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The Settlement Discipline Regime applies to all transactions in European Settlement systems and consists of both a Cash Penalty for late settlement (applied by CSDs) and Mandatory Buy-ins (to be performed by the trading parties).
All parties in the settlement chain involved in transactions in European markets are potentially impacted, including where the trading parties are not located in Europe. There are regulatory obligations for both the receiving and delivering parties in a failing transaction. This means that all market participants will need to prepare for CSDR, even those with no failing deliveries.
Cash penalties will be applied to all failing matched transactions. These will be calculated at the end of each business day where an instruction fails to settle, from intended settlement date (ISD) until actual settlement date. The calculation is done by the CSD and reported to its participants on a daily basis. Penalties will also be applied to an instruction that is matched after its intended settlement date. Daily penalty rates range from 0.1 basis points for SSA Bonds to 1.0 basis points for liquid shares. Settlement failures due to lack of cash will be charged based on official interest rates. A full list of the applicable penalty rates is included in the Annex of the Delegated Act on Cash Penalties. Penalties will be collected on at least a monthly basis by the CSD from the failing CSD participant for redistribution to the receiving CSD participant. No penalties are retained by the CSD, although the CSD may charge an administration fee.
A mandatory buy-in procedure will be introduced for transactions still failing at the end of the Extension Period. The Extension Period is determined by the instrument traded: ISD+4 for liquid shares; ISD+7 for other financial instruments; ISD+15 for transactions on an SME growth market. The responsibility for initiating the buy-in is with the receiving party. For cleared trades, the buy-in is effected by the CCP. For non-cleared trades, the buy-in is effected by the receiving trading venue member, or the receiving trading party if traded off-exchange. Buy-in mechanisms provide a buyer of securities the contractual right to source the securities elsewhere (usually for guaranteed delivery). The failing sale will be offset against the buy in and any costs passed to the failing seller. In the event that the buy-in or reference price is lower than the original transaction price, the payment of the difference is “deemed paid”.