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Navigating Post Pandemic Markets and Convergence of Regulations

By Matt Johnson and Courtney Gavin | July 2, 2021

Matt Johnson, DTCC Director, EMEA ITP Product Management and Industry Relations, and Courtney Gavin, DTCC Director, ITP Product Management, recently discussed navigating upcoming regulations in post-pandemic markets during the DTCC ITP Forum 2021 on June 17.

Looking back at 2020, markets witnessed a spike in volumes and heightened volatility combined with an overnight move to a remote work environment. While most firms were able to adapt without major issues, operational challenges existed. In this unprecedented environment, the delay in regulations such as Uncleared Margin Rules (UMR) and the Central Securities Depositories Regulation (CSDR), was a welcome respite.

With these regulations in scope for the next few months, Johnson and Gavin explored the potential impact on the industry.

Uncleared Margin Rules

While the UMR regulations went live several years ago with Phases 1-4, only the largest firms were impacted. However, the implementation of Phase 5 in September and Phase 6 next year will affect a larger group of firms and a significant effort will be needed for post-trade reconciliation.

With the coming impact of Phase 5 in just a few short months, firms that have not prepared should move quickly. DTCC’s Margin Transit Utility (MTU) allows you to efficiently enrich, settle, report and monitor matched collateral calls globally while easily connecting to and sharing information with multiple counterparties. The service helps reduce operational risk by standardizing and automating the margin process from the point of agreement and liquidity risk by accelerating the distribution of settlement data to the relevant party. With the automated processing of margin calls and data aggregation, the industry can accommodate variation margin rules and the expansion of initial margin rules from phase 1 through to phase 6, bringing automation to a bifurcated and manual process.

With the coming impact of Phase 5 in just a few short months, firms that have not prepared should move quickly.

CSDR Settlement Discipline Regime

The implementation of the Settlement Discipline Regime (SDR) will take place early next year. What are some core elements firms should address to best prepare?

  • Analytics and data: The best preparation to prevent trade fails is proper trade analysis based on current metrics. Fail-trade analysis illustrates current fails and why they happened, allowing model exposure to prevent future fails.
  • Automation: The greater the amount of manual touch points, the greater the amount of trade fails. Firms need to decide if they want to build solutions in house or use a vendor to increase trade automation.
  • Engagement and communication: Both internal and external engagement is key in managing the SDR. The regime will have an impact on all areas of the firm, including the front and mid-office. Post-trade engagement with custody networks and settlement agents will be crucial to navigate regulation.
  • Impact on commission: The penalty due to the buy-in has the impact of eating away at most if not all of a commission.

The impact of buy-ins will be felt not just in Europe, but for every market participant that invests in Europe. Industry consensus agrees that the buy-in aspect of the regime has the potential to introduce more issues to securities processing, affecting pricing, financing, liquidity, as well as the potential reduction of market makers. Although global trade associations have strongly lobbied against the mandatory buy-in aspect of the regime over the last year, there has not been any updated guidance provided by the European Commission, so firms should be prepare that the likelihood it will go live as expected.

The main driver of CSDR is greater efficiency and to drive timely settlement. Firms on their CSDR journey should seek solutions that offer a complete no-touch workflow across the lifecycle, helping firms reduce exposure to post-trade risk. Given these new, potentially large, impacts of a failed trade - the time is now to maximize your current investments in Institutional Trade Processing’s suite of services and to focus efforts on the prevention of failure.

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