The TRADE predictions series 2022: post-trade regulation

As the implementation of the Central Securities Depositories Regulation (CSDR) and the Settlement Discipline Regime loom, these industry participants see post-trade regulation as a key theme to watch.

By Editors

If 2021 was the year when post-trade came into the industry limelight, 2022 will be the year of operational aches and pains, and spending, don’t forget spending! Let’s face it, many firms aren’t quite ready yet for the introduction of the Settlement Discipline Regime in Europe and 2022 will likely involve a lot of last-minute panic buying on the part of smaller brokers and buy-side firms in particular.

Operations teams are already stretched in dealing with continued market volatility, which is unlikely to abate any time soon, given the development of COVID-19 variants and political uncertainty in numerous markets. Manual processes and inefficiencies causing failures will be thrown into the front-office and C-suite spotlight, which will hopefully result in some much-needed investment in systems and processes. Moreover, the continued discourse around a move to shorten the settlement cycle in the US, as the Securities and Exchange Commission (SEC) releases its related report and likely endorses the DTCC-led working group’s recommendations, will also evolve into a global discussion. After all, Europe was previously the frontrunner in implementing T+2 settlement and key Asian markets also made the move. Expect 2022 to be a year of a lot of post-trade planning, some technology panic buying and a bumper year for the consultant community!

– Virginie O’Shea, founder, Firebrand Research

As financial institutions are looking at the best approach to take ahead of Phase 6 next September, those that take the most pragmatic approach to segregating collateral will be in the best position. For those only using cash collateral today, the additional operational requirements brought about to segregate non-cash collateral may seem more attainable given the extension. One thing is for certain, financial institutions can’t afford to waste time.

They need to clearly understand each model and assess not just their operational capacity, but their systems capability well in advance of Phase 6. The transition away from Libor also presents significant operational challenges for the many banks, swap dealers, hedge funds and asset managers who have all been trying identify ways to convert their Libor linked derivatives trades in each jurisdiction. A bilateral approach to portfolio compression is certainly helping market participants to reduce Libor switchover risk, optimise capital, and enhance operational efficiency ahead of the December deadline. Lastly, a healthy underlying repo market will be fundamental to a well-functioning EU cash bond market in 2022.

The trouble is that inefficient repo workflows have long been an operational burden for market participants. As the issuance programme begins to ramp up in the coming months, it is paramount that some of the longstanding manual processes that have hung over repos are automated in order for the market to be fast tracked into the 21st century. Nowhere is this more important than in the area of collateral – which is currently very siloed. Some institutions have a repo and a bi-lateral cleared team using completely different systems and legal entities. Financial institutions should be trying to move to one centralised team and one system in order to bring more efficiencies to repos trading.

– Philip Junod, senior director, TriReduce and TriBalance business management at OSTTRA

The roll out of the settlement discipline regime of Central Securities Depositories Regulation (CSDR), expected to happen in February 2022, is set to have a major impact on the European securities market and in particular the long-term development of the exchange traded fund (ETF) industry.  While the rules on mandatory buy-in are postponed, there will still be streamlining of standards and efforts to improve settlement efficiency across European markets. We see an opportunity to bring more European ETF activity into clearing, so allowing investors to benefit from the resulting netting and settlement efficiencies, as well as, reducing overall costs.

At present, the clearing and settlement of ETFs in Europe is best described as sub-optimal, characterised by fragmentation, leading to settlement inefficiency and high numbers of fails. In Europe, an estimated 70 per cent of ETF trades are uncleared.  We expect that bringing more ETF activity in central counterparty clearing is in turn likely to promote more transparency and help support the continued growth and development of the ETF industry in 2022 and beyond.

– Cecile Nagel, CEO EuroCCP

Despite being plagued by delays and doubt, CSDR will be a key focus for financial services firms in 2022. It’s much more than just another piece of regulation, impacting all parties in the settlement chain in transactions across European securities. The UK announced that it will not implement the SDR, but in scope transactions are those that are settled on an EU CSD, irrespective of where they are traded. This is an aspect that may catch some firms out if the line of stock is traded on a UK venue and settled on Euroclear, for instance.

CSDR must be viewed as a significant operational and infrastructure change, supported by – but not led by – the compliance function. Although compliance will come at a cost, the necessary overhaul of front-, middle- and back-office operational processes should be viewed as an opportunity for firms to reduce risk and eliminate endemic inefficiencies in the post-trade operating model. Although there is regulatory uncertainty with regards to the scope and implementation of certain elements of the SDR – in February 2022 – and the introduction of settlement penalties, will roll around quickly. However, the firms that act now to ensure they have appropriate pre-matching and settlement process and a viable solution to consume, track and manage penalties will be better positioned come implementation day. Data will be the driving force in providing solutions, helping firms manage the regulatory obligation whilst positioning them to seize the benefits of the SDR if they put the groundwork in now.

– Linda Gibson, director, head of regulatory change at BNY Mellon’s Pershing