The financial services community is no stranger to adapting to regulatory change. It’s a fact of life in our industry. Just over the last couple of years, we’ve weathered significant new mandates like SFTR, CSDR and uncleared margin rules, not to mention overcoming the operational burdens associated with Brexit and the ongoing LIBOR transition. On top of that, the pandemic sparked record volumes and volatility across asset classes, major technology enhancements to support remote work were introduced, and the industry managed through an unprecedented acceleration of digital innovation. It’s been a challenging few years for financial services firms.
Related: DTCC's Guide to Clearance & Settlement
I was speaking with a client recently, and what he said really got me thinking. Reflecting on the burdens of regulatory and market structure changes, he quoted Albert Einstein and said, “in the middle of difficulty lies opportunity.” Not only did I admire his optimism, but the message is particularly relevant right now. In an environment of change, firms can either allow events to dictate their actions or they can use the moment as an opportunity to grow and experiment with new ways of doing things.
Companies that embrace that mindset will be better positioned to navigate this period of uncertainty and emerge stronger, more resilient, and relevant to their clients over the long-term.
Now’s the time to seize opportunity
With an overhaul of derivatives trade reporting regulation globally, the continued roll-out of CSDR, and the move to T+1 in the U.S., your firm’s operating model will really be put to the test. And therein lies the opportunity to reevaluate and reengineer your post-trade infrastructure to better prepare your firm for whatever may come next – regulatory revisions, market structure changes, or unexpected market events.
While it might be tempting in the short-term to get by with fragmented upgrades that address specific needs, this kind of siloed approach would be a mistake as incremental fixes are risky, costly and don’t best prepare you for the long run. Here are a few top-of-mind thoughts on what to pay close attention to as you begin to tackle challenges related to some of these upcoming changes.
Bullet proof your control framework
As firms prepare their systems for revised derivatives trade reporting rules, you’ll want to ensure your reporting control framework is leak-proof. The reason for this is simple: compromised control frameworks can lead to reporting errors and very possibly fines. Firms may also suffer reputational damage or difficulty retaining and attracting top talent, to mention a few.
Therefore, it’s imperative that you scrutinize “under the hood” of your trade reporting processes and conduct a diagnostic assessment to determine if your firm’s control framework ensures completeness, accuracy, and timeliness of your reporting.
Put trade reporting experts in the driver’s seat
DTCC’s Repository & Derivatives Services clients continue to tell us there’s a sizable need for help with pre and post trade reporting functions. Discussions revealed a high level of dependence on manual processes, institutional knowledge of exceptions, and a lack of understanding of how the nuances of regulatory change impact their operations. To address this, you should find a partner that alleviates these dependencies, offers future scalability, and provides you with capabilities to help manage the ongoing regulatory changes across global jurisdictions.
With complex operating model and technical architectural expertise, we can assist you with navigating the regulatory landscape, implementing business and technical requirements, testing, end-to-end assessment of your control frameworks and governance structure, data processing and more.
Get ahead of trade fails - prevent penalties!
The CSDR’s Settlement Discipline Regime (SDR) takes effect on February 1, 2022, but it’s not too late for firms to improve their settlement processes before the consequences of inaction start to bite. The only way firms can get ahead of the trade-fail penalty curve is to upgrade their operations with automation. Ask yourself: are the number of fails I am seeing what I expected? What else can I do to further drive down the failure rate? Have I automated matching and confirmation and locked in settlement instructions? Am I set up to easily fortify underlying data? If you respond “no” to any of these questions, you need to reevaluate your post-trade processes and procedures to look for weak points, and then formulate an action plan to reduce those vulnerabilities and optimize your settlement arrangements.
Don’t move at a snail’s pace on the road to T+1
Industry efforts to accelerate the U.S. settlement cycle to T+1 are well underway, with a target implementation date of the first half of 2024. As a result, firms will need to better understand the internal impacts and associated costs with the move as well as perform extensive analysis and planning to be ready for industry testing by the first half of 2023.
As part of this work, firms will have to understand procedural and behavioral changes required for allocations, affirmation and disaffirmation processes, clearinghouse processing timelines and securities lending, as well as identify the causes of settlement errors and fails to determine how automation can help. As you know, many critical trade functions generally begin after the end of the trading day. This means firms will need to ensure there is ample time for these processes to occur before starting the next business day, including exploring migrating to more real-time processing where possible.
Don’t delay - call in the experts
With such a busy agenda ahead, companies can engage with DTCC Consulting Services to gain access to post-trade experts who have deep, cross-functional experience and knowledge to inform your decision-making and planning to improve your operations.
With complex operating model and technical architectural expertise, we can assist you with navigating the regulatory landscape, implementing business and technical requirements, testing, end-to-end assessment of your control frameworks and governance structure, data processing and more.
Rather than feeling overwhelmed by the enormity of the changes on the horizon, firms can take advantage of Einstein’s advice and begin transforming their post-trade legacy systems and processes. In the end, your firm will be stronger, more resilient, and operating with a more scalable, efficient infrastructure that lowers your overall costs and risks.