What are the key challenges the industry is facing with CSDR?
Frost: The first big challenge is to understand what the Settlement Discipline Regime (SDR) will bring. We are less than three months from the go-live of the SDR component of the Central Securities Depositories Regulation (CSDR), and we still do not know whether mandatory buy-ins are actually in-scope or out of scope for 1 February 2022. Following that — and let’s assume that mandatory buy-ins will be delayed or removed altogether — dealing with the fallout of the cash penalties is going to be challenging, particularly for securities finance where the nature of the business means there are lots of onward deliveries and potential fails throughout the chain.
Another challenge, for borrowers in particular, is that in many cases they will need to settle before the delivery-versus-payment (DvP) cutoff, rather than the actual market cutoff on each business day, to fulfil those onward deliveries. That is going to be a challenge for the flow of the whole market, especially concerning early collateralisation and automation.
Lastly, organisations may be dealing with many different causes of fails, whether that be incorrect bookings, mismatched standing settlement instructions (SSIs), delayed collateralisation, or pre-settlement changes such as reallocations — which borrowers today have to deal with manually. It is crucial to ensure the platform is in place so that lenders can release the prepaid loans on time to feel the onward benefit.
What are you hearing from your client base in terms of possible approaches to addressing these challenges?
Morgan: Frankly, prevention is the best cure, whether that be having visibility, improving operational processes, identifying where the fines are going to come about, and analysing and resolving the root causes. Rather than dealing with the after-effects, it is much better to deal with the causal elements.
That is the right approach overall. But, inevitably there will be fails. When fails arise, or are likely to occur, clients are considering partial settlements, as well as last minute borrows or loans to cover fails. In some cases, they may be cancelling instructions on or before settlement date to prevent the trade failing in the first place.
In many ways, this industry segment is going full circle. Before there were other streams of securities lending activity and revenue, a lot of this activity was driven by fails coverage. Perversely, this regulation is going to affect cash markets and securities finance. Potentially, there could be a strengthening of the fails coverage that, in a sense, was the foundation for stock lending and borrowing activity. I find that quite interesting.
What has been the driver for the new service that Pirum has recently launched?
Morgan: The first phase of our new service is called Trade Risk Manager (TRM), which is part of our Front Office Services product suite. It has been fascinating to watch. In many ways this replicates our approach to the Securities Financing Transactions Regulation (SFTR) in speaking with clients to understand whether there is likely to be a problem and therefore a need for a solution. Our job as a service provider is to solve problems. Frankly, if there is not a problem, we should not build it.
Over the past year, especially since SFTR was delivered and bedded down, our clients’ focus has turned to the upcoming Settlement Discipline Regime. The approach we have taken is based on ongoing engagement and conversations, like we do in all of our product development. For six to 12 months, we have also been publishing a penalty fine report, which gives clients an indication of what penalties they would be seeing if the SDR was live. This has proven to be quite sobering for many clients in terms of realising the impact of the regulation. Clients have shown great interest in this because it will have a direct impact on the profitability of the securities finance desk. Operational inefficiency has always been unwelcome, but previously the profit and loss implications of this inefficiency have been less obvious. However, CSDR will make these P&L consequences crystal clear.
So that has provided a call to arms for the industry and has created a real catalyst for our clients. That is the reason why we have developed the product over the last six months in combination with our clients. I am glad to say we have 21 clients that will go live when we launch in the next four weeks. We have a design partnership group and we are confident that we are going to help our clients manage and minimise the impact of the penalties.
What plans do you have for future developments with Trade Risk Manager?
Frost: CSDR was the first solution that our clients wanted us to solve with the new suite of products, but that is really just the start. Over the next 12 months and beyond, TRM will become the single risk management tool across the whole post-trade lifecycle.
Shortly we will be launching with rate breaks across Real-time Contract Compare, followed by other risk types and other post-trade processes. Not only is this about managing your risk and your breaks in one place, it is also about providing further automation. We are looking at the manual processes that still exist today, particularly within the front-office, that takes up their time and distracts from their focus on trading.
We are also looking closely at other changes that are happening in the industry, such as the proposed move to T+1 settlement in the US. This is going to require a lot more automation, real-time data and real-time processing, which is something that our services are well-positioned to deliver.
Working with our clients has been absolutely key in terms of hearing the challenges they are facing. Through that design partnership, we have prioritised based upon the consensus within the group regarding what to deliver next. Like I say, there will be many more things that we deliver throughout 2022 and beyond.
How does this fit in with Pirum’s FutureTech initiative?
Morgan: Our FutureTech initiative, as the name suggests, is spurring us to focus on future technology innovation. A core element is in driving operational efficiency and meeting the demands of regulatory adaptation. Effectively, our major strength as a business is to automate the complete workflow across collateralised markets, such as stock loan, repo and increasingly in over-the-counter derivatives.
Being a technology firm, we are clearly aware that distributed ledger technology, the Common Domain Model, and the move to cloud, among other things, are increasingly interesting to the market. We are looking to utilise this new technology to solve some legacy technology issues.
We are in a privileged position to have over 100 clients who come to us with their problems. Hopefully, over the past 20 years, we have shown that we can be trusted to deliver solutions to these problems. So the FutureTech initiative is designed to ensure that we maintain our position at the apex of solutions development, not only for the current but for the future — whether that involves changing the ecosystem or adopting new technology. However, there are many other components of this initiative that you will be hearing about over the course of the coming year.
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