T2S Penalty Mechanism - PDF Free Download

CRG meeting 28 February 2017, Frankfurt DG-Market Infrastructure and Payments European Central Bank ECB-PUBLIC 1

Table of contents 1 What is the T2S penalty mechanism? Introduction Scope/Out of scope 2 How does the T2S penalty mechanism work? Definitions Reference Data Computation of cash penalties Some SEFP/LMFP examples: DVP / FOP/DWP s Reporting to relevant parties: The Daily Penalty List Reporting and queries: The A2A Channel / The U2A Channel Modification of existing penalties

What is the T2S Penalty Mechanism? Introduction The T2S CSDR Task Force was established by the T2S Steering level, in order to identify the necessary changes to the T2S platform resulting from the CSD Regulation (CSDR), with the objective to facilitate T2S CSDs timely compliance to CSDR. One of the core objectives of the CSDR is to promote settlement efficiency through a Discipline Regime, which, at the settlement layer, implies the payment of cash penalties for late settlement of transactions. It was requested by the CSG that the Eurosystem would offer a settlement penalty calculation mechanism. The new service will be built upon the T2S platform, as T2S centralises all the necessary information for identification and reporting of settlement fails. T2S CSDs can subscribe to the service on an optional basis to the settlement penalty calculation service. 3

What is the T2S Penalty Mechanism? In Scope/Out of scope The T2S penalty mechanism aims at covering the following aspects : Identification of settlement s eligible for cash penalties, Daily calculation of cash penalties, based on the official penalty rates published in the CSDR, Reporting of cash penalties to relevant parties on a daily basis, Availability of queries, An operational tool for CSDs to handle manual updates on an ad hoc basis, e.g. removing penalty, reinclusion of the removal of a penalty or update of reference data impacting the calculation of a penalty The following processes have been identified as out of scope of the T2S penalty mechanism. Derivation of the list of financial instruments subject to penalties that an external data vendor shall provide. The CSDs shall be responsible for the following actions: Monthly reconciliation, billing, collection and redistribution of cash penalties, Reporting to competent authorities, Reconciliation mechanisms and principles when two penalty systems calculate a different cash penalty for a transaction (e.g. in case of transaction with an External CSD subject to CSDR), Interaction with the buy-in process. 4

Definition Fail Penalty (SEFP): Any settlement having reached ISD, which is matched prior to the completion of the settlement processing of the relevant cut-off on a business day, and remains unsettled after the completion of the settlement processing of the relevant cut-off, will be subject to SEFP for that business day. Only an that is unsettled because it failed the eligibility/provision check with any reason associated to this and not to the counterpart s is eligible for SEFP. Trade Date T+0 Matching Business Date T+1 ISD End of EDVP cycle of T+2 ISD +1 End of EDVP cycle of T+3 ISD + 2 = Effective Date T+2 T+3 T+4 Buy-in triggered if SI still unsettled at (1) Up to 4 days for liquid securities matched still unsettled failed to settle before EDVP is still unsettled failed to settle before EDVP The SI shall be subject to SEFP according to the status and reason of failure for ISD and ISD+1 settled Up to 7 days for illiquid securities Up to 15 days for transaction on SME growth market (1)The buy-in process is mentioned for complete process explanation. However it is not a topic directly related to the penalty mechanism but to the CSD Regulation.

Definition Late Matching Fail Penalty (LMFP) Any settlement which has reached ISD and is matched after the completion of the settlement processing cut-off on a given business day, is considered eligible for LMFP for that business day. Only the that has a T2S accepted timestamp later than the T2S accepted timestamp of its corresponding counterpart is eligible for LMFP. Trade Date ISD ISD +1 T+0 T+2 End of EDVP cycle of T+2 T+3 End of EDVP cycle of T+3 ISD + 2 = Matching Business Date T+4 End of EDVP cycle of T+4 Buy-in triggered if SI still unsettled at (1) Up to 4 days for liquid securities unmatched failed to match before EDVP still unmatched failed to match before EDVP The SI shall be subject to LMFP for ISD and ISD+1 matched prior to the completion of the settlement processing of EDVP on T+4 failed to settle before EDVP the SI shall be subject also to SEFP according to the reason of failure until settlement of the Up to 7 days for illiquid securities Up to 15 days for transaction on SME growth market 7 (1)The buy-in process is mentioned for complete process explanation. However it is not a topic directly related to the penalty mechanism but to the CSD Regulation.

Reference Data T2S Penalty Mechanism The following reference data attributes are necessary in the context of the penalty mechanism Securities subject to penalties T2S shall calculate cash penalties for settlement s on specific securities only. The list will be loaded in T2S by CSDs or an external vendor (under discussion), based on information provided by ESMA Derivation of asset class for penalty rate computation Type of financial instrument which may be derived from the CFI code (mapping table) The liquidity : Liquid or Illiquid attribute of a share The SME Growth Market: whether a financial instrument belongs to SME Growth Market Rates Security Penalty Rate = rate attributed to the different asset classes Cash Penalty Rate = discount rate of the currency Euro Foreign Exchange Reference Rate = Reference Rate for each currency against the Euro used when the ISIN is denominated in a currency different from the currency of the penalty. These different rates shall be uploaded and updated manually by the T2S Operator in T2S. Price Daily reference price of an ISIN = Reference price used for the daily calculation of penalties The CSDs shall be responsible for providing and maintaining the list of daily prices. 8

Computation of cash penalties Eligibility and scope Parameters used for the calculation and frequency Fail Penalty Eligibility/Scope Any settlement having reached ISD which is matched prior to the completion of the settlement processing of the relevant cut-off on a business day and remains unsettled after the completion of the settlement processing of the relevant cut-off will be subject to SEFP for that business day. Only an that is unsettled because it failed the eligibility/provision check with any reason associated to this and not to the counterpart s is eligible for SEFP. Out of scope - All Instructions with the transaction type code CORP - s and restrictions automatically generated by T2S - restrictions Securities Penalty Rate or Cash discount Rate as mentioned in the CSDR Reference Price of the ISIN (closing price) Quantity of securities in the SI Cash amount in the SI (for special case of PFOD, explained later) Frequency: every day until SI is settled or cancelled. Late Matching Fail Penalty Any settlement which has reached ISD and is matched after the completion of the settlement processing cut-off on a given business day, is considered eligible for LMFP for that business day. Only the that has a T2S accepted timestamp later than the T2S accepted timestamp of its corresponding counterpart is eligible for LMFP. Same parameters as for SEFP + N is referring to the number of business days resulting from the difference between the ISD and the Matching Business Day. Frequency: once when matched in T2S 9

SEFP : Examples Delivery versus Payment transaction Example 1 The status and reasons at the time of the end of processing of the relevant cut-off are: DVP : Lack of securities RVP : Counterparty has lack of securities In this example, the result of the computation will be the computation of one penalty: Party A is imposed with a Penalty to be paid to Party B. Amount of the penalty: SEFP = Rate for the ISIN* Reference Price* Securities Quantity Example 2: The status and reasons at the time of the end of processing of the relevant cut-off are: DVP : Counterparty has lack of cash RVP : Lack of cash In this example, the result of the computation will be the computation of one penalty: Party B is imposed with a Penalty to be paid to Party A. Amount of the penalty: SEFP = Discount Rate* Reference Price* Securities Quantity 10

SEFP : Examples Payment Free of Delivery transaction The status and reasons at the time of the end of processing of the relevant cut-off are: DPFOD : Party hold CPFOP : Counterpart s is on hold In this example, the result of the computation will be the computation of one penalty: Party A is imposed with a Penalty to be paid to Party B. Amount of the penalty: SEFP = Discount Rate* Amount 11

SEFP: Examples Delivery with Payment transaction The status and reasons at the time of the end of processing of the relevant cut-off are: DWP : Lack of securities RWP : Counterparty has lack of securities In this example, the result of the computation will be the computation of one penalty: Party A is imposed with a Penalty to be paid to Party B. Amount of the penalty: SEFP = SEFP for securities + SEFP for cash = Rate for the ISIN* Reference Price* Securities Quantity + Cash Discount Rate* Amount 12

LMFP: Example Key differences with SEFP: Calculated once based on matched timestamp in T2S retroactively from ISD Matching Business Date may be excluded, calculation based on reference price of each BD status not relevant (pending, settled, ) Trade Date ISD ISD +1 T+0 End of EDVP cycle of T+2 End of EDVP cycle of T+3 ISD+2=Matching Business Date End of EDVP cycle of T+4 ISD+3 T+2 T+3 T+4 T+5 Buy-in triggered if SI still unsettled at (1) Up to 4 days for liquid securities unmatched failed to match before EDVP still unmatched failed to match before EDVP The SI shall be subject to LMFP for ISD and ISD+1 matched is settled Up to 7 days for illiquid securities Up to 15 days for transaction on SME growth market 13 A DVP settlement (delivering 5000 units of ISIN1 versus 39.000 Euros) is matched at 15:00 two business days after its ISD (T+4). As it is matched before the relevant cut-off of T+4 it can still settle on T+4 and therefore T+4 is excluded from LMFP calculation. Assuming that the Rate (R) and reference Price (P) for the ISIN1 are R(T+3)= 1bp; R(T+2)= 1bp; P(T+3)= 9 Euros and P(T+2)= 8 Euros LMFP will be calculated as follows: 0,0001* 9 *5000 + 0,0001* 8 *5000 = 8,5 Euros 13

Reporting to relevant parties T2S shall report a daily penalty list consolidating all the information related to the penalty computed: In ISO 20022 format In the semt. business area. (At this point of time, the semt. message shall be a new message to be registered in Pillar 3) The daily penalty list, will report, inter alia: Penalty Details: Individual ID of the penalty, type of penalty, Reference price and rate used, etc Amount of the Penalty Debit when the penalty is imposed to the CSD Participant Credit when the CSD Participant is entitled to receive the penalty Related settlement details (e.g T2S Actor reference of the SI, Instructing party, ISD of the SI, Securities Account number, Delivering and receiving parties ) In order not to affect T2S performance, the reporting shall be generated by the end of the last Night-Time cycle on the next business day. 14

Reporting and queries: The A2A Channel / The U2A Channel Reporting A2A channel T2S shall generate the daily penalty list in A2A mode in push or pull mode. In push mode: The reporting shall be generated and sent to the relevant party having set-up the message subscription, In pull mode: The reporting shall be generated and available to the CSDs and DCPs in store and forward in respect of the privileges the relevant party will be granted with. U2A channel T2S shall offer the possibility to the relevant stakeholders to query the report through a dedicated GUI screen. The penalty list query shall be available to CSDs and DCPs, The relevant party should be granted with a privilege by the T2S Operator to perform the query, The query response shall be sent through a flat file, 15

Penalty Queries U2A Channel query The U2A query shall be available to CSDs and DCPs To query penalties with a reference, the user shall specify at least one or a combination of the following parameters: -Common ID of the penalty -Individual ID of the penalty -The T2S Actor Reference of the underlying -T2S Reference of the underlying settlement -T2S Matching Reference In respect of the query type used, T2S shall return the relevant penalty and its common details for both the failing and the non-failing participants. T2S Shall allow querying the revision history of a penalty ( as existing penalty could be modified) T2S shall offer the possibility to export the result of the queries into a csv-file. 16

Modification of existing penalties Removal of existing penalties A CSD shall be allowed to perform the removal of a penalty in exceptional cases in U2A and A2A by reducing the amount of the penalty to zero only for the participants under its scope, The CSD should be granted with a new privilege to process with the removal of the penalty. T2S shall automatically recalculate existing penalties based on the below data updates: Changes in the reference price of a given ISIN, Changes in the value of the attributes of the Securities Subject to Penalties, Changes in the value of the Daily flat penalty rate (either the securities penalty rate or the cash penalty rate. A list of modified penalties shall be generated if the below modifications have been performed since the generation of the previous business day list. A penalty has been removed and / or re-included by a CSD, Update of reference data impacting the calculation of a penalty The new list of modified penalties shall be reported to the CSDs and DCPs with status updated and the new data in the relevant field. 17

QUESTIONS? 18

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Mapping of CSDR categories of financial instrument with ISO 10962 (CFI) codes Last updated: 07/06/2016 This table seeks to map the categories of financial instruments currently contained in the CSDR Level 2 standards with existing CFI (ISO 10962) codes. The objective is to allow for an efficient, reliable and automated identificati Caption - "RTS" refers to the draft ESMA technical standars under the CSD Regulation published on 28 September 2015, and more specifically Annex II of the ITS on CSD requirements, Table 3, item 4, p.149. - "TA" references to the ESMA technical advice on 4 August 2015, and more specifically the list of asset types on page 15. CSDR category (RTS) CSDR Description ISO 10962 Securities and related financial instruments Classification of financial instruments (CFI code) (2015) a) transferable securities referred to in point (a) of Article 4(1)(44) Position 1 of CFI is E of Directive 2014/65/EU (or more granular codes as provided by the CSD) E***** CFI Description in ISO 10962 CSDR category (TA) Equities Financial instruments representing an ownership interest in an entity or pool of assets Liquid shares SHRS Illiquid shares SME growth market shares SOVR b) sovereign debt referred to in Article 4(1)(61) of Directive 2014/65/EU (or more granular codes as provided by the CSD) Position 1 is "D" and position 4 is "T" or "C" D**T** and D**C** Government guarantee Government and municipal bonds DEBT c) transferable securities referred to in point (b) of Article 4(1)(44) of Directive 2014/65/EU, other than those mentioned under point b) (or more granular codes as provided by the CSD) Position 1 of CFI is "D", position 2 is NOT "Y", and position 4 is NEITHER "T" NOR "C" D*****, except D**T**, D**C** and DY**** Debt Financial instruments evidencing monies owed by the issuer to the holder on terms as specified. Corporate bonds SME growth market bonds SECU ETFS UCIT d) transferable securities referred to in point (c) of Article 4(1)(44) of Directive 2014/65/EU; (or more granular codes as provided by the CSD) e) exchange-traded funds (ETFs) (or more granular codes as provided by the CSD) f) units in collective investment undertakings, other than ETFs (or more granular codes as provided by the CSD) Position 1 is "R" R***** Entitlements (Rights) Position 1 is C and position 2 is E CE**** Exchange Traded Funds An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock, bond or commodity index. Position 1 is C and position 2 is NOT E C*****, except CE**** Collective investment vehicles Securities representing a portion of assets pooled by investors run by a management company whose share capital remains separate from such assets and includes issues of shares or units in the form of a unit trust, mutual fund, OICVM, OPCVM, SICAV, SICAF etc. Other instruments (to be grouped together with illiquid shares 21