Your failproof way to escape the new CSDR SDR penalties

Worried about the CSDR’s new Settlement Discipline Regime (SDR)?

If you know what it is, you probably are. If not, here’s a quick primer. The Central Securities Depositories Regulation (CSDR) came into force in 2014 to regulate central security depositories (CSDs) in the EU and to improve settlement discipline in the securities settlement systems operated by CSDs. However, not all CSDR’s provisions applied right away - notably the Settlement Discipline Regime, which will come into force this September.

SDR aims to improve settlement efficiency by means of a hefty deterrent: CSDs are legally obliged to set up a system of cash penalties to deter participants and their clients from causing settlement fails. There’ll also be a mandatory buy-in process for any financial instrument not delivered within a certain amount of time from the intended settlement date.

While the future of SDR in the UK may be up in the air, any company trading in securities that will settle at a European-domiciled CSD will be affected regardless; those trades will come under SDR and risk buy-ins and penalties. SDR may be a European regulation, but it will have a global impact.

So how to prepare? Simple: get good at preventing fails. If you don’t fail any transactions, you don’t have anything to worry about.

The industry’s quest for automated no-touch processing is really all about preventing fails. Don’t get hyperfocused on buy-in processes and booking models - the key is to make sure you’ve got impeccably accurate source data to create an authoritative trade record, a no-touch workflow with automated processing, and efficient exception management. The faster you can flag exceptions, the more you can cut settlement risk.

While the penalty side of SDR is challenging, it’s not completely new - there are already penalties for late matching in some settlement systems, such as Euroclear’s CREST. The tougher challenge will be the buy-ins.

Under the new regime, businesses that used to handle two or three buy-ins a month will be hit with 100 or more a day. And if that’s overwhelming for the buy-side, it could have even more of an impact on the banks.

Some companies are taking extra staff on board to prepare for CSDR. Large sell-side firms are looking at hiring 20-25 people just to handle the buy-ins, as well as 15 to handle the penalties. That’s basically a whole new department.

Instead of hiring 40 new people, it’s wiser to invest big in your post-trade solution and automation. Think about it - humans make human errors, and human error leads to fails. The fewer times you touch a transaction the more likely it is to settle, so a no-touch workflow will always beat a workflow with people putting their grubby hands on it.