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39. Has the CSD Regulation changed the settlement date for repos in Europe?
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From 2015, most securities transactions in the European Economic Area (EEA) hvae been required to settle no later than two business days after their transaction dates. This T+2 deadline has been imposed under the EU’s Central Securities Depositories Regulation (CSDR). It applies to both cash transactions and the first leg of repo and securities lending transactions.*

The imposition of a shorter maximum settlement period is intended to (1) reduce settlement risk, (2) minimise the possibility of confusion over settlement deadlines and (3) provide the fixed start date that is needed for the mandatory imposition of penalties for late delivery and buy-ins for extended failures to deliver.

The CSDR settlement deadline applies to all transactions that are:
  • in ‘transferable securities’ regulated by the second EU Market in Financial Instruments Directive and the parallel regulation (MiFID II/MiFIR); and
  • executed on a ‘trading venue’ regulated by MiFID II/MiFIR.
So the mandatory CSDR deadline does not apply to transactions executed in the over-the-counter (OTC) market, in other words, by telephone or electronic messaging. This includes voice-brokered transactions.**

Transferable securities include fixed-income and equity. Regulated trading venues include electronic trading platforms that are registered as Regulated Markets, Multilateral Trading Facilities (MTFs) or Other Trading Facilities (OTFs) under MiFID II/MiFIR. The main such trading venues for repo are BrokerTec, Eurex Repo and MTS Repo.

Although the T+2 deadline was not mandatory until 2015, most European trading venues decided to start observing the deadline from Monday, 6 October 2014, and European securities market associations, including ICMA and ISLA, recommended that their members voluntarily switch settlement of OTC transactions from T+3 to T+2 from the same date in order to avoid confusion and damage to the integrity of the market.

The T+2 deadline does not affect securities transactions in European securities like UK government bonds, which already settle on T+1. However, it has impacted eurozone markets, as the majority of cash transactions in eurozone bonds used to settle at T+3.

The main impact on the eurozone repo market will be a consequence of the movement of settlement in the cash market from T+3 to T+2. This is expected to lead to a voluntary shift in the settlement of most repos from T+2 to T+1. The reason is that the repos used by securities dealers to fund long positions or cover short positions are typically executed the day after the cash transactions that have created those positions. This is because the exact cash positions that need to be financed or covered are not finally known until after close of business on the transaction date. If cash transactions settle two business days after being executed, related repos that are executed on the next day have only one business day to settle.

There is also one significant direct impact on the European repo market. The CSDR does not allow forward repos to be executed on BrokerTec, Eurex Repo and MTS, as forward repo, by definition, settle beyond T+2.

The switch to T+2 settlement for cash transactions and to T+1 for many repo and securities lending transactions poses major operational challenges to users of the European securities markets, not least for their cash and inventory management operations, given that they have one day less to settle transactions subject to the new deadline and to resolve any settlement problems that might arise. It also has the potential to disrupt the settlement of transactions with counterparties in other time zones and with investors in Europe, some of whom may struggle to accelerate settlement.

*In addition to the first leg of repo and securities lending transactions, the CSDR also applies to the first transaction involving a transfer of securities of any ‘complex operations’ composed of several transactions.

**Exemptions from the T+2 deadline also apply to transactions ‘negotiated privately…but executed’ on a regulated trading venue and to ‘transactions executed bilaterally but reported’ post-trade to a regulated trading venue.

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