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CSDR and UMR: Are US Firms Prepared?

By Bob Stewart, DTCC Executive Director, Institutional Trade Processing | September 13, 2021

Last year, the financial services industry had to make an abrupt shift to remote work as a result of the pandemic. This shift exposed outdated practices and manual processes, underscoring the need for increased automation across the industry. One area where this was especially true was across the collateral management ecosystem, where a number of market participants faced challenges in executing their day-to-day processes that often relied on manual efforts, including fax instructions and phone verifications..

Related: Understanding the Impact of the Settlement Discipline Regime

This urgent need for improved processes has been compounded by another development: forthcoming deadlines for several global regulations which will impact buy-side operations within the next year including the Central Securities Depository Regulation’s (CSDR) Settlement Discipline Regime (SDR), mandated by the European Securities and Markets Authority (ESMA) and Phase 5 and 6 of The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) (BCBS-IOSCO) Uncleared Margin Rules (UMR).

While these regulations will not apply to every jurisdiction, they have extraterritorial impacts that U.S. firms should be prepared for.

CSDR Will Have Global Impacts

CSDR is one of the most significant regulatory changes in recent years. The goal of the regulation is to strengthen the safety and efficiency of securities settlement and infrastructures in the EU by harmonizing elements of the settlement cycle and introducing a common set of requirements for central securities depositories (CSDs).

While these new rules are being implemented across the European securities markets, they will apply to any financial institution doing business in Europe, including those based in the United States. For U.S. market participants, it’s crucial that firms understand this impact and that they may face penalties and mandatory buy-ins for failed trades under this rule. Market participants should review their post-trade processes now to help ensure compliance with the new regulation, to improve fail rates, and to ultimately avoid penalties.

It is clear that the best way forward is automation, both to address the increased operational pressures as a result of the pandemic-induced volumes and volatility and to help to achieve compliance with forthcoming regulations.

Final Phase of UMR is One Year Out

Firms must also prepare for BCBS-IOSCO’s UMR, Phase 5 of which took effect on September 1, with Phase 6 to follow in September of 2022. UMR focuses on collateral and margin management processes and has been implemented in phases since 2016. Phase 5 brought approximately 300 firms, specifically those with an aggregated average notional amount (AANA) of more than EUR/USD 50 billion, into scope to exchange initial margin with their counterparties for swaps not centrally cleared. The phase came after a year-long extension due to the pandemic, giving these firms extra time to invest in automated collateral settlement solutions and ensure preparedness. We learned from Phase 5 that, while firms had plenty of time to prepare, they still seemed to scramble for vendor and custodian services closer to the effective date to ensure preparations.

For Phase 6, the AANA threshold will drop to EUR/USD 8 billion, bringing more than 600 buy-firms around the world—along with thousands of counterparty relationships—into scope for UMR on September 1, 2022. Firms should consider front-running the official AANA observation period in preparation for Phase 6 to ensure that they have enough time to open segregated accounts and negotiate legal agreements. Phase 6 firms are encouraged to make good use of the next twelve months by making necessary changes to their systems and processes.

Related: Firms Need to Have Advanced Preparations for SDR

Firms Should Leverage Automated Solutions to Prepare

In the U.S., many firms are turning their attention to preparations. In order to prevent penalties under CSDR, firms should consider investing in automated trade processing solutions which help prevent trade failure, and leverage an exception management tool that can quickly resolve any exceptions that could potentially delay settlement. U.S. firms should also explore trade management utility platforms as a way to further automate and streamline current processes.

For example, an automated trade management platform can connect firms with a global community of users, who can then accurately share standing settlement instructions (SSI) data - a key reason for failed trades - and maintain account details, all while reducing costs by lowering manual errors and administrative overhead. Increased automation in this area helps firms to operate more efficiently, brings increased transparency to the process and reduces operational risk.

For Phase 6 of UMR, automation is key. Market participants are encouraged to invest in solutions that streamline and automate settlement of collateral across custodians and tri-party providers, deliver real-time notification of settlement to both parties of trades, and help manage credit and liquidity risk by sharing aggregated end-of-day position reports across counterparties and their custodians.

It is clear that the best way forward is automation, both to address the increased operational pressures as a result of the pandemic-induced volumes and volatility and to help to achieve compliance with forthcoming regulations. Firms should closely evaluate their collateral management and post-trade processes from a risk and cost perspective and be proactively making changes prior to the regulatory deadlines. Each firm’s processes and infrastructure are unique to their business, and the extent and type of action required may vary. However, any institution affected by the CSDR or UMR must prepare now. DTCC can help with your preparations. Read more.

This article was originally published on LinkedIn.

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Bob Stewart DTCC Executive Director, Institutional Trade Processing

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