CSDR: there are yet to be changes in industry behaviour
23 March 2021 UK
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Although the industry has been discussing the Central Securities Depositories Regulation (CSDR) for some time, Martin Smith, head of Europe Middle East and Africa and Asia Pacific (APAC) trade support, BNY Mellon, says: “I'm not seeing any real kind of changes in behaviour just yet.”
Speaking during the panel at the DTCC CSDR Series 2021, Smith comments: “The industry would like to start seeing trade fails come down to the point where the industry’s investment into this space will kick in but I'm certainly not seeing this yet.”
Smith warns that if the industry does not see this towards Q3 2021 then February next year could be a worry.
CSDR provides a set of high and consistent standards across compliant CSDs, providing assurance from the regulators to investors that stringent measures are in place to ensure the security of their assets and the efficiency of transactions.
The new regulatory framework aims to bring risk and cost reduction benefits to financial markets as a whole.
In August 2020,the European Securities and Markets Authority published a final report on draft regulatory technical standards to postpone the implementation of the CSDR settlement discipline regime until 1 February 2022 mainly due to the severe disruption of the pandemic.
While Smith notes that the penalty regime is fairly understood, he highlights that there is a question mark over what is going to happen with the buy ins.
Last week, the European Commission revealed that 51 out of 91 respondents to the CSDR consultation said the buy-in regime should change from a mandatory requirement to a voluntary one.
Responses from the consultation, which ran from 8 December last year to 1 February this year, also showed that 14 respondents requested the buy-in regime be retained while 26 either did not respond or were neutral.
In September, the International Capital Markets Association (ICMA) said the requirement to appoint a buy-in agent under the CSDR mandatory buy-in framework is “potentially extremely problematic”.
More recently, an alliance of 14 trade bodies called for a CSDR buy-in delay and cited the buy-ins should be held back from implementation schedule until it’s fit for purpose.
“I predict there will be lots of confusion between all parties in February 2022. We will have to work with clients and custodians to get over that initial period. I think it will be a challenging period especially if the issues on buy ins are not resolved,” says Smith.
Matt Jones, global head of GM equities operations, Credit Suisse, suggests that continued momentum in efforts from all of the industry participants will help to solve this problem.
“I hope that continues as it is far easier to solve this as an industry together rather than it be viewed as just a ‘broker/buy-side problem’. I hope to see continued engagement between the buy and sell side on how we can work together to combat operational risk and how to make things as automated and efficient as possible,” comments Jones.
Weighing in on this, Derek Coyle, custody product manager, vice president, Brown Brothers Harriman (BBH), adds: “CSDR is like the pandemic in the way it is not going away anywhere or anytime soon. I hear anecdotes from people saying 1 February 2022 is the end date in sight; the CSDR settlement discipline goes live and we move on.”
“However, we need to be proactively building on what the long term view will be. Tactical decisions will need to be made and I hope that the tools, support and investment that is going on now considers the long term otherwise it will bring long term challenges.”
Coyle also notes that moving towards T+1 settlement is a topic of interest. “If we look at that over a medium-term view then CSDR is going to work towards moving towards faster settlement times as well as greater risk elimination, and that will be better for all of us,” he says.
The moderator, Matthew Johnson, director Europe, Middle East and Africa (EMEA) ITP product management and industry relations, DTCC, asked the panel if the trade fails across the industry is significant.
The panel agreed that they are quite substantial but measures are being taken to help prevent trade failures such as increasing straight-through processing, ensuring accuracy and timeliness of data, looking at reference data, as well as robust pre matching to prevent those fails.
“We've used our historic data we have on those fails. By looking outwards, it’s around working with our clients and our brokers to make sure the data coming into BNY Mellon is accurate and timely. We’ve looked at referenced data and adopted DTCC ALERT Global Custodian Direct, which has reduced our settlement risk for incorrect data and reduced our overheads and we can set up our accounts for our clients because we don't have that big bulk of data to maintain,” affirms Smith.
In the Q&A session following the panel, the speakers were asked how the role of artificial intelligence (AI) could work in preventing trade fails. In response, Jones explains: “The role of AI is huge.”
According to Jones, the role of AI and machine learning could be a game changer and is going to be a better source of data in terms of how the industry makes decisions around inventory.
Speaking during the panel at the DTCC CSDR Series 2021, Smith comments: “The industry would like to start seeing trade fails come down to the point where the industry’s investment into this space will kick in but I'm certainly not seeing this yet.”
Smith warns that if the industry does not see this towards Q3 2021 then February next year could be a worry.
CSDR provides a set of high and consistent standards across compliant CSDs, providing assurance from the regulators to investors that stringent measures are in place to ensure the security of their assets and the efficiency of transactions.
The new regulatory framework aims to bring risk and cost reduction benefits to financial markets as a whole.
In August 2020,the European Securities and Markets Authority published a final report on draft regulatory technical standards to postpone the implementation of the CSDR settlement discipline regime until 1 February 2022 mainly due to the severe disruption of the pandemic.
While Smith notes that the penalty regime is fairly understood, he highlights that there is a question mark over what is going to happen with the buy ins.
Last week, the European Commission revealed that 51 out of 91 respondents to the CSDR consultation said the buy-in regime should change from a mandatory requirement to a voluntary one.
Responses from the consultation, which ran from 8 December last year to 1 February this year, also showed that 14 respondents requested the buy-in regime be retained while 26 either did not respond or were neutral.
In September, the International Capital Markets Association (ICMA) said the requirement to appoint a buy-in agent under the CSDR mandatory buy-in framework is “potentially extremely problematic”.
More recently, an alliance of 14 trade bodies called for a CSDR buy-in delay and cited the buy-ins should be held back from implementation schedule until it’s fit for purpose.
“I predict there will be lots of confusion between all parties in February 2022. We will have to work with clients and custodians to get over that initial period. I think it will be a challenging period especially if the issues on buy ins are not resolved,” says Smith.
Matt Jones, global head of GM equities operations, Credit Suisse, suggests that continued momentum in efforts from all of the industry participants will help to solve this problem.
“I hope that continues as it is far easier to solve this as an industry together rather than it be viewed as just a ‘broker/buy-side problem’. I hope to see continued engagement between the buy and sell side on how we can work together to combat operational risk and how to make things as automated and efficient as possible,” comments Jones.
Weighing in on this, Derek Coyle, custody product manager, vice president, Brown Brothers Harriman (BBH), adds: “CSDR is like the pandemic in the way it is not going away anywhere or anytime soon. I hear anecdotes from people saying 1 February 2022 is the end date in sight; the CSDR settlement discipline goes live and we move on.”
“However, we need to be proactively building on what the long term view will be. Tactical decisions will need to be made and I hope that the tools, support and investment that is going on now considers the long term otherwise it will bring long term challenges.”
Coyle also notes that moving towards T+1 settlement is a topic of interest. “If we look at that over a medium-term view then CSDR is going to work towards moving towards faster settlement times as well as greater risk elimination, and that will be better for all of us,” he says.
The moderator, Matthew Johnson, director Europe, Middle East and Africa (EMEA) ITP product management and industry relations, DTCC, asked the panel if the trade fails across the industry is significant.
The panel agreed that they are quite substantial but measures are being taken to help prevent trade failures such as increasing straight-through processing, ensuring accuracy and timeliness of data, looking at reference data, as well as robust pre matching to prevent those fails.
“We've used our historic data we have on those fails. By looking outwards, it’s around working with our clients and our brokers to make sure the data coming into BNY Mellon is accurate and timely. We’ve looked at referenced data and adopted DTCC ALERT Global Custodian Direct, which has reduced our settlement risk for incorrect data and reduced our overheads and we can set up our accounts for our clients because we don't have that big bulk of data to maintain,” affirms Smith.
In the Q&A session following the panel, the speakers were asked how the role of artificial intelligence (AI) could work in preventing trade fails. In response, Jones explains: “The role of AI is huge.”
According to Jones, the role of AI and machine learning could be a game changer and is going to be a better source of data in terms of how the industry makes decisions around inventory.
Next regulation article →
CSDR consultation responses show majority in favour of buy-ins becoming voluntary
CSDR consultation responses show majority in favour of buy-ins becoming voluntary
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