Securities Finance Times feature article


The implementation of CSD regulation has prompted regulators to issue guidance on best practices for tackling legislation relating to bond and repo markets. Carmella Haswell sums up everything you need to know

After much anticipation, the Central Securities Depositories Regulation (CSDR) came into force across Europe on February 1, 2022. Regulators including the International Securities Lending Association (ISLA) and the International Capital Market Association (ICMA), seek to support the bond and repo markets through the transition by following its best practice recommendations.

ISLA previously drafted a list of recommendations in its CSDR Sanctions Best Practice Guidelines for the Monetary Sanctions Regime, but has since updated the document to include changes that reflect member feedback over the course of of the Christmas period and, as far as possible, aligned with other professional associations.

Issuance and settlement of claims

ISLA suggests that counterparties issue their CSDR claims within 30 calendar days of the issuance of the CSD sanction. It should be noted that the proposed timelines for CSDR-triggered claims may change as the process matures. Complaints must be sent electronically or by e-mail, with signature, and preferably in PDF format. The recipient must acknowledge receipt of the claim within 24 hours and must endeavor to pay the claim within 30 days, with a maximum of 60 days from the issuance of the CSD penalty.

The minimum claim is €500, or less if bilaterally agreed prior to the activity, and the parties may agree to the consolidation of multiple failing transactions to exceed the minimum threshold. Once the claim has been accepted by both business parties, payment must be made within five working days. The complaint cannot be officially closed until the originator of the complaint confirms receipt of payment.

The sender of the complaint must provide the following information:
• Name and BIC code of the initiator of the request
• Currency and cash value
• Trading date of the failing instruction
• Complaint reference
• Expected settlement date
• Complaint calculation
• Actual settlement date
• Currency of claim/penalty
• Security ID and Description
• Amount of claim/penalty
• Amount
• Reason for complaint
• Payment details

Compensation of claims

With respect to a single failing event, ISLA recommends that claimants incorporate and account for relevant credits and debits that may apply for each failing instruction. In addition, a net settlement – a single cash flow to resolve multiple claims within the same penalty period – must be agreed for the total claims between the parties. CSDR penalizes the defaulting party to the transaction in order to promote more efficient settlement in EU capital markets. The directive specifies that claims must not unduly enrich either party.


Automatic Partial Settlement is a feature to settle incremental amounts of a failing transaction. Self-partial facilities should be applied by default for defaulting securities lending transactions, where their use does not disadvantage either party. The parties may bilaterally agree to time or quantity limits to provide sufficient opportunity to maintain safeguards or other controls. The T2S settlement system provides partial unblocking functionality, which must be used as set out in the Securities Market Practice Group (SCPG) market practices.

Notice of sale

Although best practice may recommend indicative cut-off times, it is recognized that loan counterparties will want to maintain a flexible approach. However, if notices, instructions and settlement occur outside of the recommended indicative timeframes, the parties should acknowledge that settlement will be made to the extent possible. To avoid backdating the activity, instructions should be processed on the date they are traded.

The recommended cut-off times for new loans should not exceed one hour before the cut-off time of the relevant market. Collateral for new loans will occur at different times relative to transaction and settlement. With regard to returns, the notification of a loan return must be processed electronically and, if possible, via an electronic platform, no later than one hour before the closing of the relevant market.

ICMA Regulatory Guidance

Through its CSDR Settlement Discipline Working Group, ICMA has published its Cash Penalty Guidance Practices to assist the bond and repo markets. The paper first examines best practices relating to Article 6 notification requirements. In order to prevent settlement failure, Article 6 of CSDR obliges an EU investment firm, executing a bloc with a professional client, to require that client to promptly provide it with the information that the investment firm needs to order settlement. ICMA warns that not only is this instruction likely to be delayed, but the regulatory obligation rests solely with the investment firm. The company will have to contractually engage its professional client in the process to fulfill the obligation, whether or not this client is in the EU or in a third country.

The regulator adds that the processes for sending allocation notices and confirmations of the terms of a block transaction are independent and non-sequential. The contractual arrangements between the investment firm and the professional client may take any form deemed effective by the parties, provided that they are clear as to the responsibilities of both parties. The contractual arrangements should specify the closing date of the investment firm for the purpose of receiving and implementing allotment notices and confirmations. The contractual arrangements should also specify the necessary information, detailed in Article 2(1) of the applicable regulatory technical standards, which is required by the investment firm to facilitate settlement.

Other best practices regarding notification requirements include monitoring the receipt of award notices and confirmations of conditions by investment firms, and sending acknowledgments to professional clients, against set deadlines. by regulation or any earlier timeframe agreed by the parties and audited. Additionally, as proof of regulatory compliance, a record should be kept of the timeliness of incoming notifications and confirmations, outgoing acknowledgements, and validity of incoming allocations.

The particular technology used to transmit allotment notices, condition confirmations and the receipt of such notices is not prescribed by regulation and is entirely at the discretion of the investment firm, according to ICMA. However, the likely scale and urgency of the process of sending and receiving notices means that best practices for meeting these regulatory requirements will likely only be achieved by automating the process. The particular institutional arrangements used to transmit these notices and receipts are also not prescribed by regulation and are entirely at the discretion of the investment firm.

Bilateral restitution of penalties

In its best practice paper, ICMA discusses a scenario where a repo party has offered partial delivery but the counterparty has refused, resulting in the first party receiving a CSDR cash penalty for the full amount. of the failed settlement. This raises the following question: is it preferable that the first party can request the restitution of the part of the load for which the partial delivery was refused?

The regulator concludes that refund requests, where partial delivery is denied, are not best practice. “Claims are likely to be contentious and not based on industry consensus, and while it is important to encourage splitting, it must be recognized that there are good reasons why the parties may not accept partial delivery and the defaulting party has breached its contractual obligation to deliver all of an agreed amount of securities or cash,” ICMA explains. Parties are free to agree on restitution in the event of refusal of partial delivery, but this must be agreed before negotiation.

In terms of partial settlement – ​​where the parties to a failed settlement bilaterally agree to partial settlement after the originally scheduled settlement date (DSI) – it is ICMA best practice to agree the date on which the instructions original settlement instructions should be canceled and new instructions issued. If either party failed to cancel and re-instruct on the agreed date, that party would be subject to Late Matching Failure Penalties (LMFP) for the ISD delay and would not be entitled to claim the PSMA for the period of the delay. .

Invoice and invoicing Cash CSDR penalties

Daily reports of CSDR cash penalties on individual non-compliant instructions should be made as soon as possible by CSD participants and CSD non-participants, after receiving a daily report from the calculating CSD. The same guidelines apply to the monthly Aggregate CSDR Cash Penalty Reports, which should be billed by currency and, if required, by CSD. For the purpose of collection from clients and distribution to clients, custodians should aggregate CSDR cash penalties at the top level of the investment fund or custodial account. It is also recommended that Treasury Market Practice Group (TMPG) and CSDR cash penalties be paid separately.

Reports to clients should be in the form of MT537 PENA SWIFT messages, but custodians are advised to consider offering alternatives, for example web-based reports, for clients who have not developed the capability to receive MT537 PENA messages via SWIFT.


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