Settlement fails monitoring
From the day when SDR[1] entered into force (from 1 February 2022) Centrálny depozitár cenných papierov SR, a.s. („CDCP“) regularly monitors the settlement fails and reports on them to the supervisory body. The monitoring results show that significant part is created by failed settlement of trades concluded at MTS Slovakia. This is a long-term problem discussed also with the local clearing agents (CDCP participants) who confirmed that the fails are caused mainly due to missing instructions from their clients/Primary Dealers, who do not adhere to the settlement procedures set by the MTS Slovakia operator and CDCP.
As regards CDCP, a risk arising from this situation is a possible reputation damage for CDCP due to low settlement efficiency. By reason of the high fail rate, CDCP will have to implement also a partial settlement service, as after considering defined rate and/or value of settlement fails (details in Article 12 of the SDR) CDCP will not be eligible to derogate from provision of a partial settlement stipulated in CSDR[2].
[1] Commission Delegated Regulation (EU) 2018/1229 of 25 May 2018 supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to regulatory technical standards on settlement discipline.
[2] Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012.
With aim to solve this problem, CDCP consulted current situation also with the operator of the MTS Slovakia. As a result, the MTS operator have sent to its members (primary dealers) a notice, in which it draws attention to provisions of the MTS rules, which clearly stipulate that trades concluded at the MTS Slovakia have to be settled in the settlement system operated by CDCP. Similarly, as in case of the MTS Slovakia operator, CDCP invited ARDAL to ask the primary dealers to adhere to the rules of the MTS Slovakia operator and the Rules of Operation of CDCP.
CDCP assumes that the appeal from the MTS operator and ARDAL will be considered by the primary dealers, so this joint action of CDCP, participants of CDCP and the MTS Slovakia operator will embody in a better settlement discipline of MTS trades.
Determining the end-of-day price of financial instruments
According to the SDR requirements, to calculate cash penalties for settlement fails, CDCP has to apply the end-of-day prices of respective financial instruments obtained from relevant trading venues.
In this regard, CDCP experiences practical problems, since to obtain the end-of-day prices from all possible trading venue is difficult and economically inadequate. This applies particularly to a different non-regulated trading venues, that have no obligation to send the end-of-day prices to a price provider, from which CDCP receives this information. Another practical problem is the fact, that certain financial instruments accepted to trading in a trading venue were never traded in given trading venue, thus the end-of-day price is not available.
In case of CDCP, the real figures (for August 2022) show that it is able to obtain the end-of-day price for 67% of the issues eligible to settlement fail penalty, so for 33% of issues CDCP has to use the nominal value of given financial instrument instead of the end-of-day price.
Collection of cash penalties for settlement fails
Contrary to problems related to settlement fails, CDCP has positive experience with collection and distribution of cash penalties for settlement fails. All settlement instructions related to collection and distribution of cash penalties were settled by the participants on intended settlement date.
Author: Peter Nagy
