The Central Securities Depository Regulation (CSDR), first published way back in 2014, is finally on its way in – and although final implementation may be delayed from September 2020 to February 2021, that doesn’t take away from its status as one of the biggest data management challenges for financial institutions this year.
The new regulation aims to harmonise and establish an enhanced level playing field among European securities depositories by improving the operational efficiency of securities settlement, leveraging enhanced infrastructure, and implementing more robust and consistent disciplinary measures to encourage timely settlement and reduce settlement fails. What does this mean? In essence, that firms will need to support a whole lot more information in relation to their interactions with CSDs and custodians – and the cash penalties for failure are unprecedented at a regulatory level.
Under CSDR, market participants will be bound by regulation to perform a number of operational and reporting functions with the ultimate sanctions of mandatory buy-ins and market exclusion. Within these regulatory obligations firms will be required deliver functions and services such as to offer their clients both omnibus and segregated accounts, instigate internalised settlement reporting, and introduce a new settlement discipline regime – and that’s just for starters.
“This is a significant change of settlement regime, and everyone who is involved in trade settlement will be impacted, across business lines. In its component parts it sounds like a straightforward process but actually, given the impact and input from a diverse range of affected bodies (participants, market advocacy organisations, CSDs and regulators) there is scope for a more common understanding on a lot of things,” said Paul Clark, Head of International Post-Trade Pre-Sales at Broadridge.
“But equally there is a concern for the potential of unforeseen circumstances as has been seen in previous regulatory changes – for example it was reported that liquidity issues had impacted fixed income orders being matched after prop trading was targeted. Similarly, will this limit investors in certain asset classes? Will they look at other forms of investment if they feel the impacts are adding risk to their activity? Will it have an impact on liquidity? These areas are not easy to predict.”
The data challenges alone within the new regulation are significant. Firms will have to source the central bank overnight rate, quote interest rates, carve out source reference prices for securities, and impose specific classifications around asset liquidity. The regulation also has a reference data implication, as CSDs will be mandated to record and report all LEIs to their national competent authority in order to harmonise data collection and reporting – meaning that brokers and asset managers will have to ensure those are provided for every trade and settlement message. And although this might sound like nothing new, in fact, it represents a fundamental change in approach.
“A lot of regulation so far has been behavioural, whereas this is actually a whole change in methodology,” warns Clark. “There is a definite sense of urgency because from day one this is actually going to have a commercial impact. It will directly affect your bottom line if things aren’t done in time, – as soon as we get past settlement date, the fine management is going to kick in, and I’m not sure that everyone is fully prepared for that yet.
So what should firms be doing to get ready? The most important thing is to prepare the information you are going to need in order to meet the requirements – and provide pre-emptive data to mitigate the risk of failure, preferably on a real-time data platform. “What we are doing is calculating the expected fines in readiness for that day’s settlement processing,” explains Clark. “This allows our clients to prioritise the most important transactions for settlement, based on what they will be fined for in the highest penalty form.”
According to Broadridge, firms should also be tightening their settlement processing, upgrading their intra-day position management and treasury operations to optimise use of assets and in turn prioritise failing trades.
Post-trade platforms delivering real-time, STP-driven processes for monitoring and transparent reporting of open settlements, historical fails, late matching and settlement penalties both internally and to the market are essential.
This technology must be capable of tracking buy-in periods, notices and statuses, facilitating daily CSD securities reconciliations through position reporting, efficiently capturing and maintaining clients’ standing settlement instructions details, and making sure they are able to provide enhanced data e.g. LEIs etc. to their settlement agent for every trade.
With the originally proposed date already being deferred, it is unclear whether this regime is going to have a settle-in period, like MiFID II – but either way the clock is ticking…