The European Central Securities Depositories Association (ECSDA) has published a draft of its future Settlement Fail Penalties Framework (the Framework). In an effort of compliance with the Central Securities Depositories Regulation 909/2014 (CSDR) (particularly with regards to articles 6 & 7), European CSDs have created the Framework, seeking to harmonise across four key pillars:
- measures to prevent settlement fails: CSDs´ settlement functionalities aiming at preventing settlement fails (e.g. bilateral cancellation, hold & release, partial settlement) and possible derogation from the requirements to develop some of these functionalities by smaller CSDs;
- requirements to monitor and report settlement fails: CSDs are required to monitor and analyse settlement fails and CSD participants´ settlement efficiency, including setting up working groups to define measures to improve efficiency;
- requirements for CSDs to charge cash penalties to users that cause settlement fails: For matched settlement instructions failing to settle on the intended settlement date, a daily calculation, (at least) monthly collection, distribution and reporting of penalties to CSD participants are required to be developed by CSDs. The parameters for the calculation of cash penalties for settlement fails has been adopted and published in March 2017 – Cash Penalties Calculation Delegated Act 2017/389; and
- rules requiring a mandatory buy-in: Trading parties are required to initiate a mandatory buy-in after a specific period of time after the Intended Settlement Date (CSD role limited to information gathering and regulatory reporting).
The Framework intends to provide a clear structure for settlement penalty mechanisms for CSDs (irrespective of whether or not they have yet joined the T2S platform). Many assumptions made in the draft are pursuant to receiving confirmations with competent authorities and relevant stakeholders. The consultation on the draft Framework is open for comments until 17 August 2018.