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There remains a greater demand for clarity from the market amid continued uncertainty around the implementation of the Settlement Discipline Regime (SDR) of the Central Securities Depositories Regulation (CSDR), according to a panel at the Securities Finance Technology Symposium.
The panel, ‘All settled for CSDR’, featured Paul Baybutt, director and senior product manager of global middle-office product and securities services at HSBC; Daniel Carpenter, head of regulation at Meritsoft; Matthew Johnson, director of digital platform management and industry relations at DTCC; and Camille McKelvey, head of business development for straight-through processing (STP) at MarketAxess.
It was moderated by Sarah Nicholson, senior partner at Consolo.
Described by one panellist as “the last piece of the jigsaw” in financial regulations designed to improve the safety and efficiency of the settlement infrastructure following the 2008 financial crisis, CSDR’s SDR was originally scheduled to go live in 2020, but was subsequently delayed to February 2022 owing to the COVID-19 pandemic.
Consisting of sediment reporting, penalties and mandatory buy-ins, settlement discipline is devised to harmonise the settlement cycle, improve the efficiency and safety of securities settlement, and mitigate settlement risks.
Discussing the market’s state of readiness, one panellist identifies the most significant concern to be the introduction of mandatory buy-ins, which is likely to reduce optionability and increase costs for investors, as well as damage market liquidity.
However, the market is still awaiting the impact analysis of ESMA’s consultation on the issues raised by the SDR, particularly concerning liquidity and buy-ins, and the need for a framework that is proportional to the costs of implementation.
One panellist notes that the commission is investigating ways to defer mandatory buy-ins while implementing penalties and reporting as planned — however, although there is an interest in creating a mechanism that would allow split implementation dates, since the paper has not yet been discussed there remains a significant amount of uncertainty.
Another panellist says that this uncertainty is “very challenging” for the market, with many market participants being of the opinion that it is unlikely buy-ins will go ahead as scheduled.
There is a general sentiment that fines will still go ahead owing to their potential to improve settlement rates, following similar implementation in the US for failed trades.
The panellist says: “Over the next few months, bodies need to focus on getting their ducks in a row to make sure the industry is ready for the implementation of fines.”
The panellist adds that it will be interesting to see if SDR is re-examined if the regulation is de-coupled and fines alone have a positive enough impact on settlement rates to make mandatory buy-ins redundant.
In a poll held during the panel, only 5 per cent of respondents said they thought the market was ready for full implementation of SDR, while over half cited they thought only settlement fines will be implemented in February 2022.
When asked the extent to which their specific firm is ready for CSDR, 21 per cent of poll respondents said they were either completely ready or almost ready with some outstanding actions, while 44 per cent said there is still a considerable amount of work to be done.
One panellist notes that another concern in SDR implementation is in the quality of data, which is dispositioned to be nuanced as data is not alway provided by a CSD and must be aggregated in-house across all books of business.
“Exception management is key internally,” remarks one panellist, adding that it is fundamentally important for an organisation to identify the issues they are facing and how to resolve them, as well as the main root trade failures and who is at fault.
Another panellist adds that from a securities finance approach, there remains a considerable amount of manual intervention between front- and back-office processes in the transaction itself, which requires standardisation of data and inputs.
In addition, firms are considering the accuracy and real-time of their inventory, while banks and broker dealers are modelling costs from a volume perspective.
However, the underlying sentiment of the panel was that organisations can currently only do so much to prepare for the go-live date while lacking finalised implementation plans.
One panellist says that those looking at changing their documentation are taking a minimum approach because they simply do not know how to prepare for buy-ins if there is a potential they will not happen.
The panel concluded with a poll that indicated 27 per cent of respondents believe CSDR will impact the securities finance business with a significant increase in volume — but the same amount predicted a significant decrease.
This appropriately reflects the deep uncertainties within the market over implementation, and highlights the pressing requirement for greater clarity to allow bodies to fully prepare themselves for the go-live date.
