AFME publishes CSDR recommendations
04 March 2020 London
Image: Shutterstock
The Association for Financial Markets in Europe (AFME) has published recommendations for partial settlement under the upcoming Central Securities Depository Regulation (CSDR).
CSDR’s settlement discipline regime (SDR), which includes mandatory buy-ins for failed trades, as well as cash penalties, is due to come into force in February 2021.
AFME’s recommendations aim to encourage greater and more harmonised use of partial settlement across the industry as a way of improving settlement rates.
The recommendations cover three key areas including partial hold and release, auto-partial settlement, and manual partials.
Partial hold and release
On partial hold and release, AFME recommended that settlement intermediaries are to provide support for the effective use of partial hold and release for their clients; communication and messaging to be automated using ISO/SMPG standards; and trading parties and market participants should agree and opt-in for the use of partial hold and release.
In addition, to promote settlement efficiency, AFME suggested that parties instruct with a minimum partial threshold, which should be no less than the minimum tradable amount and no greater than the respective T2S/CSD defaults.
Auto-partial settlement
AFME suggested that under auto-partial settlement, trading parties and market participants are to agree to the use of auto-partial. Additionally, settlement intermediaries provide support
for automated instruction and confirmation using ISO/SMPG standards.
The association also noted that regardless of account structure, all receipt instructions should be auto-partial enabled.
Manual partials
According to AFME, manual partials should be considered the least preferred option due to the inefficiencies it creates with cancelling, resending and re-matching settlement instructions.
However, AFME highlighted that this may be unavoidable in cases where the CSD is not obligated to offer the auto-partial or partial hold and release functionality under CSDR.
For manual partials, trading and settlement parties should communicate providing sufficient time for the agreement of the manual partial and subsequent instruction and matching process without undue delay.
Other considerations
As part of its recommendations, AFME suggested that trading and settlement parties should ensure partial settlement processing takes place in the most efficient manner from a communication, operational and risk perspective without undue delay.
It also noted that certain products such as securities lending will require significant changes to the post-trade landscape, to ensure matching, collateral and contract management are not adversely impacted.
Finally, the association explained that for CSDR mandates on the last business day of the extension period, the receiving party must accept any partial delivery offered by the delivering party.
AFME said that in cases where a partial delivery is offered but declined by the receiving party, and the failing settlement instruction results in a buy-in, the delivering party should only be responsible for buy-in liability, claims or failure costs on the residual quantity for which a partial delivery was not offered.
Stephen Burton, managing director, post trade at AFME, said: “The increased adoption of partial settlement is one example of how the industry can improve settlement efficiency.”
Burton added: “Particularly, at a time when the mandatory buy-in regime under CSDR is due to be implemented later this year, improving settlement rates will help to mitigate the possible negative impacts, including reduced liquidity and greater volatility, when investing in European securities.”
To read the full list of recommendations, click here.
CSDR’s settlement discipline regime (SDR), which includes mandatory buy-ins for failed trades, as well as cash penalties, is due to come into force in February 2021.
AFME’s recommendations aim to encourage greater and more harmonised use of partial settlement across the industry as a way of improving settlement rates.
The recommendations cover three key areas including partial hold and release, auto-partial settlement, and manual partials.
Partial hold and release
On partial hold and release, AFME recommended that settlement intermediaries are to provide support for the effective use of partial hold and release for their clients; communication and messaging to be automated using ISO/SMPG standards; and trading parties and market participants should agree and opt-in for the use of partial hold and release.
In addition, to promote settlement efficiency, AFME suggested that parties instruct with a minimum partial threshold, which should be no less than the minimum tradable amount and no greater than the respective T2S/CSD defaults.
Auto-partial settlement
AFME suggested that under auto-partial settlement, trading parties and market participants are to agree to the use of auto-partial. Additionally, settlement intermediaries provide support
for automated instruction and confirmation using ISO/SMPG standards.
The association also noted that regardless of account structure, all receipt instructions should be auto-partial enabled.
Manual partials
According to AFME, manual partials should be considered the least preferred option due to the inefficiencies it creates with cancelling, resending and re-matching settlement instructions.
However, AFME highlighted that this may be unavoidable in cases where the CSD is not obligated to offer the auto-partial or partial hold and release functionality under CSDR.
For manual partials, trading and settlement parties should communicate providing sufficient time for the agreement of the manual partial and subsequent instruction and matching process without undue delay.
Other considerations
As part of its recommendations, AFME suggested that trading and settlement parties should ensure partial settlement processing takes place in the most efficient manner from a communication, operational and risk perspective without undue delay.
It also noted that certain products such as securities lending will require significant changes to the post-trade landscape, to ensure matching, collateral and contract management are not adversely impacted.
Finally, the association explained that for CSDR mandates on the last business day of the extension period, the receiving party must accept any partial delivery offered by the delivering party.
AFME said that in cases where a partial delivery is offered but declined by the receiving party, and the failing settlement instruction results in a buy-in, the delivering party should only be responsible for buy-in liability, claims or failure costs on the residual quantity for which a partial delivery was not offered.
Stephen Burton, managing director, post trade at AFME, said: “The increased adoption of partial settlement is one example of how the industry can improve settlement efficiency.”
Burton added: “Particularly, at a time when the mandatory buy-in regime under CSDR is due to be implemented later this year, improving settlement rates will help to mitigate the possible negative impacts, including reduced liquidity and greater volatility, when investing in European securities.”
To read the full list of recommendations, click here.
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