Improvement of STP and Settlement Discipline

AO UniCredit Bank
Summary: 
NSD moves on with its initiatives to improving settlement efficiency and discipline on the Russian market and as a result penalty fees for late settlement could be introduced. AO UniCredit Bank supports its clients already now with the correct formatting of their settlement instructions so as to be able to achieve maximum efficiency and potentially evade penalty fees in the future.
Thu, 18/05/2017

 

Although the EU CSD Regulation is not directly applicable to it, the Russian CSD, NSD, is already working on implementing the underlying principles of the Regulation in the local post-trading environment. While some of these are already in place - e.g. in reference to segregation of assets, reconciliation, etc. - NSD is currently moving on with its work on standardising the settlement cycle to T+2, increasing the efficiency of the settlement process and enhancing the settlement discipline of market participants. In line with these efforts NSD will also be looking to introduce penalty fees for late instruction settlement, whereby an instruction will be considered late if received by NSD on S+1 or thereafter.

At present, around 10% to 15% of the settlement instructions received by AO UniCredit Bank arrive after S. In case the settlement discipline initiatives of NSD are finalised as envisaged, AO UniCredit Bank will have to re-invoice all NSD fees for late settlement for reimbursement as out-of-pocket expenses.

While due to current market specifics full STP cannot be achieved in most cases, there are certain ways of formatting settlement instructions that will allow for increased settlement efficiency and thereby reduced operational risk. AO UniCredit Bank would like to take this opportunity to remind our clients of the below principles that apply to the formatting of settlement instructions.

In accordance with the Russian securities market practice, the following types of DVP / RVP settlement will be applied by default (if a type has not been explicitly specified), depending on the counterparty for NSD settlement:

  • DVP1 - for settlement at NSD with Euroclear and Clearstream as counterparties
  • DVP2 - for settlement at NSD with all other counterparties

Should a client wish to opt for one of the alternative types of DVP / RVP settlement, this will have to be indicated in its MT541 / MT543 in Field 22F of Sequence E Settlement details (SETDET) as follows:

Type of settlement Value of Field 22F
DVP1 :22F::NETT//NNET
DVP2 :22F::CASY//NETS
DVP3 :22F::NETT//YNET

Our experience shows that the main gaps in formatting settlement instructions relate to specifying the counterparty settlement details, which are either missing or incorrectly indicated. A valid correctly formatted instruction needs to contain the counterparty and its account with NSD in Subsequence E1 Settlement Parties (SETPRTY) of the instruction. The correct format to provide these details is as follows:

  • for MT540 / MT541
    :16R:SETPRTY
    :95P::DEAG//AAAAAAAA
    :97A::SAFE//AA0000000000/00000000000000000
    :16S:SETPRTY
  • for MT542 / MT543
    :16R:SETPRTY
    :95P::REAG//AAAAAAAA
    :97A::SAFE//AA0000000000/00000000000000000
    :16S:SETPRTY

where:

  • Field 95P (with qualifiers DEAG or REAG) shall contain the counterparty’s BIC.
  • Field 97A (with qualifier SAFE) shall contain the counterparty’s account number. In accordance with NSD standards, the qualifier SAFE can be formatted in three alternative ways, as follows:
    AA0000000000/00000000000000000 - exactly 30 characters
    AA0000000000/KRZD/00000000000000000 - exactly 35 characters (similar to the above, with the only difference being the KRZD part)
    00000000 - exactly 8 digits, which is the short alias for the two examples above
    If the formatting deviates from the patterns described above (i.e. 30, 35 or 8 characters) or the qualifier is included anywhere else but in the SETPRTY sequence after the qualifiers REAG / DEAG, NSD will reject the instruction.

As a matter of general principle, all instructions that are formatted incorrectly are rejected by AO UniCredit Bank and have to be cancelled and replaced by new STP formatted instructions - and this leads to delays in the settlement process and deterioration of STP rates.

In case of any further questions pertaining to the correct formatting of settlement instructions, please do not hesitate to contact your Account Manager at AO UniCredit Bank.

 

Impact on investors: In order to evade future penalties for late settlement, clients are encouraged to take steps to ensure already from now the correct formatting of their settlement instructions.