With the implementation of the incoming Central Securities Depository Regulation (CSDR) drawing closer, market participants are seeking effective ways to meet the regulation’s challenges. The CSDR’s complexity extends to management of buy-ins, buy-in chains, inventory, technology, and penalties.
These challenges exist across all market participants and cannot be overcome by institutions working in silo. In order to truly enforce settlement disciple and rise to the challenge of CSDR, a collaborative approach is essential.
Although buy-ins and penalties are a key focus for CSDR solutions, these events should be viewed within the context of the entire trade lifecycle.
All market participants whether they are custodians, their clients, counterparties or service partners, need to ensure they have sufficient insight across pre-trade, trade and post-trade events. We need a single source for data aggregation, normalisation and publishing across all asset classes, which enables the whole event lifecycle can be overseen and managed in partnership with the other participants to the activity.
This extends beyond the confines of the CSDR, as visibility and transparency of the root cause of fails allows the sector to solve at source and mitigate the risk of fails in the first instance.
Custodians will primarily be impacted by the management of trade status messages, which will increase in number as we see more trades partially settle or become subject to cancellations and rebooks as a result of buy-ins. The time pressure involved in this larger workload will also have an impact, with query volumes increasing as organisations strive to avoid buy-ins.
Additional pressure will come from expectations that the management of cash penalties from failing trades will be led by the custodian community.
The custodian community needs to manage and understand the technology challenges from new requirements and enhancement of existing services. For custodians, ensuring the timely recall of stock on loan to mitigate the risk of delayed recalls leading to fails will be key. Collaboration across the community and creation of insight into inventory can alleviate this risk.
A network discussion is also needed to manage the lack of a single consistent reference to identify each trade through its entire lifecycle and all touch points.
Finally, thought needs to be given to how global custodians can ensure quick turnaround at the sub-custodian level so that trades are confirmed as settled as close to real time as possible, enabling related client queries to be minimised.
Custodians will increasingly find themselves impacted by the application and redistribution of cash penalty charges following failing trades under CSDR.
Conversations are needed across the market to understand the expectations of asset managers in this regard (for example, are existing claims protocols going to be adhered to, adapted or set aside entirely?)
We need support and engagement also from the broker community to ensure that the impact, frequency and cost of fines is understood. Their partnership with custodians will be essential in the months to come.
Based on current average settlement performance rates, 2-3% of all CSDR-eligible trades will incur costs via penalty charges as a minimum and through buy-ins where those crystallise.
In addition to these costs, organisations must factor in technology spend – both direct CSDR spend and other adjacent operational expenditure from enhancements to pre-matching or stock on loan processes – as well as resource costs arising from reinforced claims and client service teams.
Mutualisation of technology costs across the industry, where possible, will have the combined effect of lowering cost per institution and introducing/reinforcing industry best practice.
Access Fintech’s CSDR working group is meeting regularly to discuss all of these issues and to support market participants with their CSDR preparation. Discussing challenges in an open and collaborative forum we believe facilitates organisation to organisation dialogue while exploring the true requirements of CSDR service offerings. We can work it out, together.
The excellent conversations that we have facilitated over the last six months clearly show that a common approach to the issues posed by CSDR is the only way to meet the challenge. Be part of the network.