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Prevent your trades from failing in the first instance and you’ll have nothing to worry about under the new Settlement Discipline Regime (SDR), says Matthew Johnson, DTCC Associate Director, ITP product management at DTCC.

What is your key message to clients preparing for the Central Securities Depository Regulation (CSDR) and its SDR?

The narrative regarding prevention of fails is what resonates with our clients. Quite simply, if you don’t fail your transaction, you have nothing to worry about. When you look at automation and the industry’s quest to achieve no-touch processing, it really is all about preventing fails. There are a lot of people looking at buy-in processes and mapping out booking models- but first and foremost, you need to make sure you’ve got clean and accurate golden source data creating an authoritative trade record, automated processing through a no-touch workflow and efficient exception management.

In my opinion, there’s no such thing as a ‘CSDR tool’. DTCC’s Institutional Trade Processing is providing solutions to the market – such as ALERT®, CTM™ and DTCC Exception Manager – that help enable our clients, with proper usage, to prevent most instances of trade failure and for those trades that do fail – which inevitably happens in some circumstances – we can make sure they only fail for a short period.

Automation seems to be integral to your advice then?

Some of the clients we are speaking to are gearing up for a headcount increase to prepare for CSDR. We have seen that several large sell-side firms are estimating an increase of around 20-25 people just to deal with the buy-ins. Think about that, take those plus the 15 or so to deal with the penalties, and you’re looking at creating a whole new department.

That’s where the technology piece becomes more prominent; do you spend on automation or headcount? Increased headcount means more manual effort, whereas the firms that will feel less pain are the ones that invest in their post-trade solution and automation. The fewer times you touch a transaction the higher the chance it has of settling, as such firms who prepare with a no-touch workflow will win.

What is the most challenging aspect of the regulation?

Overall, while the penalty piece is tricky, some settlement systems such as Euroclear’s CREST already have penalties for late matching in place so I would say the biggest challenge will be the buy-ins.

When I was in investment banking we dealt with two or three buy-ins a month. Under the new regime there could be upwards of 100 buy-ins a day for any particular firm. Going from three a month to 100 a day will cause huge stress for the banks, who could be impacted more than the buy-side.

Despite being a European regulation, what’s the extraterritorial impact of SDR?

Although it’s a European regulation, there is truly a global impact. Now obviously, it will be a huge change to European infrastructure, by introducing mandatory buy-ins that don’t happen today and the daily penalties that will be levied on trades that fail. But, I convey to our global client base, feel that if they are transacting in securities that will settle at a European-domiciled CSD, then that trade will be in scope under the regime.

What role does exception management play and how is DTCC helping with that?

Everyone looks at exceptions today because they have to, but what we’ll see now is increased speed in flagging an exception. In order to mitigate settlement risk, you need to flag an exception as soon as possible.

With the DTCC Exception Manager platform, we’ve built a solution that gives clients the ability to publish, manage and communicate on exceptions throughout the trade lifecycle to quickly resolve exceptions and reduce any delays in settlement.

The platform enables our clients to prioritise their risk via a user-friendly dashboard so firms can really focus on the problem trades and fix potential fails before they fail. For trades that do fail, the platform will help to facilitate management with CSDR specific data points that we are adding to the service. These include CSDR eligibility flags, corresponding counts and cash amounts, penalty information, tracking information and buy-in risk indicators.

This article first appeared in Global Custodian



Matt Johnson, DTCC Director, ITP Product Management
Matt Johnson DTCC Director, ITP Product Management & Industry Relations