CSDR and the global impact
18 February 2020
With any industry-mandated regulatory change, the impact on market participants could be both an opportunity cost and financial one if the measures are not carefully considered.
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All change from the top down
It was intended to be a big year for the financial sector with two broad regulatory mandates for change due to come into effect. Wholesale market discipline measures such as the Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR) have well-intended aims, and the clear benefits are obvious to many across the industry. The CSDR legislation applies to all trades settled with a European entity. However, with any pan-European measure comes a broader impact outside of the legislative arena, which has perhaps been less carefully considered.
As a technology provider for global market participants, EquiLend has been carefully preparing our offering and our clients for the global impact of these changes. The financial penalties element of CSDR was recently delayed until early 2021, which should be viewed as an opportunity to get ahead of the change that will inevitably come.
What is CSDR?
CSDR has two key phases under one legislative agenda. The entire regulation seeks to streamline efficiencies across European central securities depositories as well as in the European settlement regime. In summary, all EU-based CSDs and any securities settling in the EU will be subject to:
• Shorter settlement periods
• Settlement discipline, including mandatory cash penalties and buy-ins for settlement fails
• Daily reconciliation of securities for internal and counterparty reporting
• Dematerialisation of most securities
• Enhanced regulation for CSDs, including reissuance of licences to standardise terms and conditions, daily reconciliation, choice of client segregation, public disclosure transparency and further detail in record keeping and reporting
Phase one sought to implement T+2 settlement across European entities, which was successfully ushered in back in 2017. Phase two seeks to increase the safety and clarity of CSD operations, but there remains some concern around the introduction of the mandatory nature of buy-ins for settlement failure strangling liquidity and further compressing margins. The potential impact of a settlement failure could have wide-scale financial consequences for each counterparty in a chain of trades.
Industry awareness
Since the light was allowed in on capital markets post-2008, legislation has almost become an industry in and of itself. The European Market Infrastructure Regulation in 2012 and the second Markets in Financial Instruments Directive in 2018 remain relatively evolving pieces of legislation, each with their own complexities and nuances for market participants. 2020 is unusual in that until recently, two wide-reaching regulations were set to be enforced: SFTR and CSDR. The overwhelming nature of the systems and processes required to meet the enhanced reporting requirement for the regulatory showstopping SFTR has meant a lesser focus on CSDR for some market participants. It is safe to say an accurate appreciation of the administrative burden of CSDR has been underestimated in some cases.
Even for European entities, a lack of clarity remains in some areas, none more so than: who will shoulder the administrative burden and the costs of settlement failure, the borrower or the lender?
Time zones and market latency
CSDR currently enforces T+2 settlement for European-settled CSDs. In phase two of the regulation, settlement fails will see mandatory cash penalties or enforced buy-ins in place. The immediate impact of settlement schedule standardisation is disincentivisation to trade with EU-settling entities.
Without cash penalties, there is settlement leniency within a trading cycle for non-EU located entities. The impact of penalties for settlement failure will be greater felt in the Americas, reducing firm’s settlement window for EU-settled trades significantly ahead of EU market close.
Asia Pacific markets could see some benefit of this market latency with only a few hours from the EU/UK close to the open in the Pacific region. There are concerns, however, that unless EU-originating trades are picked up early, time will be lost, creating a further threat to settlement.
Future trade with European-settled CSDs
Future trade with European-settled CSDs will, if mandatory buy-ins are enforced, require clean data. At EquiLend, we continually strive for the highest accuracy and transparency of client data. We are working with clients to engage with their workflow process and data output ahead of CSDR to identify common issues resulting in settlement threat or failure. In this way, our clients can double-down on the benefits of the NGT securities finance platform by identifying failures early while the majority of trades progress without issue.
Pre-booking tools
EquiLend NGT offers automated matching of multiple fields including settlement location and market field at the point of trade, ensuring trades are booked correctly at the point of trade and enabling an increased settlement ratio of same-day trades. Additionally, clients also can automate their returns and recalls from OneFile submissions, gaining further efficiencies in their workflow.
Post trade tools
Aside from manual bookings, settlement failures due to incorrect settlement instructions are the most common reason for failing trades. EquiLend’s Post-Trade Suite can facilitate risk management and eradicate settlement failure with automatic population and reconciliation at point of source.
EquiLend Unified Comparison offers a two-fold benefit in post trade:
• Risk management: By monitoring settlement and future settlement of trades through Unified Comparison, clients gain a greater awareness of problematic trades and can address these issues immediately.
• Automatic SSI reconciliation: EquiLend Unified Comparison facilitates automatic SSI reconciliation either from client OneFile submissions or against the EquiLend Settlement Instructions Repository.
Now and next
The modernisation of a complex industry inevitably comes at a price. The global benefits derived from the operation of the capital markets merit the increased scrutiny of recent years, although the process has not been simple nor inexpensive. However, both the financial and effort cost must be shouldered in order to deliver greater benefits of increased market transparency. Understanding the need for regulation drives beneficial, sensitive legislation from which the wider markets can benefit, both during and after any volatility.
It was intended to be a big year for the financial sector with two broad regulatory mandates for change due to come into effect. Wholesale market discipline measures such as the Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR) have well-intended aims, and the clear benefits are obvious to many across the industry. The CSDR legislation applies to all trades settled with a European entity. However, with any pan-European measure comes a broader impact outside of the legislative arena, which has perhaps been less carefully considered.
As a technology provider for global market participants, EquiLend has been carefully preparing our offering and our clients for the global impact of these changes. The financial penalties element of CSDR was recently delayed until early 2021, which should be viewed as an opportunity to get ahead of the change that will inevitably come.
What is CSDR?
CSDR has two key phases under one legislative agenda. The entire regulation seeks to streamline efficiencies across European central securities depositories as well as in the European settlement regime. In summary, all EU-based CSDs and any securities settling in the EU will be subject to:
• Shorter settlement periods
• Settlement discipline, including mandatory cash penalties and buy-ins for settlement fails
• Daily reconciliation of securities for internal and counterparty reporting
• Dematerialisation of most securities
• Enhanced regulation for CSDs, including reissuance of licences to standardise terms and conditions, daily reconciliation, choice of client segregation, public disclosure transparency and further detail in record keeping and reporting
Phase one sought to implement T+2 settlement across European entities, which was successfully ushered in back in 2017. Phase two seeks to increase the safety and clarity of CSD operations, but there remains some concern around the introduction of the mandatory nature of buy-ins for settlement failure strangling liquidity and further compressing margins. The potential impact of a settlement failure could have wide-scale financial consequences for each counterparty in a chain of trades.
Industry awareness
Since the light was allowed in on capital markets post-2008, legislation has almost become an industry in and of itself. The European Market Infrastructure Regulation in 2012 and the second Markets in Financial Instruments Directive in 2018 remain relatively evolving pieces of legislation, each with their own complexities and nuances for market participants. 2020 is unusual in that until recently, two wide-reaching regulations were set to be enforced: SFTR and CSDR. The overwhelming nature of the systems and processes required to meet the enhanced reporting requirement for the regulatory showstopping SFTR has meant a lesser focus on CSDR for some market participants. It is safe to say an accurate appreciation of the administrative burden of CSDR has been underestimated in some cases.
Even for European entities, a lack of clarity remains in some areas, none more so than: who will shoulder the administrative burden and the costs of settlement failure, the borrower or the lender?
Time zones and market latency
CSDR currently enforces T+2 settlement for European-settled CSDs. In phase two of the regulation, settlement fails will see mandatory cash penalties or enforced buy-ins in place. The immediate impact of settlement schedule standardisation is disincentivisation to trade with EU-settling entities.
Without cash penalties, there is settlement leniency within a trading cycle for non-EU located entities. The impact of penalties for settlement failure will be greater felt in the Americas, reducing firm’s settlement window for EU-settled trades significantly ahead of EU market close.
Asia Pacific markets could see some benefit of this market latency with only a few hours from the EU/UK close to the open in the Pacific region. There are concerns, however, that unless EU-originating trades are picked up early, time will be lost, creating a further threat to settlement.
Future trade with European-settled CSDs
Future trade with European-settled CSDs will, if mandatory buy-ins are enforced, require clean data. At EquiLend, we continually strive for the highest accuracy and transparency of client data. We are working with clients to engage with their workflow process and data output ahead of CSDR to identify common issues resulting in settlement threat or failure. In this way, our clients can double-down on the benefits of the NGT securities finance platform by identifying failures early while the majority of trades progress without issue.
Pre-booking tools
EquiLend NGT offers automated matching of multiple fields including settlement location and market field at the point of trade, ensuring trades are booked correctly at the point of trade and enabling an increased settlement ratio of same-day trades. Additionally, clients also can automate their returns and recalls from OneFile submissions, gaining further efficiencies in their workflow.
Post trade tools
Aside from manual bookings, settlement failures due to incorrect settlement instructions are the most common reason for failing trades. EquiLend’s Post-Trade Suite can facilitate risk management and eradicate settlement failure with automatic population and reconciliation at point of source.
EquiLend Unified Comparison offers a two-fold benefit in post trade:
• Risk management: By monitoring settlement and future settlement of trades through Unified Comparison, clients gain a greater awareness of problematic trades and can address these issues immediately.
• Automatic SSI reconciliation: EquiLend Unified Comparison facilitates automatic SSI reconciliation either from client OneFile submissions or against the EquiLend Settlement Instructions Repository.
Now and next
The modernisation of a complex industry inevitably comes at a price. The global benefits derived from the operation of the capital markets merit the increased scrutiny of recent years, although the process has not been simple nor inexpensive. However, both the financial and effort cost must be shouldered in order to deliver greater benefits of increased market transparency. Understanding the need for regulation drives beneficial, sensitive legislation from which the wider markets can benefit, both during and after any volatility.
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