SDR (Settlement Discipline Regime or Regulation (EU) 2018/1229 supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council) is a directly applicable EU regulation which sets strict rules for the increased safety and efficiency of securities settlement. SRD came into force on the 1st of February 2022. Different measures for safety and efficiency complementing the regulation will come into force gradually.
The first of the measures is penalty mechanism which consists of collecting and distributing cash penalties for settlement fails.
Penalty mechanism
CSDs (Central Securities Depositories) shall begin to provide cash penalties for transactions that fail to settle by their intended settlement date. Penalty obligations will be applied to the counterparty which is causing the settlement to fail while the suffering party shall be the recipient of the penalty amount. The debiting and crediting of the penalties is settled on the 18th business day of the following month.
Types of penalties
SEFP (Settlement Fail Penalty) – caused by a lack of securities or cash on the intended settlement date, which results in transaction being delayed.
LMFP (Late Matching Fail Penalty) – caused by entering the transaction after the intended settlement date. Penalty will be applied to the last party which enters the transaction after intended settlement date.
Measures to avoid penalties
SEB Bank is already requiring sufficient resources for entering the securities transactions, thus ensuring that the customers will not cause penalties resulting from lack of cash / securities. However, the customers will still be able to cause late matching penalties if they are not careful when entering transactions with another person. Here are a few tips to ensure transactions are settled without penalties:
- Leave ample time between the trade date and settlement date to have a window for entering the transaction before settlement date
- Triple-check all transaction details and enter them as agreed, as discrepancies in the transactions will often be discovered when they fail to settle (causing LMFP). Please see the table and explanations below for further information
- On the settlement date, periodically check whether the transactions have settled. If the transactions haven’t settled, contact SEB Bank to inquire about the status of the transaction
- Mandatory – both counterparties need to have the same information
- Optional – if the field is used by only one counterparty, the transaction will settle (matched with “blank”). If both counterparties use this field, the values have to match
- Additional – if the field is used by one counterparty, the other has use it too. The values have to match
| Field | Mandatory | Optional | Additional |
|---|---|---|---|
| Transaction type (DVP*, FOP**) | Yes | No | No |
| ISIN code | Yes | No | No |
| Trade date | Yes | No | No |
| Intended settlement date | Yes | No | No |
| Counterparty account operator’s BIC code in respective security country’s CSD | Yes | No | No |
| Currency | Yes (only DVP) | Yes (FOP) | No |
| Settlement amount | Yes (only DVP) | Yes (FOP) | No |
| Common reference | No | Yes | No |
| Counterparty’s securities account | No | Yes | No |
| Counterparty’s name or BIC code | No | Yes | No |
| Opt-out indicator | No | No | Yes |
| Cum/Ex indicator | No | No | Yes |
*DVP – Delivery versus payment
**FOP – Free of payment
Although counterparty’s securities account and name or BIC code are optional fields from the settlement mechanism side, in some case they are mandatory due to AML reasons. Please note that other optional and additional fields should not be used if not agreed with the counterparty, as it might cause settlement delays.
| Instruction type | Failure caused by | Formula to apply |
|---|---|---|
| Delivery versus payment Delivery free of payment Receipt free of payment | Lack of securities | (Security penalty rate) x (Reference price) x (Quantity) |
| Receipt versus payment | Lack of cash | (Cash discount penalty) x (Reference price) x (Quantity) |
| Receipt versus payment already matched | Lack of securities | (Security penalty rate) x (Reference price) x (Quantity) |
| Financial instrument type | Liquidity | SME Growth Market | Asset type | Daily flat penalty rate (Security penalty rate) |
|---|---|---|---|---|
| Shares | Liquid | Not traded | Liquid shares | 0.01% |
| Shares | Illiquid | Not traded | Illiquid shares | 0.005% |
| Shares, derivatives, ETFs, Investment funds or others | Liquid or illiquid | Traded | SME Growth Market bonds (non-bonds) | 0.0025% |
| Private debt or money market instruments | Not applicable | Not traded | Corporate bonds | 0.002% |
| Private debt or money market instruments | Not applicable | Traded | SME Growth Market bonds | 0.0015% |
| Public debt instruments | Not applicable | Traded or not traded | Government and Municipal bonds | 0.001% |
| Derivatives, ETFs, investment funds or other | Not applicable | Not traded | Other financial instruments | 0.005% |
| Not applicable | Not applicable | Not applicable | Cash | Official interest rate for overnight credit charged by the Central Bank issuing the settlement currency with a floor of 0 (zero) |
