Central Securities Depository Regulation (CSDR)

The CSDR came into force in 17 September 2014 and introduced shorter settlement periods (T+2) settlement discipline, organisational, conduct and prudential requirements for CSDs and passporting. It applies to all European CSDs and the settlement of all transactions in all transferable financial instruments unless otherwise specified.

CSDs are of central importance in the securities lifecycle and the CSDR has implications for the wider market participants across the settlement cycle. Trading parties, trading venues, CCPs clearing and settlement agents involved in the post-trade flow processes leading to trade settlement are affected by the settlement fails regime. As CSDs provide for the registration and safekeeping of securities, the settlement of securities vs cash, track the issuance of securities and track the ownership of securities through securities holding systems through which CSD participants report securities holdings of client, the CSDR affects market participants such as issuers required to move to book entry securities and custodians holding securities on behalf of investors.

The main rules impacting the CSDs and participants are as follows:

• Cash penalty on settlement fails. A daily cash penalty applies for each settlement instruction that fails to settle by the intended settlement date.
• Mandatory buy-in for delivery failure for any financial instrument within a set period of the settlement date. The buy-in is executed by the participants (by the CCP for CCP-cleared transactions, or with the trading party for non CCP-cleared transactions).
• The CSD must complete a daily reconciliation to verify records with participants
• The CSD must enable segregation of securities between participants, and their clients, and offer omnibus and individual client segregation.
• CSD participants must be able to offer their clients the choice between omnibus segregation and individual client segregation and provide information on level of protection, risks and costs associated with each option.
• Transactions settled off-exchange> Settlement agents, intermediaries and custodians are required to report to the regulator the volume and value of all security transactions settled outside of a CSD.
• Book entry. Issuance of transferable securities by EU issuers is required to be represented in book entry form (dematerialised).

As well as revising the settlement discipline regime, the CSDR Refit of 2023 simplified the passporting process and facilitated CSD access to or provision of banking -type ancillary services.

There was significant impact to the securities lending industry both in terms of T+2 and enforcement of timely settlement. At ISLA we considered that this moved the market towards a more standardised and efficient post trade market as it gave firms the opportunity to streamline their back and middle office processing operations and technology to become more efficient and cost effective whilst avoiding penalties. Whilst CSDR can help improve settlement fails, these will inevitably still occur, and firms must integrate sufficient technology upgrades to be able to determine liability for such fails and allow the pass on of associated costs to the relevant party.

Following industry concerns as to complexity and practicability, the 2023 CSDR Refit has now excluded securities financing transactions from the mandatory buy-in regime and disapplied cash penalties to settlement fails where the underlying cause is not attributable to the participants in the transaction or operations that are not considered trading (such as free of payment collateral transfers).

In April 2018, ISLA published the results of a settlement survey undertaken with several member firms to understand how the market manages loan settlements. The results showed that members settlement rates were between 80-90% and the majority of fails occurred in loan returns. CSDR has forced the industry to address the issue of settlement efficiency without jeopardising liquidity, especially with the upcoming adoption of buy-ins and cash penalties. Mandatory partialling, SSI sharing, and standardisation are key elements that firms needed to review in preparation for CSDR. ISLA has published the below whitepapers which discussed these impacts in more details.

There was no requirement under the CSDR Refit to move to a T+1 settlement cycle, although following the US move to T+1 this is now being discussed at EU level. ESMA is due to report to the EU on this matter by 17 January 2025. ISLA is part of the European T+1 Industry Task Force and is closely monitoring developments on T+1 within the EU.