With last week’s publication of the European Commission’s Delegated Regulation postponing the Settlement Discipline Regime to 1st February 2022 due to the COVID-19 pandemic, we are now one step away from a further extension of the live date for CSDR.
The new Settlement Discipline Regime provides a set of measures designed to prevent and address failures in the settlement of securities transactions and will have a profound impact on market participants across the buy and sell side and on the CSDs themselves.
If used wisely, the additional time will allow firms to review and implement enhanced operating models and automated technology solutions to provide more effective fails prevention and management, and to develop a comprehensive approach to processing the new CSDR related penalties and mandatory buy-ins.
Establishing the liquidity type, fee rate and price of each security across all the relevant European CSDs for penalty fee calculations and mandatory buy-in periods is complex enough. It becomes even more challenging when also considering the processing of partial settlements and alternative buy-in cash compensations for illiquid securities, reconciling on a daily basis with all key counterparties and understanding the true impact to profitability across each firm’s customer relationships. The basis point rate for the liquid securities accrued over multiple days could easily wipe out any profit for firms executing those transactions.
To meet these challenges financial institutions will need integrated technology workflows that incorporate exception–based processing and a high degree of straight-through-processing. And, in a data driven world, flexible reporting and analytics are crucial. The ability to use trend analysis to predict fails and act to prevent them is set to become a key component of an effective end–to–end workflow solution for fails management and CSDR penalties and buy-ins processing.
The time required to introduce these solutions suggests a busy year ahead for most securities stakeholder firms. If the additional time is used effectively, the Settlement Discipline Regime could be instrumental in driving a significant reduction in securities settlement fails in Europe. That is surely a worthy goal for all market participants.
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