As settlement penalties will directly impact the front-office, the decision to invest in settlement infrastructure must be supported by the business. Otherwise SDR will quickly eat into profits, argues Tonic director Craig Pearson.

In 2014, the European Union published the Central Securities Depositories Regulation (CSDR) with the objective of increasing the safety and efficiency of securities settlement infrastructure.

As an initiative, CSDR has already delivered key securities settlement infrastructure improvements to the European market and, in their recent interim report on the review of CSDR, the European Commission concludes that “in broad terms CSDR is achieving its original objectives”. 

The final CSDR ruleset is the Settlement Discipline Regime, currently scheduled for implementation in February 2022, which introduces key measures designed to harmonise the treatment of securities settlement fails. 

Settlement discipline regime (SDR) 

Settlement infrastructure has historically been a neglected area across the industry.  

Often considered an operations problem, with limited or no front-office impact, settlement functions have routinely suffered from under investment.  As a result, manual processes across legacy, siloed infrastructure have resulted in high risk, error-prone settlement for many firms.  

Practices such as assumed settlement and reactive fails tracking are common, resulting in failing settlement instructions being treated as the norm. Regulators have sought to address this settlement failure risk via the settlement discipline rules, which are designed to improve efficiencies in the securities settlement process chain. 

The SDR provisions will focus on the prevention and punishment of settlement fails. Although a European regulation, SDR will impact all trading entities, regardless of domicile, that settle transactions in MiFID II or  MiFIR (the second Markets in Financial Instruments Directive and its accompanying regulation) financial instruments at an EU CSD, either directly (as a member) or indirectly (via an agent).

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