Securities Clearing: C7 Securities Clearing Service (SCS) Release 3.7: Update on CSDR RTS Art. 19 amendments and handling of CSDR penalty imbalances of Eurex Clearing

1. Introduction

With Eurex Clearing Circular 011/24 (21 February 2024) and Release Notes C7 SCS 3.7 (26 April 2024), changes to the reporting and payment processing regarding Central Securities Depositories Regulation (CSDR) penalties related to settlement fails of cleared transactions were announced. With this publication, the new Member compensation process to mitigate CSDR penalty imbalances on cash accounts of Eurex Clearing AG (hereafter: Eurex Clearing) is described. 

Production start: 2 September 2024

Learn now more about C7 SCS Release 3.7 on the Eurex Clearing website www.eurex.com/ec-en/ under the following link: Support > Initiatives & Releases > C7 SCS Releases > C7 SCS Release 3.7. System documentation, circulars, timeline and much more information is there for you.

2. Required action

Eurex Clearing processing with regards to CSDR RTS Art. 19 amendments: Clients will have to adapt their internal penalty processing according to regulatory requirements. Especially, decommission of Eurex Clearing's CSDR penalty reporting, and penalty booking procedure, where the (I)CSD is responsible for CCP penalty booking, analogue to penalty processing for non-cleared business.

3. Details: Regulatory and legal background

With the CSDR SDR RTS1 Art. 19 amendment in Delegated Regulation (EU) 2023/1626, (I)CSDs will directly book CSDR net cash penalties on Eurex Clearing’s cash accounts. The EU amendment has already entered into force and changes will apply on 2 September 2024.

The CCP permission for imbalance compensation is clarified by the guiding principles of (EU) No 2023/2845, Art 7(3)(c), that cash penalties shall not apply to failing participants which are CCPs (for cleared business). With the amended SDR RTS Art. 19, CCPs are explicitly permitted to allocate any remaining net cash amount of penalties after booking by the (I)CSDs to their own Clearing Members (based on rules in their contractual rulebooks) to achieve the net flat-zero position of the CCPs in the penalty process, which is the regulatory aim of aforementioned CSDR RTS Art. 19 amendments.

Eurex Clearing will respectively apply the compensation of its CSDR net penalty imbalance in line with RTS Art. 19. The compensation of a potential monthly CSDR net penalty imbalance for Eurex Clearing will be ensured in a new monthly compensation process on Clearing Member level. The new process will replace the existing pro-rata adjustments and will be documented in the Clearing Conditions of Eurex Clearing AG.

¹ SDR: Settlement Discipline Regime, RTS: Regulatory Technical Standards

A. General aspects of the compensation concept

Eurex Clearing has currently seven securities settlement accounts for cleared business with related cash accounts at the (I)CSDs:

• CBL/CBF-i²: 51295, 67525, 67530
• CBF/T2S³: 8501, 7525, 7530
• EB⁴: 22563

(I)CSDs will calculate a monthly net amount ("Global Net Amount" in (I)CSD reporting) to be booked per penalty currency on cash accounts assigned to each of above (I)CSDs settlement accounts as

• Net amount (per settlement account and penalty currency) = (Sum of all calculated penalty collections from Clearing Members to Eurex Clearing) - (Sum of all calculated penalty distributions from Eurex Clearing to Clearing Members)

Eurex Clearing will determine the overall net imbalance for Eurex Clearing in a monthly CSDR penalty booking process by the (I)CSDs based on the overall offset of the single net payments (per penalty currency) related to the seven settlement accounts. As Eurex Clearing will no longer be involved in the CSDR penalty booking process, Eurex Clearing cannot apply pro-rata adjustments on the CSDR penalty bookings anymore to balance penalty pay-outs to Clearing Members to the level of the own Eurex Clearing penalty credits.

Instead, Eurex Clearing will subsequently apply individual compensation payments vis-a-vis its Clearing Members to balance own penalty receipts from Clearing Members (credits from Eurex Clearing’s view by the (I)CSDs) to the level of the (I)ICSD triggered penalty debits on Eurex Clearing cash accounts (to reach the net flat-zero position, as is the aim of the regulatory provisions).

² CBF: Clearstream Banking AG (Frankfurt), CBF-i: Clearstream Banking AG (Frankfurt) International
³ T2S: TARGET2-Securities
⁴ Euroclear Bank S.A.

B. Calculation of compensation

In case the overall net balance based on (I)CSD bookings is negative from Eurex Clearing’s view, Eurex Clearing initially faces a loss. To balance such loss, Eurex Clearing will apply a pro-rata assignment of the monthly overall Eurex Clearing net gap to the Clearing Members. Each affected Clearing Member will have to pay one single monthly payment (Member debit payment from Clearing Member to Eurex Clearing per potential penalty currency) as own compensating share to the Eurex Clearing gap.

In the unlikely case of a potential positive overall Eurex Clearing net balance, such positive amounts will be used to offset an overall negative Eurex Clearing gap in the following month(s), before calculating again each Clearing Member’s compensation share.

Determination of the contribution of the penalty gap per Clearing Member takes place in a 3-step approach:

Step 1: Eurex Clearing overall net imbalance

Calculation of a monthly overall CSDR penalties net imbalance across Eurex Clearing’s settlement accounts. The identification of net imbalance is based on (I)CSD reporting and the effective (I)CSD cash bookings. In case of an overall negative balance for Eurex Clearing, a compensation process is triggered for the actual month.

Only Eurex Clearing’s settlement accounts which have a negative imbalance contribution are considered in the further compensation process. The overall net gap will be assigned pro-rata to all negatively contributing Eurex Clearing accounts (adjusted net gap contribution).

Step 2: Single Member contribution on penalty collections

As no direct relation of the overall Eurex Clearing net gap to a single Clearing Member can be drawn, applicable baseline for the calculation is the evaluation of the single Member contribution in relation to the total (I)CSD calculated net penalty collections towards Eurex Clearing, related to a specific Eurex Clearing account (defining a Clearing Member individual pro-rata contribution factor per account and penalty currency).

Hence, only Clearing Members with CSDR penalty payments towards Eurex Clearing (Clearing Member has lack of cash or securities or has instruction on hold) based on one of the negatively contributing Eurex Clearing accounts are included in the further gap compensation process. Clearing Members with no actual penalty payments to Eurex Clearing, as well as Members involved in penalty processes with no negative imbalance in an Eurex Clearing account will not be considered for compensation payments.

Step 3: Single Member share on potential Eurex Clearing net cash gap

The pro-rata factor (calculated in Step 2) is applied to the adjusted net gap contribution (calculated in Step 1). The result is the Clearing Member share of the net gap which will be booked as a single net payment (per penalty currency).

C. Simplified example

Scenario: “Clearing Member1” (CM1) is involved in settlement “Account1” of Eurex Clearing

Step1 (overall gap to “Account1” assignment):

Total net imbalance (gap) across all Eurex Clearing settlement accounts: -30,000 EUR.
Negative imbalance contribution of Account1: 66.67%.
Assignment of total gap to Account1: -20,000 EUR.

Step2 (collection contribution of “CM1” for “Account1”):

All (I)CSD penalty collections for Account1: 170,000 EUR.
CM1 collection for Account1: 1,500 EUR.
CM1 collection ratio: 0.88%.

Step3 (gap compensation share of "CM1" for "Account1"):

Gap assignment to Account1 (see step1): -20,000 EUR.
Collection ratio for CM1 (see step2): 0.88%.
Final share of gap for compensation for CM1/Account1: 0.88% of -20,0000 = -176 EUR.

In case "CM1" would be involved with own penalty payment towards Eurex Clearing also in other settlement accounts of Eurex Clearing with negative imbalance contribution, additional amounts would be added to the final compensation payment of "CM1".

D. Reporting of compensation payments

Eurex Clearing will provide reporting for the Clearing Member compensation payment in terms of

• "Clearing Member ID" (Clearing Member identification).
• "CSDR IMBALANCE COMPENSATION" (name of the compensation payment).
• "Penalty currency".
• "Compensation amount" (to be paid).

Reporting of the compensation payments will be provided in the new monthly fine report Monthly Fine Statement (CB227).

E. Time schedule for compensation payments and introduction timeline

Member compensation payments will be part of the standard monthly Eurex Clearing payment notification process. A potential positive overall Eurex Clearing net balance in a specific month will be kept in Eurex Clearing’s view to compensate (offset) penalty gap(s) in the following month(s).

The Member compensation payments are caused by the monthly (I)CSD-triggered payments but are independent in process and timing. The compensation payments for the imbalance will be booked beginning of the month after the (I)CSDs have booked the cash penalties.

Regulatory go-live for the change of CSDR SDR RTS Art. 19 amendment is 2 September 2024. Eurex Clearing will apply the penalty imbalance compensation process for the first time after the (I)CSDs have reported the penalties for the penalty period of September 2024. First applicable payment notification and reporting process for Member compensations will be performed during the month-end process for October 2024 in the beginning of November 2024.

Unless the context requires otherwise, terms used and not otherwise defined in this circular shall have the meaning ascribed to them in the Clearing Conditions or FCM Clearing Conditions of Eurex Clearing AG, as applicable. 

Further information