Uncertainty around SDR implementation looms large
09 November 2021
There remains a demand for greater clarity from the market amid continued uncertainty around the implementation of the CSDR settlement discipline regime, according to a panel at the Securities Finance Technology Symposium. Rebecca Delaney reports
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There remains a demand for greater clarity from market authorities 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, hosted by SFT.
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 HSBC’s Baybutt 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 industry concerns around elements of the SDR content (particularly relating to mandatory buy-ins) and the COVID-19 pandemic.
Consisting of settlement reporting, penalties and mandatory buy-ins, the settlement discipline regime aims to improve the efficiency and safety of securities settlement, to mitigate settlement risks and to encourage further harmonisation of settlement practice.
Discussing the market’s state of readiness, Baybutt identifies the most significant concern to be the introduction of mandatory buy-ins, which is likely to reduce optionality and increase costs for investors, as well as impacting market liquidity.
However, the market is still awaiting the impact analysis of the European Securities and Markets Authority’s (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.
Baybutt adds that the European Commission is investigating ways to defer mandatory buy-ins while implementing penalties and failed trade reporting as planned. However, although there is an interest in creating a mechanism that would allow split implementation dates, there is still considerable uncertainty around this proposal and whether it will be approved.
MarketAxess’ McKelvey says that this uncertainty is “very challenging” for the market, with many market participants believing 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.
She says: “Over the next few months, firms need to focus on getting their ducks in a row to make sure the industry is ready for the assumed implementation of settlement penalties.”
McKelvey adds that it will be interesting to see if SDR is re-examined, whether the regulation will be de-coupled and whether fines alone will 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 indicated they thought only settlement fines will be implemented in February 2022.
When asked about 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.
Meritsoft’s Carpenter notes that an important concern in SDR implementation is with the quality of data. The required data is not always provided by a CSD and must be aggregated in-house across all books of business.
“Exception management is key,” remarks DTCC’s Johnson, adding that it is fundamentally important for an organisation to quickly identify settlement exceptions and resolve them, as well as determine the root cause of any trade failures which can help prevent fails in the future.
McKelvey 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 status 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.
Baybutt says that those looking at changing their documentation are taking a minimum approach because they currently do not know if buy-ins will happen, or at least be deferred.
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.
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 HSBC’s Baybutt 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 industry concerns around elements of the SDR content (particularly relating to mandatory buy-ins) and the COVID-19 pandemic.
Consisting of settlement reporting, penalties and mandatory buy-ins, the settlement discipline regime aims to improve the efficiency and safety of securities settlement, to mitigate settlement risks and to encourage further harmonisation of settlement practice.
Discussing the market’s state of readiness, Baybutt identifies the most significant concern to be the introduction of mandatory buy-ins, which is likely to reduce optionality and increase costs for investors, as well as impacting market liquidity.
However, the market is still awaiting the impact analysis of the European Securities and Markets Authority’s (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.
Baybutt adds that the European Commission is investigating ways to defer mandatory buy-ins while implementing penalties and failed trade reporting as planned. However, although there is an interest in creating a mechanism that would allow split implementation dates, there is still considerable uncertainty around this proposal and whether it will be approved.
MarketAxess’ McKelvey says that this uncertainty is “very challenging” for the market, with many market participants believing 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.
She says: “Over the next few months, firms need to focus on getting their ducks in a row to make sure the industry is ready for the assumed implementation of settlement penalties.”
McKelvey adds that it will be interesting to see if SDR is re-examined, whether the regulation will be de-coupled and whether fines alone will 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 indicated they thought only settlement fines will be implemented in February 2022.
When asked about 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.
Meritsoft’s Carpenter notes that an important concern in SDR implementation is with the quality of data. The required data is not always provided by a CSD and must be aggregated in-house across all books of business.
“Exception management is key,” remarks DTCC’s Johnson, adding that it is fundamentally important for an organisation to quickly identify settlement exceptions and resolve them, as well as determine the root cause of any trade failures which can help prevent fails in the future.
McKelvey 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 status 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.
Baybutt says that those looking at changing their documentation are taking a minimum approach because they currently do not know if buy-ins will happen, or at least be deferred.
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.
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