CDCP plans, in compliance with postponed effectivity of the SRD (Commission Delegated Regulation (EU) 2018/1229 supplementing Regulation (EU) 909/2014 of the European Parliament and of the Council with regard to regulatory technical standards on settlement discipline) to launch on 1 February 2022 the Penalty Mechanism.
T2S DRY RUN
Since the penalty mechanism will represent primarily new obligations and processes for CDCP participants, CDCP will be connected from 14 September 2021, similarly as other T2S CSDs, to so-called T2S Dry Run. This general, pan-European testing in production environment will be chance for the participants to see what impact the penalty mechanism would have on them, in case it started right on 14 September 2021. It means, how to analyse penalty reports, how to process them, what conclusion to adopt base on the reports. One of the main reasons why to participate in the Dry Run as actively as possible can be exactly the possibility to understand impacts of the penalty mechanism to a participant, primarily in form of financial costs and flows, and this all without bearing the potential expenses fully at this stage.
For better illustration, the T2S Dry Run will demonstrate to participants, in form of daily and cumulated monthly report on settlement fail penalties, what sums in euro based on netting principle, whether on revenues or costs side, will be needed in addition to liquidity management requirements as regards securities transactions settlement. However, CDCP will not debit or credit these sums during the Dry Run, they will be only reported. Another reason why to participate in the Dry Run is, that the participants of CDCP will have accurate idea of costs related to holding of pending transactions, what will enable them to optimise their portfolio of active transactions in way that is financially least negative for them after 1 February 2022.
Collection of static data
In connection with the Penalty mechanism, in following weeks CDCP will invite CDCP participants to provide certain data, representing new administrative processes related to the Penalty Mechanism. In addition, the participant will have to inform CDCP on link setup of securities accounts and DCA accounts, that are essential for settlement of instruction related to collection and distribution of settlement fail penalties. The details will be included in appeals to provide such data.
Measures on failed instructions
In order to adopt adequate measures in relation to long term failed instructions which in recent months became a serious problem on the Slovak market posing effective threat of mandatory implementation of partial settlement, the selected participants with significant fail rate of submitted instructions will be contacted in 2H of July 2021 with request to reduce mainly long term pending transactions and to adopt measures at their side.
Since the SDR is not effective, the Slovak market is allowed to use only soft instruments in form of appeals, monitoring and testing in order to reduce failed instructions. When the SDR becomes effective, both CDCP and participants of CDCP will collectively get into situation when, in connection with settlement fails, will be necessary to start to apply mandatory, EU harmonised “hard“ instruments in form of cash fail penalties, mandatory buy-ins, mandatory implementation of partial settlement, reporting of failed participants to the national competent authority with potential restriction of authorised participation of significantly failing participants.
Considering already mentioned buy-ins, CDCP will play relatively passive role, as it will be involved in this activity in form of mandatory reporting on status and results of a buy-in. Monitoring of requirement to initiate a buy-in, start of buy-in and organising of buy-in process (nomination of buy-in agent, administration of instruction related to the buy-in process) is fully within competence of the trading parties, or of CDCP participants in position of intermediaries respectively.
Author: Juraj Aksamít
