Sponsored by Access Fintech
In the time since the Settlement Discipline Regime (SDR) component of CSDR was first announced in September 2018, much has been written and discussed about the interpretation of the regulation and the cost impact of mandatory penalties and buy-ins.
However, less attention has been focused on the increased manual effort through messaging and investigation that the regulation is likely to create. With limited market standard messaging announced to support the various components of CSDR, there is significant risk that the market will rely on email communications throughout the lifecycle, leading to even more onerous manual effort.
The operational impact of the regulation is likely to be significant, and it is vital that automation is introduced and used wherever possible to reduce pressure on personnel, ensure operational efficiency, and minimise risk. With a potential delay to February 2022 now being considered, the market is likely to have more time to ensure automated solutions to CSDR from the outset.
Since July 2019, Access Fintech has chaired a CSDR Industry Working Group, comprised of more than 40 parent-level firms, with a specific focus on the operational impact of the regulation. Collectively, participants have generated significant output detailing the foreseen operational challenges and scope for automation to mitigate these.
Defining the problem
Each element of the SDR has the potential to create a maelstrom of inter-party requests, validation, and investigation. With no market standard messaging for some components, it could quickly become difficult for organisations to act as efficiently or as effectively as they might want to.
From an operational perspective, firms are likely to see:
– increased cost associated with manual effort
– inefficient processes resulting in missed opportunities to resolve fails at the earliest opportunity
– heightened risk of additional manual processing and investigation
– decisions being made not to recoup costs of fails due to the effort investigation would require.
During my time leading a trade management function for a leading provider of outsourced middle-office services, I encountered just one European buy-in and this was notified and agreed entirely over free format emails, which was achievable. When trades were failing, offers for partial settlement were similarly put forth and agreed over email. However, in a post-CSDR world, where partial settlements will be par for the course and hundreds of buy-ins could be in flight at any one time for each firm, this approach would quickly become unmanageable.
Unstructured messages cannot be automated and if this approach becomes the default, the management of the entire CSDR lifecycle will become a manual and burdensome process.
Turning attention to penalty tracking, it will not be unusual to see scenarios where up to five organisations will interact with the same penalty (CSD -> local agent -> global custodian -> outsourced TPA -> asset manager.) There is little value to be added by most of these participants, however each organisation will have to consume and then pass on the information, potentially in various formats.
Attempting to then link the penalties to the correct failing trades in order to assess impact and exposure is also likely to require manual effort unless a robust solution is used.
The upfront investigation of pre-matching issues and failing trades typically results in significant email traffic as queries are raised and responded to – this workload will not diminish in a post CSDR world and, instead, it is likely that even more query traffic will be generated as organisations strive to avoid a buy-in scenario from materialising.
Sharing information, insight and ideas
In order to co-ordinate activity across the buyer, seller, and buy-in agent in the most efficient way, buy-ins should be managed through structured, data-centric messages. Investigation shows that execution of a single “straightforward” buy-in (i.e. no chain, no deferral, buy-in successful at the first attempt) will require as many as 20 interactions between the parties in order to execute all of the relevant steps.
Given that research from 11 CSDs indicates that we could see 1.8 million buy-ins executed annually, it is clear that without automation the effort involved in managing the associated communications will be significant.
By agreeing best practice content and format for messaging, it will be possible for the industry to manage the complexities of CSDR messaging in an automated way.
Furthermore, by introducing structured format acknowledgements, organisations can systemically gather information to validate decisions and ensure robust audit histories. This is particularly relevant when determining the existence of a buy-in chain or ensuring that the trade for which a buy-in is being planned is eligible for the action.
Consistent formatting for these interactions will allow rules-based logic to automate interactions with only discrepancies and disputes requiring manual intervention.
Systemic consumption and sharing of penalty data to the right parties in a consistent and automated way will allow for complete information flow between all parties, and linkage to the relevant trades. This can support ease of analysis, prioritisation and dispute raising.
What do we do at AFT that can solve?
Access Fintech’s data driven solution to CSDR aims to maximise potential for automation throughout the lifecycle. This includes automated dissemination of messaging, tracking of penalties, and even appointment of buy-in agents.
Working with organisations from across the market, content and format for new instruction messaging is being actively developed and agreed and these best practice standards will be shared with the broader market in the months to come.
By coupling this with a live settlements offering that shares data across participant organisations to allow for a self-service approach to investigating exceptions, clients can gain further efficiencies by automating pre-matching steps and mitigating risk of fails in the first instance.
Whether CSDR goes live in February 2021 or 2022, it should be paramount for organisations to have strategic and automated CSDR solutions in place from the outset in order to minimise impact and ensure efficiency adherence to this long-running regulatory change.