EU CSDR Settlement Discipline Regime: Penalties and buy-ins - Update
Note: This announcement, originally published on 5 May 2020 and updated on 10 June and 1 December 2020, has been further updated to provide new dates and information on testing and dry-run. The changes have been highlighted.
One of the objectives of Regulation (EU) N° 909/2014 on improving securities settlement in the European Union and on central securities depositories (CSDR) is to foster settlement discipline and improve settlement efficiency across EU.
The Regulatory Technical Standards (EU) N° 2018/1229 of 25 May 2018 with regard to regulatory technical standards on settlement discipline (Settlement Discipline Regime or SDR) specifies requirements for the prevention of settlement fails and measures to address these settlement fails once occurred.
Clearstream Banking1 plans to activate the functionalities relating to the identification, calculation and reporting of cash penalties on 14 September 2021, in a dry-run mode and in line with the T2S schedule. The dry-run will be available until the end of January 2022. In addition, Clearstream Banking plans to provide customers with testing facilities as of 1 July 2021 until 17 September 2021.
Further information on the testing and dry-run test will be communicated later. The penalties payment functionalities (that is, monthly collection and distribution of net amounts of cash penalties) will only be activated as of 1 February 2022, not considering any cash penalties calculated and reported by Clearstream Banking before this date.
Note: In October 2020, the European Commission accepted the proposal from the European Securities and Markets Authority (ESMA) and issued a Delegated Regulation postponing the entry into force of SDR to 1 February 2022.
As various aspects of the CSDR settlement penalties regime are still subject to ESMA guidelines and clarifications, this announcement may be subject to further changes.
Cash penalties
Cash penalties on CASCADE and LION2 settlement fails on the T2S platform will be calculated by the T2S penalty mechanism. The T2S Penalty Mechanism will calculate and apply cash penalties on matched settlement instructions that failed to settle (in full or in part) on and after the intended settlement date (ISD) when both the settlement instruction and the relevant financial instrument are subject to cash penalties in T2S. CBF will use the T2S_semt_044_001_01 penalties reporting received from the T2S penalty mechanism to provide its customers the relevant cash penalties information in SWIFT ISO 15022 MT537 format.
Clearstream Banking intends to comply with the “ECSDA CSDR Settlement Fails Penalties Framework” unless stated otherwise. The latest version of the document can be found on the ECSDA website.
Scope
T2S will calculate cash penalties on any settlement instructions which types and instruments are in scope of the SDR.
Instructions subject to cash penalties
Any free of and against/with payment matched settlement transactions of Clearstream Banking customers that fail to settle in accordance with Article 16 of the SDR RTS 2018/1229, settlement instructions reported by T2S and CBF as “pending – failing” (SWIFT settlement status code “PENF”) will be considered for penalties calculations.
Exceptions
T2S will exclude only the following transactions from its penalty mechanism:
- Instructions related to corporate actions on stock generated by CSDs and containing ISO transaction code “CORP”;
- settlement Instructions automatically generated by T2S for realignment purposes.
Note: Discussions are still ongoing at the ESMA about specific instruction types and events to be excluded from the scope of the SDR. We will inform you as soon as the ESMA has confirmed the list of instruction types, for which no penalty applies.
Instruments subject to cash penalties
Any financial instrument listed in the Financial Instruments Reference Data System (FIRDS) database maintained by ESMA will be subject to cash penalties. However, for shares also listed in the Short Selling Regulation (SSR) exemption list, cash penalties will not apply.
Application
Cash penalties will be calculated by the T2S penalty mechanism and reported by CBF to customers when an instruction matches at T2S after the ISD with the execution of the T2S event “Late Matching Fail Penalties” (LMFP) or/and when the transaction fails to settle on and after its ISD (T2S event “Settlement Fail Penalties” (SEFP)).
Note: In the context of “external” settlement transactions in T2S that actually settle outside the T2S platform (for example, in CBL), T2S will always calculate and report the penalties, even if T2S is not the actual place of settlement as described in the ECSDA Penalties Framework. CBF will automatically request that T2S remove these penalties, so that only the cash penalty calculated by the local system applies. The removal of the T2S penalties will be reported in a "modified penalties" report to CBF customers acting in ICP and DCP mode.
The T2S penalties for ICPs and DCPs will be applied and reported on T2S Party BIC level.
Late Matching Fail Penalty (LMFP)
LMFPs will be applied if the transaction matches after the ISD. The LMFP will be only calculated once, will be applied on the day the instruction matches, and will be charged to the last party who sent its settlement instruction.
If both parties send their respective settlement instruction after the ISD, only the last customer to send its instruction will be charged the LMFP.
Where settlement instructions match before the end of the relevant settlement period on any business day after ISD, the T2S penalty mechanism will consider all T2S business days as from the ISD until and excluding the business day that the instruction is matched.
Where settlement instructions match after the end of the relevant settlement period, the T2S penalty mechanism will consider all T2S business days as from the ISD until and including the business day that the instruction is matched.
Settlement Fail Penalty (SEFP)
SEFPs will be applied on matched T2S settlement instructions and will be calculated on each business day when the transaction failed to settle in part or in full on and after the ISD. For partial settlement, the T2S penalty mechanism will calculate the SEFP based on the residual amount to be settled. Clearstream Banking will charge the SEFP to the customer whose instruction is not fully settled at the end of the relevant settlement period of the ISD as the instruction:
- is put on “party hold”;
- is failing due to lack of securities (if 1 does not apply);
- is failing due to lack of cash (if 1 and 2 do not apply).
If both settlement instructions are “on hold” at the end of the relevant settlement period, both customers will be charged the SEFP.
Calculation
Penalties for free of, with and against payment settlement transactions will be calculated by the T2S penalty mechanism only in the T2S-eligible currencies (EUR or DKK3) and using the following formulas depending on the failing settlement instruction type:
Settlement instruction type | Calculation formula |
Delivery against Payment (DvP) a | Security Penalty Rate multiplied by Quantity of non-delivered securities multiplied by Reference Price |
Free of Payment (DFoP and RFoP) | |
Receipt against Payment (RvP) | Cash Discount Penalty Rate multiplied by Quantity of non-delivered securities multiplied by Reference Price |
Payment Free of Delivery (PFoD) | Cash Discount Penalty Rate multiplied by Amount of cash to be delivered |
Delivery with Payment (DwP) Receipt with Payment (RwP) | Security Penalty Rate multiplied by Quantity of non-delivered securities multiplied by Reference Price Plus Cash Discount Penalty Rate Multiplied by Amount of cash to be delivered |
a. Including fails in the T2S BATM cycle. The same applies for receipts against payment.
Note: For the special case of failing T2S against payment settlement instructions in a non-T2S eligible currency that is recognised and processed by the T2S settlement system as FOP instructions for which the cash payment is executed on the customer’s CBF-i account, the T2S penalties system will apply FOP penalties, that is, no “lack of cash” penalties will occur. Also, such cash payments are not subject to any penalties calculated by CBL4.
The Security Penalty Rate designates the applicable rate of penalty to be applied, based on:
- The financial instrument type classification (CFI code of the ISIN according to the T2S reference data);
- Whether the financial instrument is a liquid or illiquid share (considering the financial instrument type classification, information is derived by CBF from the ESMA FITRS database for equities and provided to the T2S penalty mechanism on a daily basis for those ISINs for which CBF serves as the Securities Maintaining Entity in T2S); or
- Whether the financial instrument was traded on an EU SME Growth Market (as shown on the (optional) “place of trading” Trading Venue MIC information in both legs of the settlement transaction).
Depending on the combination of the above attributes, the T2S penalty mechanism will determine the applicable Penalty Rate as defined by ESMA and displayed in the following table:
Type of fail | Type of securities | Liquidity Indicator | SME Growth Market | Penalty Rate (in bps) |
Lack of securities (Applicable Penalty Rate is called “Security” Penalty Rate) | Share | Liquid | No | 1.00 |
Illiquid | 0.50 | |||
n/a | Yes | 0.25 | ||
Sovereign debt | n/a | 0.10 | ||
Corporate debt Money-market instruments | No | 0.20 | ||
Yes | 0.15 | |||
Other instruments (including Exchange traded funds, units in collective investment undertakings, emission allowances, etc.) | No | 0.50 | ||
Yes | 0.25 | |||
Lack of cash (Applicable Penalty rate is called “Cash Discount” Penalty Rate) | n/a | n/a | n/a | Official interest rate for overnight credit charged by the central bank issuing the settlement currency with a floor of 0 |
For "lack of cash" penalties in EUR, the Cash Discount Penalty Rate will be the “marginal lending facility rate” as provided by the ECB divided by 360. For “lack of cash” penalties in DKK, the rate to be used is currently reviewed with the Danish National Banks.
The Reference Price designates the price of the financial instrument used by the T2S penalty mechanism to calculate the cash penalties; such price is provided by CBF to T2S on a daily basis for those ISINs for which CBF serves as the Securities Maintaining Entity in T2S. The Reference Price will be the closing price of the financial instrument at the relevant MiFID II/ MiFIR trading venue for the day the cash penalty applies, when available. If no trading venue price is available, a market or default price as determined by Clearstream Banking will be applied.
Reporting
For CBF transactions failing in T2S, the respective penalties will be reported daily and monthly by the T2S penalty mechanism to CSDs and T2S DCPs in ISO20022 format (T2S_semt_044_001_01; please refer to T2S CR654 for message details).
Customers acting in ICP-mode will receive the daily and monthly reports from Clearstream Banking (via MT537 or Xact Web Portal) using the current OneClearstream connectivity channels Xact via SWIFT, MQ, Xact File Transfer via LIMA and Xact Web Portal.
Clearstream Banking will report cash penalties related information to customers via MT537 only. Two new reports will be developed, one to report cash penalties on a daily basis, including details of the calculation (Statement of Cash Penalties), and one monthly report, including the global net amount of cash penalties to be paid or received by the customer (Monthly Aggregated Report). In addition, the Xact Web Portal will be enhanced to enable customers to query and monitor the cash penalties related information.
Important note: To be able to receive the daily and monthly reports from Clearstream Banking, customers must have subscribed to the already existing OneClearstream connectivity. Regarding Xact File Transfer via LIMA, subject to the details published in the dedicated functional specifications document, customers should be aware that the sender BIC of such files will be “CEDELULLXXX” (that is, the CBF sender BIC “DAKVDEFFXXX” cannot be supported).
Xact Web Portal will allow Clearstream Banking customers to query and monitor the cash penalties related information. The receipt of the penalties reports through the Xact via SWIFT and Xact Web Portal requires customers to actively subscribe to these new reports. Samples of the daily and monthly MT537 reports related to CBF transactions are available here.
Note: The schedule of the T2S penalty mechanism daily reporting (once a day around noon) deviates from the reporting schedule applied by CBF (three batches throughout the day, see below for details).
Daily statement “Statement of Cash Penalties”
T2S as well as Clearstream Banking distinguish newly calculated penalties from penalties already calculated and modified or removed afterwards. Therefore, new and amended cash penalties will be reported separately.
Customers will have the possibility to schedule their respective reports directly in Xact Web Portal, selecting one or multiple times (among a selection of thirteen available times, between 8:30 and 18:00 CET). All reports are “delta” reports (i.e. contain penalties information received by Clearstream Banking after the previous report was sent) including, for instance, new or amended cash penalties since the last report sent. If no cash penalty is to be reported at a scheduled time, then Clearstream Banking will provide customers with a “no activity” report.
Monthly statement “Monthly Aggregated report”
On the 14th penalties business day (PBD), for each customer account, Clearstream Banking will aggregate and net the cash penalties from the previous month, per currency and per counterparty (I)CSD. The resulting net amount will constitute the amount to be paid (if negative) or to be received (if positive) and will be reported in real-time to customers in a MT537 Monthly Aggregated Report, once received and successfully reconciled with the T2S Monthly Report.
Customers acting in ICP mode will be able to identify the “net”credit/debit payment amount per CSD/market and currency in the monthly report (or via the PFoD), that is, no additional "payment pre-advice“ will be sent by Clearstream Banking.
Note: For customers acting in DCP mode: the T2S penalty mechanism´s monthly T2S_semt_044_001_01 report will not contain aggregated net amount information but only ”bilateral nets” per counterparty (please refer to T2S CR654 for details).
Appeals
From the date when the cash penalty was reported until the 10th PBD of the next month (the “appeal period”), customers may (exceptionally) address “appeals” regarding their penalties to CBF exclusively via the Xact Web Portal; accepted appeals will lead to the provision of a MT537 "modified penalties" report.
Important note: Customers that have not migrated to Xact Web Portal are strongly recommended to do so in order to be able to receive penalties information and to address appeals to Clearstream Banking.
Collection and distribution of net amounts
Upon reporting to customers, in a MT537 Monthly Aggregated Report, of a net amount to be paid or received, Clearstream Banking will generate already matched “payment free of delivery” PFoD instructions for such net amount versus the customer (default) T2S (EUR) DCA for each net amount to be collected or to be redistributed.
Important note: CBF customers that have not yet set-up a EUR DCA with a Central Bank are required to do so in order to be able to process penalties payments.
These PFoD instructions will be generated with a trade date of the 15th PBD, and an intended settlement date of the 17th PBD of the month, using a single dummy ISIN LU2128008567 for all T2S penalties and the settlement transaction type indicator “PAIR”. These PFoD instructions itself are not subject to settlement fails penalties.
Note: In line with SDR RTS Article 19, settlement fails involving a CCP will be flagged by the T2S penalty mechanism to allow CBF to exclude such penalties from its actual PFoD collection and distribution process as such penalties payments shall be handled by the CCPs towards their clearing members.
Mandatory buy-ins
The objectives of CSDR and of the SDR are to foster settlement discipline and to improve settlement efficiency across EU but also to define precise rules if the delivering party cannot deliver the securities at the end of the extended period following the intended settlement date. For such aged fails, trading parties and CCPs will have to initiate mandatory buy-ins after a certain time period (“extension period”). For non-cleared transactions, the receiving trading party will be required to take the necessary actions to receive the expected securities and shall trigger a mandatory buy-in process with a buy-in agent.
Subject to ongoing “buy-in market practice” discussions by AFME and pending clarifications from ESMA, for non-CCP cleared transactions, where the buy-in is possible, the receiving party shall appoint a buy-in agent on the business day following the expiry of the relevant extension period and will notify the failing delivering party thereof. The delivering party will be requested to put his instruction “on hold” (the instruction will continue to be subject to SEFP).
The receiving party shall notify the results of the buy-in to the delivering party at the end of the business day on which the receiving party receives the bought-in securities and:
- the initial settlement instructions relating to the settlement fail are cancelled by both parties;
- in case of partially successful buy-ins, new settlement instructions are created by both parties for the remaining quantity. In line with SDR RTS Article 16.3, to avoid LMFP, reference to the buy-in is required in the new settlement instruction sent to CBF by populating the MT54x settlement instruction sequence E “Settlement Details” with field “22F:: STCO/REGL/BSSP”.
At the end of the buy-in period, if there are non-delivered securities, the receiving party can decide to defer the execution of the buy-in to a later date or to be paid cash compensation.
In relation to the failing instructions in Clearstream Banking´s settlement system that are subject to buy-in or cash compensation, customers shall notify Clearstream Banking of the buy-in or cash compensation results.
The information shall be provided once the buy-in or cash compensation has been executed by the CSD participant to the CSD via a specific “buy-in” MT530 message (see SWIFT fast track change request 001614 development implemented in the SWIFT Release November 2020).
Clearstream Banking technically accepts these SWIFT MT530 messages since implemented in the November 2020 SWIFT Release but does not process them any further. Alternatively, proprietary communication means may be offered by Clearstream Banking for this purpose (for example, .csv file upload to Xact Web Portal, using the template defined by ECSDA).
Detailed information about the notification of the buy-in or cash compensation results will be communicated at a later stage.
Monitoring of settlement fails and “working arrangements” with relevant failing customers
As per Article 7 of CSDR, Clearstream Banking has an obligation to
- monitor settlement fails,
- implement “working arrangements” with relevant failing customers,
- report fails and measures to improve settlement efficiency to its competent authorities on a monthly basis, and
- publicly disclose anonymised statistics on an annual basis.
In this context, Clearstream Banking will implement a “Settlement efficiency monitoring system”, in order to monitor settlement fails in volume and value.
Customers subject to the highest settlement fail rates (based on LEI) in number or values will be contacted by their respective Relationship Officer to discuss solutions to improve their overall settlement efficiency.
Further information
For the detailed technical specifications about the Xact Web Portal, the reporting of cash penalties and net amounts and the notification of the buy-in or cash compensation results please consult the CSDR Customer readiness documents on the Clearstream website or contact Clearstream Banking Client Services or their Relationship Officer.
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1. Clearstream Banking refers to Clearstream Banking AG, registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500.
2. For transactions in CSC (collective safe custody) and NCSC-T (non-collective safe custody T2S-eligible) securities; penalties for transactions in NCSC (non-collective safe custody) securities settling on the Creation platform will be handled by the CBL penalties system (see CBL Announcement A20047).
3.CBF does not currently offer T2S against payment settlement in Central Bank money in DKK currency, hence, no “lack of cash” penalties in DKK will occur and T2S penalties in DKK will be limited to free of payment settlement fails when the denomination or reference price currency = DKK and CSD VP DK is part of the failed transaction (as per T2S Fasttrack CR 745) CBF will process DKK penalties payments on the customers´ CBF-I accounts for the benefit of its customers to not having to open a DKK DCA only for penalties purposes.
4. CBF will send an automated “repair” request to T2S to adapt the failing party for penalties related to such transactions as, when the CASCADE/ T2S (free of payment) instruction is on “CoSD hold”, T2S assigns the penalty to the deliverer (not knowing that CBF put the receipt instruction on “CoSD hold” and, therefore, the receiver must be penalised instead).