In a recent interview with Global Custodian, DTCC’s Matt Johnson, Associate Director, ITP Product Management, looked at the key priorities and available solutions as buy-side firms prepare for the implementation of Central Securities Depositories Regulation’s (CSDR) Settlement Discipline Regime (SDR).
What’s most important for buy-side firms to know about CSDR?
CSDR’s provisions are very broad but a key aspect of this mandate is its settlement discipline regime. We expect the SDR to have a huge impact on every single post-trade market participant – to the point that firms, including on the buyside, will have to change the way they conduct business.
How can firms improve confirmation and settlement to reduce trade fails?
We encourage electronic or automated confirmation. If you're trading with a broker that requires an email allocation or email confirmation, you may want to look at moving confirmation onto an automated platform.
We also advise automating the various steps in the settlement process. Now that Europe works on a T+2 settlement cycle, you only have 48 hours after execution to capture the trade, book the trade, confirm it, affirm it, instruct it, fund it, pre-match, then settle. At the same time, you need to make sure the reference data you're using - i.e., settlement instructions - are correct.
What tools are available to the buyside?
DTCC’s ITP no-touch workflow offers multiple tools to facilitate confirmation and settlement and minimize inaccurate or incomplete standing settlement instructions (SSIs), which are one of the biggest reasons for trade failure.
Confirmation ensures you understand what's been bought or sold, what needs to be delivered or received. Ideally it should also verify the place of settlement and location of the relevant accounts. If both parties provide that information and both parties have agreed, you've locked in your economic risk and your settlement risk.
Using the no-touch workflow eliminates your need to pre-match prior to settlement because it's been done straight after execution as part of confirmation.
Our central trade matching platform (CTM™) enables same-day confirmation and matching of trades globally. CTM in tandem with our ALERT database can reduce SSI-related trade fails by enriching trades with golden-source account and standing settlement instructions. Additionally, our ALERT Key Auto Select (AKAS) feature determines the preferred place of settlement and location of accounts.
We encourage clients to populate their outbound SWIFT messages to their settlement agent or custodian with this locked-in data. That way, they’re distributing the same data they’ve agreed with their broker-dealer all the way through the post-trade lifecycle.
For buy-side firms we offer the Global Custodian Direct workflow. This tool allows global custodians to manage SSI maintenance and ownership within ALERT on behalf of their buy-side clients by automating the exchange of SSIs between a custodian’s central repository and the ALERT database.
In cases where trade failures and exceptions do happen, DTCC Exception Manager will allow counterparties to view exceptions when they occur so they can be addressed or fixed prior to settlement. If trades do fail, the exceptions can be highlighted, and the dataset can be shared among the relevant parties to that transaction.
Fixing exceptions prior to trade failure, or quickly after, allows firms to mitigate their exposure to regulator-imposed penalties and buy-ins.
Can CSDR preparations be outsourced?
Buy-side compliance cannot be outsourced to a custodian or a broker. Therefore, firms must look for gaps in their current trade processes and post-trade lifecycles in terms of what the CSDR discipline regime will impose, then run an analysis to judge whether they can plug those gaps internally or need to seek out a vendor or third-party system.
Our clients can do this gap analysis using a DTCC best-practice scorecard that breaks the post-trade lifestyle into four components: SSI and general reference data; confirmation and the automation of confirmations; notification out for settlement; and exception management capture and trade analytics. The scorecard can identify gaps in data sources or processing.
Where there are gaps, we can help clients plug them - by identifying the DTCC services they can use or, for those who want to keep some work in-house, recommending capabilities they should build in order to mitigate their settlement risk. Some clients may achieve top marks across all four areas of the scorecard yet still have trades fail. In that case, the scorecard says you're likely not at fault because your processes are designed to make sure the trade is settled with finality on its settlement date.
One thing that I emphasize to my clients is: make sure you're using your systems, in-house or outsourced, the way they're intended. If you use a service, utilize all of its features - it doesn't cost you extra and you'll get additional benefit when CSDR’s discipline regime takes effect.
To hear more from DTCC’s experts about how the buy-side can prepare for the compounding impact of regulations such as CSDR, SFTR and UMR, read the full Global Custodian supplement here.
To learn more about CSDR, visit www.dtcc.com/csdr
This article was originally published in Global Custodian.