CDCC's Harmonisation with CSDR

Zagrebacka Banka d.d.
Summary: 
Croatian Central Depository & Clearing Company Inc. (CDCC) publicly announced their expected workflow and activities undertaken to harmonise its business operations with CSDR.
Thu, 09/02/2017

Harmonisation with provisions of CSDR is a prerequisite for obtaining authorisation for the CDCC as a central depository, and continued provision of services of managing such central depository of dematerialized securities and of a securities settlement system. According to CSDR, the CDCC is obliged to submit the request for authorisation to the Croatian Agency for Supervision of Financial Services (HANFA) within six months from the date of entry into force of technical standards on the requirements for central depositories. The CDCC expects the deadline to be during September 2017.

The CDCC intends to carry out such harmonisation with CSDR in two phases:

1.    For changes related to provisions of CSDR and RTSs (except for RTS on settlement discipline), Operating rules will be ready by the deadline for application submissions for authorization. Implementation will be possible after obtaining authorization from HANFA;

2.    For changes related to provisions of RTS on settlement discipline, targeted timeline for implementation is no later than the date of entry into force of the RTS on settlement discipline.

A significant portion of CSDR provisions concern the settlement and settlement discipline in particular, influencing the CDCC, CDCC members and other market participants in part of the buy-in process, penalties for settlement fails, valuation of financial instruments, supervision of timely settlement, as well as activities concerning instructions matching, hold and release mechanism, partial settlement and tolerance level for cash settlement amounts. An overview of the most significant changes having direct impact on business processes of CDCC members and market participants are as follows:

1.    Keeping records of transactions, settlement instructions and positions (of securities)

  • participants and issuers will have to submit their LEI to the CDCC
  • when entering settlement instructions, participants will also have to enter data on: transaction type (purchase or sale of securities, collateral management, repurchase transactions, other types of transactions), place of trading, place of clearing, trade date.

2.    Measures to prevent settlement fails in relation to participants’ clients

  • investment companies are obliged to undertake measures in order to prevent settlement fails, in relation to their clients
  • investment companies are obliged to ensure their clients provide all information necessary for the settlement of transactions and written confirmation of the client's consent to the terms of the transaction

3.    Processing and matching of settlement instructions

  • new mandatory fields for instruction matching will be introduced in the CDCC securities settlement system: transaction type designation and trade date
  • introduction of additional fields for instruction matching, which become mandatory fields for instruction matching, if entered by both settlement parties: place of trading and place of clearing
  • introduction of a tolerance level for cash settlement amounts (EUR 2 for settlement amount of up to EUR 100,000 and EUR 25 for settlement amount over EUR 100,000)

4.    Hold and release mechanism and partial settlement

  • introduction of instruction hold and release mechanism, and the possibility of partial settlement within one year from the fulfilment of requirements from Article 12 of the RTS on settlement discipline

5.    Measures to address settlement fails - cash penalties

  • CDCC will establish a mechanism of penalties for settlement fails caused by participants
  • for each working day on which the transaction failed to settle, from the intended settlement date to the actual settlement date or the end of the buy-in process, cash penalties will be calculated on a daily basis and will be reallocated to participants affected by settlement fails

6.    Consistent and systematic failure to deliver securities

  • CDCC may decide to suspend the participant that consistently and systematically fails to deliver securities in the settlement system of the CDCC on the intended settlement date (based on its efficiency rate) and publicize its identity

7.    Buy-in

  • CDCC will not be held responsible for undertaking the buy-in procedure, but the sole responsibility remains at the trade level, between the counterparties to the trade
  • period to initiate the buy-in process depends on the type and liquidity of financial instrument (4 working days for liquid stocks market, 7 working days for all other financial instruments, 15 days for financial instruments traded on SME growth markets)

8.    Acceptance into membership

  • besides public disclosure of conditions for CDCC membership, CDCC is obliged to undertake comprehensive risk assessment particularly taking into account the legal, financial and operational risks, when deciding on the application for admission to membership and application for inclusion of a security to depository services and clearing and settlement services

9.    User committee

  • User committee will be established as an independent body, consisting of representatives of the issuers and participants of the CDCC, in order to enable them to express views and opinions on issues of significant influence to them, especially on key mechanisms affecting members of the CDCC, including the criteria for admission into membership of the CDCC

10.    Requirements related to operational risks that may be posed by key participants

  • requirements related to identification of operational risks impose an obligation to the CDCC to identify, track and manage the risks that key participants in securities settlement systems it manages might pose to its operations.

Impact on investors: As announced by the CDCC, the harmonisation process with CSDR will introduce significant changes to the business process of the CDCC as well as its members and participants of the Croatian capital market.