Leverage automation to avoid CSDR fines, says ISLA
30 September 2019 London
Image: Shutterstock
The International Securities Lending Association (ISLA) has published a new report highlighting the potential pain points associated with settlement fails for transactions in-scope for the Central Securities Depositories Regulation's (CSDR) incoming settlement discipline regime.
The CSDR settlement discipline framework aims to improve transaction settlement rates and enters into force in September 2020, however, it has caused concern for some industry participants who are worried about cash penalties for settlement fails.
ISLA’s CSDR working group created the paper ‘Phase 2: Recommendations, Guidance & Future Practices’, and explained that while a failure to settle a trade may manifest itself as a trading issue, the underlying reasons for that failure are likely to lie elsewhere.
“Poor account set-up procedures including fundamental data requirements such as Standard Settlement Instructions (SSIs) can lead to undesirable levels of failed trades,'' the paper warned.
ISLA advised that in order to maximise efficiency, create scalability and improve matching and settlement rates in the market, certain steps must be considered to mitigate potential impact including regular maintenance of account set-up and local reference data – semi-annually.
The association identified a number of key issues adversely impacting market settlement rates for securities lending transactions, such as the significant contribution of inaccurate SSIs to the failure in the settlement process.
The current process for communicating, verifying and updating SSIs is highly manual for most market participants and in some cases exacerbated by complex account structures.
According to ISLA, improved pre-matching of SSIs could have a dramatic impact on reducing SBL settlement rates. ISLA recommended a phased change to the current process and infrastructure with the aim of improving market-wide management of securities lending SSI communications.
Elsewhere in the paper, ISLA drew attention to inconsistent source data and noted that for areas such as pricing requires consistent data to allow trade matching, settlement, and thereafter exposure management and billing accrual processes.
Counterparties need to implement processes to automatically receive lender(s) prices or agree a central price source to solve price disagreement, ISLA recommended.
ISLA continued: “The current best practices should be reviewed, taking into account the reduced tolerances related to Securities Financing Transactions Regulation (SFTR), and should direct more parties more precisely on the timing and use of price.”
Meanwhile, in order for the trade booking and notification process to be effective, some key components must be completed automatically to overcome manual processing requirements, which ultimately lead to settlement barriers, the paper reads.
ISLA said that this includes a requirement to notify or 'call-in’ transactions to counterparts, exacerbated by the lack of standard formats for non-automated solutions.
This also includes a requirement to act upon the agreement of the notification or notify the counterparty within a reasonable time period where the notification cannot be met, to allow the transaction to be re-agreed as required.
Elsewhere in the report, ISLA also looked at collateralisation and stated that much has already been done within the vendor space to support the automation of collateralisation within the securities lending market.
“These automations have become more and more relevant as both loan and collateral demands and ‘velocity’ have increased,” the report reads. "CSDR also stands to have a very real impact, not least because lenders and agent lenders have to ensure adequate collateral coverage before any new loans can be released to the market."
Moreover, ISLA noted that late collateralisation of pending loans by the borrower may result in a fine for the lender/lending agent where they aren’t able to instruct the loan.
ISLA added that whether automation is utilised or not, the same practicalities will apply including pre-matching of pending transactions is highly recommended whether via trade confirmations, manual trade files or an automated contract compare.
The association further noted that all the details that can affect successful settlement are vital, but items such as position valuation, required margin, and method/account of collateralisation greatly help in the successful agreement of exposure.
Commenting on the paper, Adrian Dale, director, regulation and market practice at ISLA, said: “The work undertaken by the CDSR Working Group has shone a light on legacy practices that were perhaps overdue for market review."
"We look forward to working on the implementation phase with members, mindful that any work will need to consider impacts across all markets and regulations.”
The full report can be viewed here.
The CSDR settlement discipline framework aims to improve transaction settlement rates and enters into force in September 2020, however, it has caused concern for some industry participants who are worried about cash penalties for settlement fails.
ISLA’s CSDR working group created the paper ‘Phase 2: Recommendations, Guidance & Future Practices’, and explained that while a failure to settle a trade may manifest itself as a trading issue, the underlying reasons for that failure are likely to lie elsewhere.
“Poor account set-up procedures including fundamental data requirements such as Standard Settlement Instructions (SSIs) can lead to undesirable levels of failed trades,'' the paper warned.
ISLA advised that in order to maximise efficiency, create scalability and improve matching and settlement rates in the market, certain steps must be considered to mitigate potential impact including regular maintenance of account set-up and local reference data – semi-annually.
The association identified a number of key issues adversely impacting market settlement rates for securities lending transactions, such as the significant contribution of inaccurate SSIs to the failure in the settlement process.
The current process for communicating, verifying and updating SSIs is highly manual for most market participants and in some cases exacerbated by complex account structures.
According to ISLA, improved pre-matching of SSIs could have a dramatic impact on reducing SBL settlement rates. ISLA recommended a phased change to the current process and infrastructure with the aim of improving market-wide management of securities lending SSI communications.
Elsewhere in the paper, ISLA drew attention to inconsistent source data and noted that for areas such as pricing requires consistent data to allow trade matching, settlement, and thereafter exposure management and billing accrual processes.
Counterparties need to implement processes to automatically receive lender(s) prices or agree a central price source to solve price disagreement, ISLA recommended.
ISLA continued: “The current best practices should be reviewed, taking into account the reduced tolerances related to Securities Financing Transactions Regulation (SFTR), and should direct more parties more precisely on the timing and use of price.”
Meanwhile, in order for the trade booking and notification process to be effective, some key components must be completed automatically to overcome manual processing requirements, which ultimately lead to settlement barriers, the paper reads.
ISLA said that this includes a requirement to notify or 'call-in’ transactions to counterparts, exacerbated by the lack of standard formats for non-automated solutions.
This also includes a requirement to act upon the agreement of the notification or notify the counterparty within a reasonable time period where the notification cannot be met, to allow the transaction to be re-agreed as required.
Elsewhere in the report, ISLA also looked at collateralisation and stated that much has already been done within the vendor space to support the automation of collateralisation within the securities lending market.
“These automations have become more and more relevant as both loan and collateral demands and ‘velocity’ have increased,” the report reads. "CSDR also stands to have a very real impact, not least because lenders and agent lenders have to ensure adequate collateral coverage before any new loans can be released to the market."
Moreover, ISLA noted that late collateralisation of pending loans by the borrower may result in a fine for the lender/lending agent where they aren’t able to instruct the loan.
ISLA added that whether automation is utilised or not, the same practicalities will apply including pre-matching of pending transactions is highly recommended whether via trade confirmations, manual trade files or an automated contract compare.
The association further noted that all the details that can affect successful settlement are vital, but items such as position valuation, required margin, and method/account of collateralisation greatly help in the successful agreement of exposure.
Commenting on the paper, Adrian Dale, director, regulation and market practice at ISLA, said: “The work undertaken by the CDSR Working Group has shone a light on legacy practices that were perhaps overdue for market review."
"We look forward to working on the implementation phase with members, mindful that any work will need to consider impacts across all markets and regulations.”
The full report can be viewed here.
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