How CSDR Penalties Work: Daily Rates, Exemptions, and T+1

Under the Central Securities Depositories Regulation, CSDR penalties work by charging a failing party a daily cash amount for every business day a matched trade misses its intended settlement date at an EEA central securities depository. The charge is calculated in basis points against the value of the undelivered securities, collected by the CSD, and paid across to the non-failing counterparty. The regime has been live since February 2022 and applies to every matched instruction that settles through a European CSD, regardless of where the participants themselves are based.

What Starts the Clock

Article 7(2) of the CSDR requires CSDs to charge cash penalties “for each business day that a transaction fails to be settled after its intended settlement date until the transaction is either settled or bilaterally cancelled.”¹ A fail occurs when the delivering participant cannot provide the securities, or the receiving participant cannot provide the cash, at the point the CSD’s settlement engine processes the instruction.

Both sides have matched their instructions, the intended settlement date arrives, and the trade does not complete. From that moment, each business day the instruction stays open generates a fresh charge. Detection is automatic inside the CSD’s infrastructure, so a participant cannot escape a penalty by holding back or delaying its instruction. Accrual stops only when the trade finally settles or both sides bilaterally cancel.

The Two Kinds of Penalty

The regime treats fails after matching differently from fails caused by late matching, and the split determines who pays and from when.

Settlement Fail Penalty

A Settlement Fail Penalty (SEFP) applies to a matched instruction that fails to settle on or after its intended settlement date. Matching happened on time; the delivering or receiving party simply did not have the securities or cash ready. SEFPs accrue daily from the intended settlement date and continue until settlement or cancellation.² This is the more common of the two types, covering ordinary inventory or funding shortfalls at the moment of settlement.

Late Matching Fail Penalty

A Late Matching Fail Penalty (LMFP) applies where one or both parties submitted the settlement instruction after the intended settlement date, so the trade could not match on time. The party that entered or modified its instruction last carries the charge, as that side caused the matching delay.³ Once matching finally occurs, the LMFP is applied retroactively to the intended settlement date, so the late party pays for the full delay rather than only the days after matching.² The retroactive design removes any incentive to sit on an instruction.

Daily Rates by Asset Class

The daily rate depends on the type of financial instrument. Liquid, high-volume instruments carry higher rates, on the reasoning that delays there cause more disruption and sourcing the assets should be easier. The rates come from Delegated Regulation (EU) 2017/389:²

Liquid shares: 1.0 basis point per day
Illiquid shares: 0.5 basis points per day
Shares on SME growth market venues: 0.25 basis points per day
Sovereign, sub-sovereign, and agency bonds: 0.10 basis points per day
Other bonds, such as corporate: 0.20 basis points per day
Bonds on SME growth market venues: 0.15 basis points per day
All other instruments: 0.5 basis points per day
Fails due to lack of cash: the official overnight interest rate of the relevant currency issuer

A basis point is one-hundredth of a percentage point. On a €10 million trade in liquid shares, a 1.0 basis point daily rate produces €1,000 per day, which compounds quickly over a multi-day fail. The 0.10 basis point rate on sovereign debt reflects the fact that government bond markets can face genuine supply constraints, and equity-level rates there would be disproportionate.

How Each Daily Charge Is Calculated

For securities fails, the CSD multiplies the number of undelivered instruments by a daily reference price and then applies the relevant basis point rate. The reference price is sourced each day from external market data vendors and typically reflects the closing price on the instrument’s most liquid market.⁴ Because that price updates daily, the penalty amount moves with the market value of the failed securities. A sharp price swing changes the charge even when nothing operational has changed.

Cash-side fails use a different formula. Instead of a fixed basis point rate, the calculation applies the official overnight interest rate of the currency of the settlement. A euro-denominated cash fail tracks the ECB’s deposit facility rate. Tying the charge to prevailing monetary conditions prevents the rate from becoming meaningless when official rates are low.

Which Trades Are Covered

The regime applies to transactions settled at an EEA CSD that were either traded on an EU trading venue or cleared by an EU central counterparty. In scope are transferable securities such as equities and bonds, money-market instruments, units in collective investment undertakings, and emission allowances.⁵ That is broad enough to capture almost everything settling through a European CSD.

Location of the participant does not matter. A U.S. broker-dealer or an Asian custodian settling through Euroclear or Clearstream faces the same rules as a European firm.⁵ One carve-out is worth flagging so the scope is not overread: shares whose principal trading venue sits outside the EEA are excluded, even if they happen to settle through an EEA CSD.

When No Penalty Applies

Not every fail generates a charge. The CSDR Refit, in force from January 2024, codified four exemption categories under Article 7(3):⁶

Fails not attributable to the participants, including CSD infrastructure outages, cyberattacks, network disruptions, and CSD-level errors such as incorrect master data.
Operations not considered as trading, which fall outside the penalty scope.
CCP transactions where the central counterparty, acting in its interposition role, is the failing participant.
Cases where insolvency proceedings have been opened against the failing participant.

ESMA’s June 2025 final report added examples under the first category, including full-day trading suspensions of an instrument on its most liquid market, instructions involving sanctioned securities or issuers, and instructions put on hold by court or regulatory order.⁷ The exemptions do not run automatically in every case; participants have to flag qualifying situations to their CSD.

Cutting the Bill with Partial Settlement

When a delivering participant cannot provide the full quantity, partial settlement reduces the ongoing exposure. The delivering side settles whatever portion it has, both parties cancel and reinstruct for the balance, and penalties after that point apply only to the undelivered residual, provided the partial settles on or before the intended settlement date.

How this works in practice depends on arrangements with the CSD. Some firms opt into auto-partialling, where the CSD’s system settles whatever is deliverable without manual steps. Others coordinate bilaterally, agreeing when to cancel the original instruction and enter new ones for the residual. Timing is critical: if the new instruction matches after the intended settlement date, an LMFP hits the residual retroactively to the original date.

Partial settlement is not compulsory. A receiver can refuse it, and there are legitimate reasons to do so where a fractional delivery creates its own operational or risk problems. On high-value fails, though, it is one of the few practical ways to bring the daily bill down.

Collection, Netting, and Payment

CSDs generate daily penalty data at the instruction level, giving participants a running view of charges incurred and credits earned. At month-end, the CSD nets everything for each participant. A firm that failed on some trades and was on the receiving end of others ends up with a single net debit or credit for the month. The CSD issues a monthly report of the netted amounts, and the actual transfer of funds takes place on or around the 17th business day of the following month.² The CSD collects from net debtors and pays out to net creditors.

The depository does not keep any of it. The regulation states expressly that penalties “shall not be configured as a revenue source for the CSD,” so every euro collected is passed through.⁶

What About Mandatory Buy-Ins

Cash penalties are the active enforcement mechanism. Mandatory buy-ins sit behind them as a dormant backstop. The CSDR Refit turned buy-ins into a measure of last resort that only activates if the European Commission adopts an implementing act, and the Commission may act only where two conditions are both met: existing tools have not produced a sustainable reduction in EU settlement fail rates, and the level of fails has or is likely to have a negative effect on EU financial stability.⁶ No such act has been adopted, so buy-ins do not currently apply and the penalty regime alone carries the discipline function.

What Changes with T+1

ESMA has recommended 11 October 2027 as the target date for the EU to shorten its standard settlement cycle from T+2 to T+1.⁸ The compression has direct penalty consequences. Under T+2, a firm has the business day after trade date to fix matching problems, source securities, and arrange funding. Under T+1, that buffer largely disappears; industry estimates put the reduction in the post-trade processing window at around 83%.

The effect is sharpest for participants in non-EU time zones. A New York desk trading European securities may find that by the time its back office processes the trade, the European settlement window has already closed, and any late instruction triggers an LMFP running back to the intended settlement date. The regime does not weigh why matching was late, only that it was.

1
European Securities and Markets Authority. Article 7 Measures to Address Settlement Fails
2
Association for Financial Markets in Europe. Guidance on Cash Penalties Under CSDR Settlement Discipline
3
Euronext. SDD Settlement Penalties
4
Official Journal of the European Union. Commission Delegated Regulation (EU) 2017/389
5
Euroclear. CSDR Settlement Discipline
6
EUR-Lex. Regulation (EU) 2023/2845
7
European Securities and Markets Authority. Final Report on CSDR Penalty Mechanism
8
European Securities and Markets Authority. Shortening the Settlement Cycle to T+1 in the EU