JUMP Club U' CSDR regulation

The context of the CSDR regulation

The CSDR regulation was designed by ESMA in response to the growing public demand for transparency in transactional flows since the 2008 crisis.

Who is affected?

The following entities are concerned:

  • CSDs (central securities depositories) and by extension their clients (investment management companies, institutional investors, insurers, mutual insurers, etc.)
  • CCCs (central clearing counterparties)
  • Trading platforms
  • Trade repositories
  • Payment systems

Which financial instruments are concerned?

The following instruments that are potentially traded and/or cleared in the EU/EEA area:

  • Securities (WAPS)
  • Emission allowances
  • Money market products

What are the drivers of CSDR?

  • An optimised settlement/delivery cycle
  • Infrastructure
  • Investor protection
  • Transparency

The reference text published by ESMA (No. 909/2014) came into force in February 2022. Given the impossibility of enforcing the entire regulation, ESMA published a number of relaxations in March 2022, including non-regulated derivatives, review of the mandatory buy-in principle, and review of penalty application and rates.

The rule and its impacts

Description of the investor protection rules designed by ESMA:

  • Prevention of settlement defaults
    • Obligation to wind back settlement instructions on settlement date
    • Settlement date = Trade date +2 maximum
  • Gradual measures
    • Confirmation terms set in advance
    • Possibility of partial settlement
    • Financial penalties & suspensions
  • DTC obligations
    • Implementation of monitoring tools
    • Quarterly ESMA reporting

Circumvention of the rule

Central depositories (Euroclear, Clearstream, etc.) have delegated the monitoring of settlement obligations to local global custodians (BP2S, Caceis, SGSS, etc.). In reality, custodians have devised a strategy to address the issue from their point of view and to suit their needs, setting up automated "partialisation" as a default rule.  They thereby protect themselves from the risks of penalties provided for by the new regulation instead of their clients whom the regulation was meant to protect.

Why circumvent the rule?

If custodians fail to use all the means at their disposal to unwind their clients' settlement instructions, they are obliged to pay penalties to their clients to cover their losses due to late delivery and the cost of redemption as participants in the market regulated by their clearing house (LCH clearnet, etc.). By a domino effect, a rule that is supposed to protect clients (final investors) forces the latter to be subject to the regulation instead of the upstream players in the settlement/delivery chain.

How to circumvent the rule?

Custodians put forward their interpretation of the regulatory text, with automated "play-by-play partialisation" by default for any settlement/delivery defaults on their clients' securities or cash positions.

How does JUMP support its users in respect to CSDR regulation? 

JUMP carried out regulatory intelligence, well before ESMA's announcement on CSDR in 2014. Until January 2022, major custodians were communicating a default behaviour of "non-partialised" at the start of CSDR and identified impacts identified were on SSI and Swift communications. In February 2022 JUMP detected the first functional impacts in production.

Having identified these early impacts, JUMP worked to provide users with a solution that would allow them to stop and identify flows, giving them the necessary tools to comply with the regulation. 

The JUMP solution allows for complete automation of the partialisation process (from order placement to reconciliation). 

See all the news
hello world!