Centrálny Depozitár cenných papierov SR, a.s.

News on implementation of the penalty mechanism

We have prepared updated and detailed information on the Penalty Mechanism that shall be implemented in the Slovak market in connection with implementation of Commission Delegated Regulation (EU) 2018/1229 supplementing the Regulation No 909/2014 of the European Parliament and the Council.

Payment process

Most significant change is different settlement method of penalty obligations and rights. Initially planned payments via RTGS system and relating authorisation to the Direct Debit granted by participants are not considered anymore. New approach to payments within the penalty mechanism envisages utilisation of payment-free-of-delivery (PFOD) instructions that will be settled in the T2S system similarly as securities settlement instructions are settled. These PFOD instructions will be, the same way as the regular settlement instructions, submitted to T2S in format according to ISO 20022, as instructions with zero quantity (volume of securities) and non-zero financial value for settlement. On 15th business day of the month following the reporting period CDCP shall submit to T2S respective PFOD instructions for debit (DCA account of participant is debited and DCA account of CDCP is credited) or for credit (DCA account of CDCP is debited and DCA account of the participant is credited) payments to settle the penalty obligations and rights. Within the scope of standard T2S functions the participants shall receive copy of these instructions including details, which at the same time shall serve as a payment advice informing on a sum that should be paid or received by the participant on 17th business day (which is equal to the Intended Settlement Date of the PFOD instructions). Since by reason of the abovementioned Regulation No 909/2017 CDCP as a central securities depository is not allowed to undertake financial risk, it is important that it at first collects all funds determined for redistribution (i.e. debit PFOD) in full amount and consequently it shall settle the credit PFODs. In case debit PFOD instructions have been announced, the participants have to ensure that on T2S DCA account, at the beginning of night settlement on the 17th business day, are funds allowing settlement of these debit PFOD instructions already during the night settlement.

Setting of DCA accounts

As regards T2S DCA accounts that are to be used to settle PFOD instruction within the penalty mechanism, CDCP shall not instruct the participants whether they should open special DCA account (dedicated to the penalty mechanism) or they should use DCA accounts open for regular settlement. However, in both cases CDCP shall require from the participant not only standard linking of DCA account to the securities account, but also authorisation to use these accounts for purpose of settlement of PFOD instructions within the penalty settlement and linking of these accounts. In this context CDCP would like to draw participants’ attention to necessity to assess possible risks and benefits connected to utilisation of general DCAs (i.e. the participant would use DCA for both regular settlement and settlement within the penalty mechanism), mainly in cases when one DCA is used concurrently by several individual entities.

Reporting and communication

CDCP shall be sending to the participants aggregated monthly reports and daily reports containing primary calculations of penalties for previous day and modified re-calculations of penalties in case of qualitative (e.g. due to appeal procedure) or quantitative changes (change of input parameters as classification or value of underlying security). Both types of reports shall be sent to the participants in form of message semt.044 only in ISO20022 format, it means that transmission of messages in ISO15022 format is not considered. SWIFT already published on its web site structure of the message semt.044 and participants are invited to become acquainted with the message before CDCP makes available local specification in 2Q 2020.

The details of the appeal procedure are currently being prepared internally. Now is already decided that e-mail communication and standard communication templates shall be employed in this procedure.

Next steps

Testing of the penalty mechanism in all its aspects at the community level is expected in 3Q 2020.

The standardised procedures that shall be implemented to all national penalty mechanisms are being prepared by the ECSDA and will be published in a document „ECSDA Settlement fail penalties framework“. As regards T2S, namely the article 20 of the Regulation 909/2014, highly harmonised procedure for all central securities depositories operating on this platform is expected.

Author: Juraj Aksamít

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