Settlement Fails and Extension Period

Questions and Answers

What is the penalty rate in basis points for settlement fails due to lack of shares with a liquid market?

0.25

0.75

1.0 (correct)

0.5

Who is responsible for calculating penalties for settlement fails?

Market participants

Central banks

Central Securities Depositories (CSDs) (correct)

European Financial Stability Mechanism

How often are collected penalties redistributed to market participants impacted by settlement fails?

Monthly (correct)

Daily

Annually

Quarterly

What is the minimum penalty rate in basis points for settlement fails due to lack of cash?

The official interest rate for overnight credit Signup and view all the answers

Which of the following is NOT a factor in determining the penalty rate for settlement fails?

Location of the market participant Signup and view all the answers

What is the primary goal of the Settlement Discipline Regime (SDR) introduced as part of the CSDR?

To incentivise timely settlement and deter settlement fails Signup and view all the answers

What is the purpose of the Settlement Discipline Regime?

To encourage Straight-Through Processing and reduce settlement fails Signup and view all the answers

What happens to transactions that continue to fail due to a lack of securities after the extension period?

They are subject to a mandatory buy-in process Signup and view all the answers

When are penalties calculated for settlement fails?

Daily, for each day between the intended and actual settlement dates Signup and view all the answers

Who is responsible for paying penalties for settlement fails under the SDR?

The market participant responsible for the settlement fail Signup and view all the answers

What determines the penalty rate for settlement fails caused by a failure to deliver the financial instrument under the SDR?

The type of instrument and the value of the instrument to be delivered Signup and view all the answers

What is the primary reason for extending the settlement period beyond the intended settlement date?

To allow for more time to resolve settlement fails Signup and view all the answers

What happens if a buy-in is not possible due to reduced liquidity?

The buyer must accept a cash compensation from the seller Signup and view all the answers

When did Phase 3 of the CSDR, which introduces the Settlement Discipline Regime, come into force?

1 February 2022 Signup and view all the answers

What type of reports must be submitted to the regulatory authority of the CSD?

Settlement fails reports Signup and view all the answers

Which of the following is NOT a type of financial crime?

Tax avoided Signup and view all the answers

What is the OECD Convention focused on?

Supply side of bribery transactions Signup and view all the answers

Which Act is an example of legislation designed to implement the OECD Convention?

UK Bribery Act 2010 Signup and view all the answers

What is the term defined by the FSMA to include ‘any offence involving fraud or dishonesty; misconduct in or misuse of information relating to, a financial market; or handling the proceeds of crime’?

Financial crime Signup and view all the answers

How many countries have adopted the OECD Convention?

39 Signup and view all the answers

What is the purpose of the OECD Convention?

To criminalise the bribery of foreign public officials Signup and view all the answers

What is the primary goal of the Settlement Discipline Regime under CSDR?

To encourage firms to settle transactions on the intended settlement date Signup and view all the answers

What is the role of Straight-Through Processing (STP) in maintaining timely settlement?

It facilitates the electronic exchange of messages and reference data Signup and view all the answers

Which of the following is a requirement under Section 302 of SOX?

The CEO and CFO must certify the financial statements and other information on each quarterly report Signup and view all the answers

What is the purpose of a Central Securities Depository (CSD)?

To hold financial instruments including equities, bonds, and mutual funds Signup and view all the answers

Under CSDR, what is the deadline for settling transactions?

Two business days after the trade date Signup and view all the answers

What is the purpose of the buy-in process under CSDR?

To acquire the necessary securities to settle a failed transaction Signup and view all the answers

Which of the following is a responsibility of firms under CSDR?

To offer professional clients the mechanism to electronically send confirmations and allocation details Signup and view all the answers

What is the scope of CSDR?

It applies to all firms that trade securities in the EU, regardless of their location Signup and view all the answers

Study Notes

Settlement Fails and CSDR

Settlement fails should be resolved during the period between the trade date and the intended settlement date.
If not possible, the settlement period may be extended, introducing an extension period and a buy-in period.
The extension period is typically four business days, but can be increased to seven business days based on asset type and liquidity considerations.
The buy-in period is after the end of the extension period, where transactions that continue to fail due to a lack of securities will be subject to a mandatory buy-in process.
If buy-in is not possible, the seller must pay a compensation to the buyer in cash.

Settlement Discipline Regime (SDR)

The SDR, introduced as of 1 February 2022, phase 3 of the CSDR, imposes new cash penalties for settlement fails.
Penalties are imposed on the market participant responsible for the settlement fail.
Market participants may pass on the penalties to their clients if the settlement fail is not their fault.
The SDR aims to be an effective deterrent of settlement fails, whilst incentivising timely settlement.

Penalty Rates

Penalty rates apply to all transactions in transferable securities, money-market instruments, units in collective investment undertakings, and emissions allowances.
Penalty rates vary based on the cause of the settlement fail:
- Lack of shares with a liquid market: 1.0 basis points
- Lack of shares with an illiquid market: 0.5 basis points
- Lack of financial instruments traded on SME growth markets: 0.25 basis points
- Lack of debt instruments: 0.1-0.2 basis points
- Lack of other financial instruments: 0.5 basis points
- Lack of cash: official interest rate for overnight credit charged by the central bank issuing the settlement currency, with a floor of zero
Penalties are calculated by the CSD on a daily basis for each day between the intended and actual settlement date and are charged to each failing market participant at least monthly.

Financial Crime and Regulations

There is no internationally accepted definition of 'financial crime', but it includes the laundering of proceeds of any crime, terrorist financing, and market abuse.
The Financial Services and Markets Authority (FSMA) broadly defines financial crime to include any offence involving fraud or dishonesty.
The UK Bribery Act 2010 and the Foreign Corrupt Practices Act are of particular importance in global financial compliance.
The Central Securities Depository Regulations (CSDR) 2022 is an EU regulation introducing uniform requirements for the settlement of financial instruments in the EU.
A CSD is an institution that holds financial instruments including equities, bonds, money market instruments, and mutual funds.

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Description

This quiz covers the concept of settlement fails, intended settlement dates, and the extension period in the context of trade settlements.