Settlement Discipline Regime: Adaptation of settlement functionalities - update

21.12.2020

Note: This announcement, originally published on 24 February 2020 and modified on 24 July and 23 October 2020, was updated to add details on the cutover process and the subsequent impacts to be considered by CBL customers. Changes have been highlighted.

The objectives of the Regulation (EU) N° 2018/1229 of 25 May 2018 and published on 13 September 2018 supplementing Regulation (EU) N° 909/2014 with regard to regulatory technical standards on settlement discipline are to increase settlement efficiency, to monitor and address settlement fails by applying late settlement cash penalties and mandatory buy-ins for matched settlement instructions that fail to settle on, or for a certain period of time, after their intended settlement date (ISD).

Effective

8 February 2021

Clearstream Banking1 will adapt existing and introduce new functionality.

Note: CBL will trigger the cutover process on 5 February 2021, after EOD.

Bilateral cancellation

As in Article 7 of the regulation,

CSDs shall set up a bilateral cancellation facility that enables participants to cancel bilateral matched settlement instructions that form part of the same transaction”.

This means that matched instructions can only be cancelled if both counterparties request a cancellation of their instructions. Bilateral cancellation is already applicable to instructions between two Clearstream Banking counterparties.  Bilateral cancellation will be extended to matched instructions between Clearstream Banking and Euroclear counterparties also known as Bridge instructions. As the bilateral cancellation applies on the Bridge, no automatic cancellation will be performed for matched Bridge transactions (even if they are pending for more than 60 calendar days).

Domestic instructions will follow local market rules. Upon receipt of the customer’s cancellation request, Clearstream Banking will:

  • Forward such request to the market;
  • Report the status of such request; and
  • Effectively cancel the instruction upon cancellation confirmation received from the market.

Until the cancellation confirmation is received from the market, the instruction will remain eligible for settlement, that is the instruction may be provisioned and proposed for settlement.

Customers are not expected to take any action during the cutover. 

Hold and release

As per Article 8 of the regulation,

“the CSD shall set up a hold and release mechanism that consists of both of the following:

(a)    a hold mechanism that allows pending settlement instructions to be blocked by the instructing participant for the purpose of settlement;

(b)    a release mechanism that allows pending settlement instructions that have been blocked by the instructing participant to be released for the purpose of settlement.”

The Hold and Release mechanism today enables customers to temporarily hold back a securities transaction from settlement, even if cash or securities provision is available, and to release it only when settlement is desired. The matching process applies independently of the “hold and release” status of the instruction. The service is available for internal, Bridge and external instructions, free of payment or against payment.

We remind you that an instruction “On Hold” is subject to a matching process but will not settle until both parties agree to release for settlement.

The "hold" condition can be specified immediately when sending an instruction to Clearstream Banking or, provided that the instruction is still pending in Clearstream Banking, it can be added at a later stage.

Both ICSDs have agreed to inform each other of the Hold/Release status of the underlying customer’s instruction.

Existing restrictions to apply a "hold" request as described in section 3.12 of CBL Customer Handbook remain applicable

Impact on failed instructions

  • If a buy-in action is launched, the failing party must ensure that the settlement instruction relating to the settlement fail is put on hold;
  • A settlement fail penalty will be charged to the participant that has put its instruction on hold.  If both parties have put their respective instruction on hold, both will be charged the settlement fail penalty.

Customers are not expected to take any action during the cutover. 

Optional settlement flag

The optional settlement flag enables customers to determine, for cash management purposes, which against payment internal and Bridge securities transactions are included in the optional settlement period processing. Customers currently have complete flexibility to include or exclude transactions at their own discretion. In the future, it will no longer be possible to change the value of the optional settlement flag from ”Mandatory and optional” to ”Mandatory only”.  The change from ”Mandatory only” to ”Mandatory and optional” will remain possible.

If a default option at account level is overwritten for a particular instruction and the instruction does not settle, such value will be recycled until the end of the settlement life (for example, effective settlement or cancellation) of the instruction.

Customers are not expected to take any action during the cutover. 

Partial settlement

As per Article 10 of the regulation, “CSDs shall allow for the partial settlement of settlement instructions.”

Partial settlement will be available for customer internal and Bridge instructions free of and against payment. Partial settlement for internal and Bridge transactions will only be possible if there is a lack of securities, not a lack of cash.

By default, all internal and Bridge instructions will not be eligible for partial settlement. The customer can opt in for partial settlement either at instruction level or at account level. If a default option at account level is overwritten for a particular instruction and the instruction does not settle, such value will be recycled until the end of the settlement lifecycle (for example, effective settlement or cancellation) of the instruction. 

If one party accepts to settle the transaction with partial settlement and the other party does not, the instruction will match but no partial settlement will take place. Customers will be duly informed if the instruction is eligible for partial settlement.

The partial settlement shall not be done on a real-time basis but rather at dedicated partial settlement windows throughout the day before the end of each mandatory and optional settlement periods to maximise the settlement possibilities. When the partial settlement window is opened, it is available for partial deliveries free of and against payment in all currencies eligible for the settlement period. If a trade has been partially settled in a partial settlement window, the total outstanding/remaining quantity can be proposed in any other settlement window (partial or not).

For domestic transactions, the customer’s decision to accept for the transaction to settle/not to settle partially will be systematically included in the instruction sent to the local market. Partial settlement will continue as today and Clearstream Banking will continue to report partial settlement feedbacks received from the market. Domestic back to back transactions and domestic deliveries are however not eligible for partial settlement. 

Customers are not expected to take any action during the cutover. 

Information about partial settlement instruction eligibility will be provided via Xact via SWIFT and Xact Web Portal. Detailed information on how to opt in at account level to partial settlement can be found in the Functional Specifications.

Cash tolerances

In line with Article 6 of the regulation, for all internal and Bridge instructions against payment in EUR, the following cash tolerance levels will apply:

  • EUR 2 for transactions of an amount up to or equal to EUR 100,000; and
  • EUR 25 for transactions of an amount greater than EUR 100,000

With non-EUR currencies, for settlement amounts equivalent to less than or equal to EUR 100,000, the tolerance level will be equivalent to EUR 2, while for settlement amounts that are equivalent to more than EUR 100,000, the tolerance level will be equivalent to EUR 25.

In the case of external against payment instructions, the maximum discrepancy tolerated in settlement. Matching varies in accordance with market practice and the conditions of the domestic link. Details are given in the respective Market Link Guide. 

Customers are not expected to take any action during the cutover. After cutover, pending unmatched instructions will be subject to new tolerance levels. Matched instructions, that do not fulfil the new tolerance levels, will remain valid.

Delivery instructions without matching ("dump" instructions)

The current selective acceptance service for internal and Bridge delivery instructions without matching enables customers to decide to automatically reject internal and Bridge deliveries of securities from counterparties without matching instructions into a specified account, while per default account set up such receipts of securities are accepted.

While delivery instructions without matching will no longer be supported for Bridge instructions, the service will continue to be provided in case of internal instructions but only if they involve transfers of financial instruments between different accounts opened by the same Institution. 

At cutover, Clearstream will reject:

  • Pending internal “dump” instructions that do not comply with the new validation rules; and
  • All pending Bridge “dump” instructions.

Matching information

The Trade Date will become a mandatory matching criterion for all internal and Bridge instructions. If the trade date is missing, the instruction will be rejected, and the customer will have to re-instruct. Domestic instructions will follow local market rules. Details are given in the respective Market Link Guide.

At cutover, CBL will:

  • Reject all unmatched instructions without a trade date; and
  • Reject matched settlement instructions, if none of the instructions include a trade date.

For matched instructions where only one instruction is missing the trade date, such instruction will become invalid. Consequently, both instructions will become ineligible for settlement and will have to be bilaterally cancelled by both customers.

At cutover, CBL customers are requested to:

  • Cancel all pending matched and unmatched internal and bridge instructions without a trade date; and
  • Reinstruct those instruction with a trade date.

CBL customers must ensure they always provide the trade date in their new settlement instructions to avoid rejection and matching fails.

The Market Claims and Transformation indicator and the Cum/Ex coupon indicator will become additional matching fields for internal instructions only that is if included by one party, it must be included by both parties and both values must match.

Customers are not expected to take any action during the cutover. Pending unmatched instructions will be subject to the new matching rules. Matched instructions, that do not fulfil the new matching rules, will remain valid.

Further information

Detailed information can be found in the Functional Specifications.

For further information, customers may contact Clearstream Banking Client Services or their Relationship Officer.

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1. Clearstream Banking refers collectively to Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Trade and Companies Register under number B-9248, and Clearstream Banking AG (for Clearstream Banking AG customers using Creation accounts), registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500. (CBL).