Deferred Settlement Service (SRD): when duly warned clients invest at their own risk - February 2020
The Deferred Settlement Service (SRD) is a service allowing leveraged speculation: it allows clients to execute a transaction on equities listed on Euronext Paris, taking advantage of deferred settlement and delivery in return for the payment of a special commission and the provision of collateral in the form of cash or securities. In this way, they can invest a sum which may represent up to five times the amount of the assets available on their account when the collateral consists of cash.
This service therefore entails significant risks and is not suitable for relatively inexperienced investors: the leverage involved undoubtedly multiplies the potential gains, but also the risk of losses, as illustrated by the case I will describe to you this month. This case is also an opportunity for me to reiterate the need for clients to take into account the warnings and notices issued by their financial intermediary.
The facts :
In June 2018, Mr T opened a securities account with the firm X, and a bank account to which he transferred €40,000.
Mr T then submitted "SRD" buy orders on several different securities. However, when the price of the shares in question fell steeply, he very soon found himself with insufficient collateral, or in other words his SRD exposure was no longer sufficiently covered for the required minimum amount,  and he was forced to resell the securities acquired in this way in accordance with the SRD rules, at very poor prices. In less than two months, he thus lost the whole of his initial €40,000.
Considering that in light of his profile and experience, the SRD was not suited to his situation, he requested my intervention in order to obtain compensation from firm X.
I contacted firm X which informed me of its observations on this case.
Firm X first told me that before he could open his securities account, Mr T had to reply to an initial questionnaire (the MiFID questionnaire) in order to determine his investor profile,  and they gave me a copy of it.
The firm emphasised that it appeared that Mr T had a level of experience considered as "Medium", that his level of risk tolerance was "high risk accepted", and that his investment strategy was of the "aggressive" type.
Moreover, at the end of the questionnaire, Mr T was warned and informed of the fact "that an aggressive strategy entailed very high risk and required an "Expert" type level of knowledge and experience.
The firm added that when Mr T wanted to invest using the SRD, he was asked, in the following days, to reply to another questionnaire, a copy of which was also submitted to me, to determine his fitness for trading in the market using this complex service.
Given the replies made to this questionnaire, Mr T was alerted once again: he was recommended to consolidate his level of knowledge before making an investment using this service, and he was informed that "this service entails a risk of total loss of the capital invested".
Firm X also confirmed to me that several formal notices were sent to Mr T. whenever his SRD position was insufficiently covered, as provided for in Article 315-19  of the AMF General Regulation. Accordingly, about ten formal notices, not disputed by the client, were sent to him. The firm specified to me that for each observation of insufficient collateral, three different alerts were sent to Mr T.: an email, an SMS message and a pop-up on his customer area. For each alert sent, Mr T. credited his securities account to restore the collateral on the same day.
What is collateral?
Collateral is a form of guarantee provided by the investor submitting SRD orders to ensure that, at the end of the stock market month, he will be able to fulfil his settlement and/or delivery obligations for which he has committed himself irrevocably.
The calculation of the collateral may vary depending on the financial institution, but these institutions are bound to comply with minimum collateral rules defined by the regulations. Clients must therefore make sure that they constantly have sufficient collateral for their SRD positions.
In cases of insufficient collateral, their intermediary is required to give them formal notice to restore their collateral within 24 hours, in accordance with Article 315-19 of the aforementioned General Regulation.
If a client fails to restore his (her) collateral within the stipulated time limit, the institution is entitled to liquidate the client's position(s).
Based on these facts, the firm X considered that it did not have to award compensation to this client.
For my part, I made a careful analysis of this case, first with regard to Article L. 533-13 II Para. 3 which states that: "when service providers consider, based on the information provided, that the service or instrument is not appropriate, said providers shall warn these clients, before providing the service in question."
Now, in this case, I noted that firm X had indeed given a warning before the first use of the SRD by Mr T, inviting him to consolidate his knowledge and informing him of the risks of a total loss of the capital invested.
As a consequence, it appeared to me that Mr T. could not be unaware of the fact that the SRD was not suitable for his profile, nor of the risks inherent in the use of such a service. Despite the warning given to him, Mr T. chose to disregard this warning and carry out SRD transactions, at his sole responsibility.
Moreover, I noted that the information provided by the firm X showed that formal notices had indeed been sent to Mr T, in accordance with Article 315-19 of the AMF General Regulation, to inform him of the collateral shortfalls regularly observed. Now, the fact that, despite these repeated warnings, Mr T systematically replenished his account and continued to invest using the SRD, at the risk of losing his entire capital, may not, in my opinion, be attributable to firm X.
Based on the analysis described above, I considered that I had no information liable to lead me to recommend a commercial gesture in this case, and I stated to Mr T. that I shared the view of firm X leading it to reject his request for compensation.
Lesson to be learned
Investors for whom the SRD is not considered suitable should take into account warnings specifically issued to them and, if they do not refrain from using this service, they should be aware that if the risk materialises, the financial intermediary may not be held liable.
Given the extremely speculative nature of the SRD, this service is governed by very strict rules, laid down by the AMF General Regulation and by the Euronext market rules, notably regarding position covering.
Since 2008, legal decisions have constantly considered that the rules relating to the obligation of covering no longer protect merely the interests of intermediaries and market security. They are also designed to protect clients, by enabling them to limit the risk of losses being exacerbated by successive collateral calls.
 Service which makes it possible to defer until the end of the stock market month the settlement or delivery of transactions in the securities eligible for this service (list established by Euronext based on market capitalisation and liquidity criteria).
 The required collateral is calculated as a percentage of the positions, and is stipulated as at least 20% when it is in the form of cash.
 Pursuant to Article L. 533-13 II2, ISPs must gather "information on their investment knowledge and experience in relation to the specific type of financial instruments or services proposed or requested, to be able to determine whether the service or financial instrument is appropriate."
 "Initial margin deposits are readjusted, if need be, in view of the daily marking to market of the position and the assets accepted as collateral therefor, so that the deposits comply at all times with the minimum regulatory requirement. The investment services provider shall order the client, by any and all means, to top up or restore its collateral within one trading day. If the collateral is not topped up or restored in due time, the investment services provider shall take the necessary measures so that the client's position is once again collateralised. Unless the provider and the client have agreed on a different procedure, the investment services provider shall begin by reducing the position before realising some or all of the collateral."
Head of publications: The Executive Director of AMF Communication Directorate. Contact: Communication Directorate – Autorité des marches financiers 17 place de la Bourse – 75082 Paris cedex 02