A settlement penalty is a cash charge levied on a market participant whose securities transaction does not settle on its intended settlement date. In the European Union such penalties are mandatory under the settlement discipline regime of the Central Securities Depositories Regulation, in force since February 2022. Each central securities depository calculates the penalty for every business day a matched instruction remains unsettled, by applying a daily rate set for the type of instrument to the value of the securities that were not delivered.
The amount is charged to the failing participant and credited to its counterparty, with collection and payment once a month. Custodians and brokers then pass penalties on to the clients responsible. A late-matching penalty applies when instructions are matched after the intended date. The charge is meant to deter each settlement failure, and it has made settlement fail management a measurable cost. It is separate from a buy-in procedure.