Will CSDR Strengthen Settlement Processes in the Year of the Tiger?

Daniel Carpenter, Head of Regulation, Meritsoft (a Cognizant company), discusses the new Settlement Disipline rules that come into force today.

After numerous delays and a prolonged focus on projects to implement new systems and processes, the new Settlement Discipline rules come into force today, albeit without the fireworks and fanfare marking the Chinese New Year celebrations.

The Lunar New Year marks the year of the tiger, a symbol of strength. Market participants will be hoping that their efforts to bolster internal operations will be sufficiently strong enough to limit the impact of the new penalties for settlement fails. While it is reassuring to see that feedback from the industry confirms many businesses have implemented solutions to manage the penalties and appeals processes, only time will tell the how far the new regime will go in heralding a new dawn for global trade settlement operations.

Due to the global nature of capital markets, firms have continually struggled to manage fails across different systems and regions, and across distinct asset classes and clearing houses. Incidents such as the GameStop saga this time last year serve to highlight the negative and destabilising impact that  settlement fails can have on the markets.

The introduction of financial penalties and, until very recently, the prospect of the now-delayed mandatory buy-ins, have brought a renewed focus on operational improvements that for too long have been relegated to the bottom of the priority list. But in seeking to comply with the requirements of CSDR how many firms have taken a long-term view? Beyond reducing the impact of fines, there is real value in improving transparency across the whole organization to enable in-depth analysis of the trade settlement process.

Based on our engagement with the market, we have seen an increasing number of forward-thinking firms sharing our vision for a more strategic approach to fails management that goes beyond CSDR compliance. New technological capabilities are making this possible, in particular the digitization of high volumes of disparate data, advances in analytics and the scalability and flexibility of cloud computing.

By adopting a more holistic approach that aggregates all the relevant settlement data from across the organization and making this accessible through a ‘single pane of glass’, firms can analyze this data to gain real insight into which trades are failing to settle, with which counterparties, and why.

Only then can they address operational issues, improve efficiency and re-evaluate counterparty relationships to limit the incidence of fails, and, ultimately, reduce their exposure to penalties, and to similarly costly interest claims.  There are undoubtedly many tactical solutions in place to address the immediate impact of settlement fails and to manage the regulatory requirements. The real winners will be those who are looking beyond the new rules with a more strategic vision for efficient settlement operations.