The long-awaited Central Securities Depositories Regulation’s (CSDR) Settlement Discipline Regime (SDR) went live this past February, albeit with a temporary reprieve of the mandatory buy-in aspect that industry participants had strongly disputed. However, this reprieve is with the caveat that settlement fails would be proven to be reduced.
Related: Accelerating to T+1 - Impact on Institutional Trade Flows
My colleague Courtney Gavin, DTCC ITP Director Product Management, Institutional Trade Processing, led a panel with industry leaders across the post-trade lifecycle to discuss the biggest challenges the industry has faced since February and lessons learned. Panelists included Sachin Mohindra, Executive Director for Market Solutions, Goldman Sachs; David Armstrong, Middle Office Transaction Management Global Process Owner, BNP Paribas; Roberto De Paolis, Director of Custody Product Manager, BNYMellon; Rudi Fernandez Michiels, Senior Relationship Manager, Euroclear; and Jennifer Cryan, Custody Product Developer, Citi.
Here’s a summary of our discussion:
Challenges of the New Settlement Regime
- The industry underestimated how complex penalties would be; participants noted that resources concentrated on preparing for buy-ins and development could have been better focused in areas such as understanding the nuances of penalties, overall timing, and end-to end testing.
- A divergence of practices and the absence of a single, common database for reference data to manage penalties holistically have made operational processes difficult.
- IT readiness was not cohesive for all participants in the custody chain, complicating end-to-end testing.
- Lack of post-trade standardization, including varied message layout, presented issues to custodians
Opportunities to Promote Settlement Efficiency
- Increase clearing on the institutional side, similar to what is being done in the U.S. to improve same day matching and allocation and help reduce fails.
- Recalibrating penalties to adapt to market conditions, particularly if penalties don’t have the desired effect.
- Increase the use of partial settlements as a proactive measure to drive change and reduce fails. The industry should evaluate the feasibility of mandating partial settlements. In the interim, focus should be on:
- Educating industry on applicability and usage
- Addressing issues with capability market-by-market
- Developing Industry Guidelines for partial settlement
- Standardized standing settlement instructions (SSI) can reduce the likelihood of fails. However, despite tools such as ALERT®, there are still firms using manual processes to manage their SSIs leading to mismatching that could be easily avoided with automation.
- Improved inventory management to ensure inventory is where it is supposed to be can help to avoid settlement failure.
Other Key Takeaways
- The European Commission has proposed that penalties and buy-ins should only apply to two trading parties. Panelists argued that this may devalue the penalty process and create further bifurcation and that penalties should apply to all types of settlement failures as an incentive to settle on a timely basis.
- Partial settlements are an efficient tool for reducing penalties. However, the industry needs to increase awareness and publish guidelines as not all clients have a working knowledge of the concept. Another option is for regulators to mandate partial settlements—as all parties need to be involved for it to work.
- Proactive measures can help the industry change market behaviors and improve settlement finality. DTCC’s Institutional Trade Processing provides an integrated suite of solutions to help support SDR compliance, minimizing the risk of trade failure by ensuring that clean and accurate golden source data are used to create an authoritative trade record, automated processing, and efficient exception management.