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CSDR - Client Guide Settlement Discipline Regime

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Following the 2008 financial crisis, the European Commission (EC) decided that EEA (European Economic Area) Central Securities Depositories (CSD) needed to harmonise their practices, and improve the safety and efficiency of transaction settlement.

The Central Securities Depositories Regulation (CSDR) aims to harmonise the authorisation and supervision of CSDs across the EEA. It establishes both uniform requirements for the settlement of financial instruments in the EEA and rules on the organisation and conduct of CSDs to promote safe and efficient settlement.

The scope of CSDR includes all EEA CSDs and the (I)Central Securities Depositories (hereafter referred to as the CSDs), their participants, and trades settling in the EEA. This comprises all EU member states, plus Liechtenstein, Iceland, Norway and Switzerland. There is also an extraterritorial impact.

Settlement Discipline Regime (SDR)

The settlement discipline regime (SDR) 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.

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

The enhancements will be available via SWIFT ISO15022 (MT537s and MT548s for penalties, MT54x and MT530s for buy-ins) and via our proprietary web portal, HSBCnet in readiness for the currently planned live date of 1st February 2022.

We note the European Commission’s report on CSDR issued on July 1st 2021 in which the Commission has indicated subject to an impact assessment, they will consider proposing a refit to elements of CSDR more broadly and SDR specifically around mandatory buy-ins based on feedback from the industry.

Update on the implementation of CSDR Mandatory Buy ins (MBI)

Over the past few years there has been a considerable industry advocacy effort in support of withdrawal/ postponement/ changes to the mandatory buy ins (MBI) element of the settlement discipline regime. In July of this year, the European Commission indicated, subject to an impact assessment, they will consider proposing a refit to elements of CSDR more broadly and SDR specifically around mandatory buy-ins based on feedback from the industry. In September of this year ESMA issued a letter to the Commission recommending a postponement to the implementation of the mandatory buy in (MBI) regime. Key industry meetings took place over October and into November on this topic.

In an announcement on Wednesday the 24th of November the European Parliament agreed to a postponement of the February 1st 2022 go live of the MBI element of the settlement discipline regime. We are expecting a formal announcement to be issued by ESMA imminently as well as an outline of next steps. At this point, HSBC Markets & Securities Services has ceased work on implementation of MBI in line with this guidance until advised of its future roadmap by the European Regulatory bodies. We will provide further updates as they become available.

Additionally, please note that only MBI is postponed, other elements of CSDR SDR as mentioned in the guide will be live from 01 February 2022. As industry best practices develops and further regulatory guidance is received there may be changes to the requirements for supporting SDR. HSBC Markets & Securities Services will continue to keep clients informed of any such changes and supplement this guide as necessary.

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.

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