Settlement Discipline Regime (SDR)

The settlement discipline regime (SDR), due to come into force 1 February 2022 introduces new rules for cash penalties and buy-ins. Its scope is extraterritorial in nature since all market participants, regardless of domicile, are impacted when trading and settling securities issued and held in EEA CSDs. Those market participants are required to comply with all measures relating to cash penalties for settlement failures and mandatory buy-ins. Further information on each of the key SDR rules are detailed below:

Securities trades that are admitted to trading or traded on an EEA trading venue or cleared by an EEA CCP which fail to settle on an EEA CSD will be subject to a penalty charged by the EEA CSD:

• If the trade is unmatched, the trade will be subject to a "late matching penalty" imposed on the participant that fails to submit matching instructions. The penalty will be levied for each day until matched.
• If the trade fails to settle, due to missing security or cash payment, the trade will be subject to a "late settlement penalty" that will be levied on the party at fault for each day until the trade is settled, cancelled or the mandatory buy-in takes effect*.

Article 2 of Commission Delegated Regulation (EU) 2018/1229 (the “RTS”), states that EEA Investment Firms must have arrangements in place with clients requiring communication of certain information between them within prescribed time limits. These obligations apply upon execution of a transaction in transferable securities (e.g. shares and bonds), money-market instruments, units in collective investment undertakings and emission allowances that settle on a CSD located in the EEA.

These allocation/confirmation requirements apply unless, as permitted under the RTS, the parties agree in writing that the written allocations and confirmations do not need to be sent by because the prescribed information has been made available in advance of the prescribed time limits.

HSBC has updated its Terms of Business to reflect that existing processes will be relied upon to ensure that the information is received within the prescribed timeframes.

More detail on the requirements of Article 2 of the RTS can be found in the AFME Explanatory Note for Professional Clients.

As agreed by the European Council and European Commission on 24 November 2021, the mandatory buy ins will be decoupled / delayed from February 2022 Go Live.

On 17 December 2021, ESMA published a statement noting that “ESMA is aware that the legislative procedure in relation to the Proposal for a Regulation on a DLT Pilot Regime is not yet concluded and the adopted text of the DLT Pilot Regime is not expected to enter into force ahead of the application start date of the settlement discipline regime. From a legal perspective, neither ESMA nor NCAs possess any formal power to allow the disapplication of directly applicable EU legal text. Therefore, to take into account the future amendment of the RTS on settlement discipline to postpone the date of application of the buy-in measures and to avoid potential additional costs linked to any additional later change of the systems and processes of market participants implementing these measures, ESMA would expect NCAs not to prioritise supervisory actions in relation to the application of the CSDR buy-in regime”.

Our Securities Services team is enhancing HSBC’s management of settlement instructions to include all the information required by the CSDs, notably the implementation of reporting for the new penalty and buy-in regime requirements.

The Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime (SDR) came in to force on 1 February 2022.

It is important that asset owners and managers are aware of and compliant with this regulation. Our CSDR-SDR Client Guide (PDF, 5.6MB) will help you to navigate the impact of CSDR implementation.

The purpose of this document is to support clients contracting with HSBC Bank plc, HSBC Continental Europe (Ireland and Luxembourg branches) and The Hong Kong & Shanghai Banking Corporation Limited for the provision of Global Custody services with operational and technical information necessary for understanding and implementing CSDR Settlement Discipline Regime changes.

In preparation for the CSDR 1 February 2022 deadline, please refer to the Global Markets Client FAQ (PDF, 1.8MB).