CSDR Settlement Discipline Regime

The Settlement Discipline Regime (SDR) goes live on 1st February 2022

CSDR SDR penalties (interest and mandatory buy-ins) are due to be implemented on 1st February 2022. The regime’s objective is to reduce the number settlement fails and their duration. It is likely to be successful: the costs of processing penalty interest and buy-ins are going to be significant.

The regime’s impact will be global. It will apply to cash, repo, and securities lending trades settling in European CSDs/ICSDs. The location of the settling party is irrelevant: it will apply to firms in Frankfurt, London, New York and Tokyo. Similarly the role of the settling party is irrelevant: it will apply to banks, brokers and fund managers.

The value and volume of cash flows will be large. At current fail levels, we estimate in excess of €1.5bn (annual total) of debit and credit interest. If each interest debit and credit is processed by an average of 4 firms, the total flows will be €6bn. Every firm in the chain – custodian, bank, broker, fund manager, etc. - will need to ensure that amounts are correct, appropriately booked and passed on in a timely manner. Query and SLA management will add to the cost and complexity.

Mandatory buy-ins are much more challenging. Not only are they manual and difficult to process but they can also have P&L, contractual, and client service impacts on both sell and buy-side front offices.

What does the CSDR SDR project need to consider?

Improving settlement rates

Transactions settling on Intended Settlement Date (ISD) won’t ever incur penalty interest or buy-ins
Settlement before the end of the Extension Period means no buy-ins
Pillar 1 imposes specific requirements: trade allocations and confirmations, settlement instruction mandatory matching fields, partial settlements, etc

Processing the penalties received

Determining the approach
Understanding daily, monthly, ad hoc reporting received
Validating and allocating
Handling queries both ways (penalties received from providers, penalties recharged / recredited to clients)

Processing mandatory buy-ins

External contractual and operational arrangements
Internal processes and controls
Resourcing and workflow management

Preparation needs to include Legal & Compliance – not only contractual implications but also confirmation that the proposed approach is permissible (eg no risk of Client Asset or Inducement to Trade breaches)

How TORI can help?

CSDR Settlement Discipline project readiness assessment and planning

Expected impact
Fails reduction / potential buy-in reduction
Penalty interest processing
Buy-in processing

Consultancy resources and tools to support project activities to reduce fails and implement the necessary processes and controls to support interest and buy-in processing

Co-ordination with linked programmes such as Operational Resilience, Cost Reduction, and Supplier Management

TORI CSDR SDR experience

Working since mid-2019 to develop CSDR Settlement Discipline expertise. This has included building a tool to assess the interest and buy-in impact and using it to deliver impact analysis assessments
Working with CSDR Settlement Discipline solution providers to understand technology solutions available to support validation, allocation, buy-in processing, etc
Working with CSDs, Settlement Intermediaries (CCPs, Custodians) and other relevant 3rd parties (eg Fund Admins) to understand their proposed solutions