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CSDR and the settlement discipline regime
CSDR and the settlement discipline regime
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CSDR and the settlement discipline regime

06/04/2020


Welcome to our podcast series.

AFMEs Managing Director of post trade, Stephen Burton, provides his perspective on the Settlement Discipline Regime.

Transcript

  • AC:
  • In this edition we are going to talk with Stephen Burton from AFME about CSDR. Stephen, welcome to our podcast.
  • SB:
  • Thank you
  • AC:
  • So to begin with Stephen, could you tell us a little about yourself, what you do at AFME and why CSDR is important to you?
  • SB:
  • Yes, of course. I have worked in the banking industry for 35 years now, mostly operations focused with some of the bigger banks that people will recognise, but for the last ten years I have been working with AFME. AFME is an association which tries to lobby on behalf of the big banks where there is a need for education of officials or regulators as they are not experts in the field we feel we have some expertise and we obviously lean on our members to help us with that.
    AFME tries to harmonise, standardise and make as efficient as possible, regulation throughout Europe. We are a pan-European organisation, but we recognise that some of the regulations in Europe now are extra-territorial and they will affect third countries, not just Europe.
  • AC:
  • Amongst the regulations that are being talked about in the post-trade industry today, CSDR features very prominently. Could you begin by telling us what CSDR is all about?
  • SB:
  • So, CSDR is one of three regulations that aim to regulate the market infrastructures. We had EMIR which regulates CCPs, we have MIFID which regulates the trading venues, and now CSDR which is designed to regulate the CSDs. The CSD’s themselves are the entities that settle the transactions throughout Europe and include the likes of Euroclear Bank and Clearstream International in that, but also included in the CSDR are aspects that relate to the settlement efficiency of transactions and particularly we are talking about transactions which settle late and (European) Commission was keen to increase settlement efficiency rates across the European CSDs.
  • AC:
  • So it sounds like it’s not just the CSDs that are impacted?
  • SB:
  • It’s not at all. It’s all participants who transact in EU securities which settle via an EU CSD. It sounds like a bit of a mouthful but to try and put that into context, if you are a Singaporean entity (a non-European entity) and you are transacting in a French security and you are settling it across a French CSD or your using a third party to do that, then you will be caught by the Settlement Discipline Regime, which not only includes late matching fines, but also includes a mandatory buy-in regime.
  • AC:
  • So within CSDR there is a lot of stuff, but most people I speak to are focused on the Settlement Discipline Regime. My understanding is that CSDR requires banks participating in settlement to behave somewhat differently, is that correct?
  • SB:
  • I would say yes, it is. There may be some banks that have already got the measures in place but the ones I immediately think of are the way in which we should allocate and confirm with you clients, that’s probably the most important one, agree the transaction as soon as possible, and ESMA have laid down some guidelines around that, timing wise and then you will hopefully be in good position to settle the trade on time and not incur any of the penalties or buy-ins that we will talk about later.
  • AC:
  • Could you begin to tell me a little about settlement fines? Who is charged them, who gets the money, how are they calculated? It’s an interesting subject.
  • SB:
  • It certainly is, settlement fines are going to be levied on the party that fails to deliver the securities. There are also late matching penalties for parties that instruct on a late basis. In terms of how they are calculated, there is a calibration that ESMA has made per product type so equities are fined more than a sovereign debt and there are various increments in between.
  • AC:
  • And this is all being done by the CSD I guess?
  • SB:
  • The CSDs have been given the responsibility to collect and pass on the settlement fines. The Commission decided that it should be a zero sum game as far as the CSDs are concerned, they should not be able to keep any portion of the settlement fines, and they should go directly to the aggrieved party. One thing we are starting to see is CSDs thinking about charging for the process of all these fines that they expect to see.
  • AC:
  • And when is this going to happen?
  • SB:
  • The due date for implementation is September this year, 2020, however the settlement penalties part has largely been built by the T2S, the European settlement platform, and (it’s very technical but) there SWIFT release doesn’t go live until the end of November so we are anticipating a delay so that we don’t have to do everything by Excel spreadsheets for the first six months or so and then switch over to an automated method that T2S will provide to its CSDs.
  • AC:
  • As well as settlement fines, I understand that CSDR brings in buy-ins. Could you tell me a little bit about the buy-in procedure?
  • SB:
  • So the buy-ins are a mandatory piece of the legislation, it’s something that everyone needs to consider who trading in European securities and the reason is as follows. There are four separate dates after which you might be bought in. There’s four days after your intended settlement date, for what we call liquid securities, seven days after intended settlement date for less-liquid securities and then finally 15 days after intended settlement date for the SME growth markets so the small-medium sized growth companies that are listed on exchanges and it’s based on the exchange that they are listed on.
  • AC:
  • And who performs the buy-ins?
  • SB:
  • So the regulation states that the receiving trading party has to initiate the buy-in by appointing a buy-in agent which is something that is going to be quite new to most European entities. And when we think overall who is going to be the initiator, we at AFME believe that an awful lot of it is going to have to be done by the fund managers, the buy-side effectively, because they are the ones that hold the long-only positions, there is the possibility to defer the buy-in and that’s up to the receiving trading party, they can defer it for a further four or seven days depending on the asset class.
  • AC:
  • SO who is going to act as a buy-in agent?
  • SB:
  • It’s a very good question, and I’m not sure we know the answer at this stage. We do know that some infrastructure are looking at setting up a platform which will allow parties to input there requests for a buy-in and perhaps it will have a pool of buy-in agents behind that, but equally if you or I had transacted and you wanted to buy me in, you could go to your colleague at another bank and ask them if they would buy the securities is, and that can happen regularly now but it’s on a voluntary basis.
  • AC:
  • What impact will these buy-ins have on the market?
  • SB:
  • We believe they could have a fundamental impact on the liquidity of a particular security and the pricing of that security if certain parties, let’s say there is a chain of parties where one delivers to another who delivers to another and so on, if they are not aware that each is going to buy-in or start the buy-in process they may all start to buy-in at the same time, so we may have multiple parties buying in the same type of securities increasing the price and reducing the overall liquidity in that security. So by affecting the liquidity of that security you are effectively having an unintended consequence which is the traders will see an impact to their trading book, the securities that they sold originally will be bought in and their position will now be effectively long of those securities again and they will have to re-sell them in the market. We believe it’s an unintended consequence but traders need to be aware that this is going to impact their books, middle office people need to be aware that they will need to support the process, and settlement people, operations teams will need to build the necessary technology to make sure everyone is kept informed.
  • AC:
  • It sounds like there is a lot happening with CSDR, how well prepared do you think the market is for this? Can you give us a mark out of ten?
  • SB:
  • The market is becoming increasingly aware I would say, but I don’t think we are anywhere near the scale we would like to be at this stage with possibly less than a year to go, they are adapting to this at the moment. I get the impression that smaller institutions have only just woken up to the fact that this is going to impact the trading book and it’s not just a settlement or post trade piece of legislation. So if you are going to give marks out of ten, the bigger institutions I’d say are probably about a seven or eight out of ten, I think the smaller institutions I would probably say are a four or a five.
  • AC:
  • Stephen thank you for joining us and telling us all about CSDR and Settlement Discipline, and thank you for listening to this Thinking Aloud podcast brought to you by BNP Paribas Securities Services.

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