Questions and Answers
What is the penalty rate in basis points for settlement fails due to lack of shares with a liquid market?
Who is responsible for calculating penalties for settlement fails?
How often are collected penalties redistributed to market participants impacted by settlement fails?
What is the minimum penalty rate in basis points for settlement fails due to lack of cash?
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Which of the following is NOT a factor in determining the penalty rate for settlement fails?
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What is the primary goal of the Settlement Discipline Regime (SDR) introduced as part of the CSDR?
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What is the purpose of the Settlement Discipline Regime?
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What happens to transactions that continue to fail due to a lack of securities after the extension period?
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When are penalties calculated for settlement fails?
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Who is responsible for paying penalties for settlement fails under the SDR?
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What determines the penalty rate for settlement fails caused by a failure to deliver the financial instrument under the SDR?
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What is the primary reason for extending the settlement period beyond the intended settlement date?
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What happens if a buy-in is not possible due to reduced liquidity?
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When did Phase 3 of the CSDR, which introduces the Settlement Discipline Regime, come into force?
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What type of reports must be submitted to the regulatory authority of the CSD?
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Which of the following is NOT a type of financial crime?
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What is the OECD Convention focused on?
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Which Act is an example of legislation designed to implement the OECD Convention?
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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’?
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How many countries have adopted the OECD Convention?
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What is the purpose of the OECD Convention?
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What is the primary goal of the Settlement Discipline Regime under CSDR?
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What is the role of Straight-Through Processing (STP) in maintaining timely settlement?
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Which of the following is a requirement under Section 302 of SOX?
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What is the purpose of a Central Securities Depository (CSD)?
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Under CSDR, what is the deadline for settling transactions?
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What is the purpose of the buy-in process under CSDR?
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Which of the following is a responsibility of firms under CSDR?
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What is the scope of CSDR?
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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.