides the CSDs, the settlement discipline requirements hugely affect other market participants like banks, asset managers and custodians to a slightly different extent. We have identified the following four key challenges they all will need to face:

It will be necessary to process external information to fulfil the requirements regarding measures to prevent settlement fails, cash penalties and mandatory buy-ins. The data preparation is crucial for subsequent processes like extracting open transactions that are CSDR relevant, reconciliation of cash penalties amount or calculating the required collateral for the buy-ins. Those implementations will lead to major efforts for business and IT.

Currently, only one provider (EUREX STS) in the European market will offer the buy-in agent service according to the settlement discipline requirements. This could lead to a bottleneck in the client on-boarding process with increasing lead times. For asset managers, this will strongly depend on whether a direct connection or an indirect connection via a service provider or a custodian is established.

Due to the new requirements, it is possible to introduce new services to those clients who carry out external transactions, which are settled through the bank. Informing clients and concluding the contracts can prove to be very time-consuming. Asset managers should contact their custodians or other service providers for information on possible services.

There is no market standard for the booking of the cash penalties or buy-ins. Especially the buy-in process leads to various relevant outcome scenarios that must be taken into account (successful auction with full settlement, partial settlement or cash compensation). Due to the different setup, there are additional challenges for asset managers and their custodians like the bookkeeping of cash penalties on fund level.