Europe: Has the New CSDR Penalties Regime Escaped Your Notice?
The Central Securities Depositaries Regulation (CSDR) originally entered into force in the EU on 17 September 2014, aiming to harmonise timing and standards of conduct in the EEA’s securities settlement industry. It introduced measures for the authorisation and regulation of EEA central securities depositaries (CSDs).
While much of the regulation focuses on prudential, organisational and business standards of CSDs, some of its requirements directly affect trading entities that settle trades on EEA CSDs. These include measures to address and prevent settlement fails and improve settlement discipline, which became effective on 1 February 2022.
To deter settlement failures, EEA CSDs are now required to impose cash penalties on CSD participants (i.e. local custodians or settlement agents) that cause a settlement failure.
Penalties are not to be a source of revenue for CSDs and they must be redistributed to the non-failing participant (i.e. local custodian or settlement agent).
In practice, settlement failures may not be caused by the CSD participants themselves and so they may seek to pass the penalties up the settlement chain to the trading parties responsible for the settlement failure, for instance to an investment manager.
We recommend that you keep an eye out for information on this issue and consider requesting contractual amendments from counterparties regarding this penalty regime.
From what we have seen these penalties are often being aggregated on a monthly basis by counterparties and the “net credits” are being allocated to an investment manager’s client custody cash accounts. However, where the debits exceed the credits, investment managers are often deciding to bear this cost to avoid their client suffering financially. We would finally note that the CSDR penalties regime has not been adopted in the UK. As a result, the trading of securities that are ultimately settled in CREST will not be affected.