Challenges brought about by the introduction of the Central Securities Depositories Regulation (CSDR) means that settlement efficiency must improve, according to Adrian Dale, the International Securities Lending Association’s (Isla) director of regulatory policy and market practice.
“The Isla CSDR working group is mainly focusing on improving settlement practices which will, in turn, reduce the risk of settlement penalties. But looking more broadly at how to address challenges introduced by CSDR, it’s clear that settlement efficiency needs to step up a notch,” says Dale.
Differences between settlement deadlines has meant that it is possible to experience a settlement failure even when adhering to a market deadline, says Dale.
“Within the TARGET2-Securities (T2S) system, the Free-of-Payment (FOP) deadline is 6pm whereas the Delivery-Versus-Payment (DVP) deadline is 4pm. That means it is entirely possible for a counterparty to settle DVP whilst at the same time causing the recipient to fail on their onward FOP delivery,” says Dale.
In a securities lending report published earlier this month, Isla said the implementation of “CSDR will inevitably pose numerous challenges for securities finance participants, and the timeframe of the implementation has the potential to interfere with firms looking to upgrade legacy systems or build a technology solution to assist in overcoming these challenges.”
“Ultimately market participants who ensure that robust technology solutions and processes are in place well before September 2020 will help protect themselves against the many risks posed by CSDR and SFTR,” continued the report.
The deadline for the first internalized settlement report is due to be sent to the national competent authority on July 12, and the settlement discipline rules are due to enter force in the third quarter of 2020.
“Available automated [vendor] solutions may not meet market needs and are not consistently utilised by firms,” according to an Isla whitepaper published in February looking at the impact of CSDR settlement discipline on the securities lending sector.
For Dave Grace, UK head of post-trade at Capco, there are tools available that are fit for purpose but uptake levels are poor.
“The adoption rate of those vendors is pretty poor in comparison to other segments of the market, such as cash equity and bond flows. Those businesses are a bit more mature both from a buy and sell side perspective, whereas securities financing has somewhat been behind the curve for years and got away with it,” says Grace.
“Some of the vendor technology isn’t quite ready for it yet, and I think that is fair but historically the vendors have been, ‘we know what we think you need, you need to tell us what you want, but unless you start using the platform we have no incentive to invest in our technology either.’ It becomes a chicken and egg situation,” he says.
Low adoption of automation technology is due to institutions failing to acknowledge that CSDR will soon be coming into force, he says.
“Some banks have literally sat on their hands to wait to see whether this is even going to happen, and that’s a huge risk. It might sound like it’s Q3 2020 that this goes live but I believe that moving your settlement rate by 1% or 2% when you are in the high 90s is incredibly difficult. And if you don’t spend enough time on the analysis, you run the risk of missing something,” says Grace.
“Quite a few large banks have kicked the can down the road on this problem for settlement discipline for years. This has been well known since 2010, that this was coming. Banks have taken incremental minor programs of remediation as part of their BAU operational effectiveness type reviews that they do,” he says.