CSDR Challenges and Considerations

Central Securities Depositories Regulation (CSDR)

The Impact for Securities Finance, Collateral and Swaps Market Participants

Central Securities Depositories Regulation, known as CSDR, is a European Union regulation that seeks to harmonize the settlement process and improve settlement discipline across the EU. Among other mandates, it aims to do this by harmonizing cross-border settlement rules, centralizing supervision of EU central securities depositories (CSDs) and implementing cash penalties and “buy-ins” for settlement fails. CSDR applies to any firm that transacts in the EU, even if they are based outside the Union.

EquiLend's Solutions for CSDR

How does CSDR impact the securities finance, collateral and swaps markets?

The core intention of CSDR is to improve settlement efficiency, and one tenet of this is to introduce fines for settlement fails as well as mandatory buy-ins. Beyond the inherent compliance considerations, CSDR offers a path to industry best practice to eliminate some of the inefficiencies and risks within the pre- and post-trade environment.

For those firms that consider the unique opportunity the regulation presents, increasing settlement efficiency can require enormous resources from all participants involved, and as such CSDR has the potential to reduce market participation.

What is the broader impact of CSDR on the cost to trade equities and fixed income instruments and the risk to market liquidity?

Impact on market maker liquidity

Impact on exchange activity

Risk to borrow - different assets have a different cost attributed to failing to settle

Cost to trade - impact on trading spreads

What is the market opportunity?

Increased borrow demand
Increased demand for visible liquidity
Increased revenue opportunity for beneficial owners

When must firms be CSDR compliant?

CSDR has been gradually phased in since the regulation entered into force in 2014. It is anticipated that settlement discipline rules will be effective from February 2021, at which time mandatory cash penalties and mandatory buy-ins would be effective in the case of a settlement fail.

What preparation can firms do ahead of compliance being enforced?

As CSDR has been anticipated, firms will have undertaken significant analysis of their internal processes to identify points of friction in pre-matching and post-trade settlement. Working with counterparts and vendors to ensure more effective processes through the trade lifecycle is required to ensure the effectiveness of any regulatory solution.

CSDR Challenges & Considerations

Under CSDR, market participants are subject to mandatory buy-ins, which could threaten liquidity for mid-sized firms. Liquidity concerns could threaten the secondary market opportunity for these same firms.

Settlement will be subject to CSDR in the form of fines for settlement failure. This presents further liquidity concerns and could have a negative impact on market efficiency and stability.

Facilitating workflow efficiencies is key to an effective CSDR solution. Assessment of broken or ineffective processes will enable firms to assess the true requirements for their CSDR solution.

Learn more about our solution for CSDR

Iain Mackay
Global Product Owner
Post-Trade Services
+44 20 7426 4402

Grant Davies
Director
Head of European Sales
++44 20 3023 8383