Firms that use the potential delay to the Central Securities Depositories Regulation’s (CSDR) settlement discipline regime as an opportunity to improve internal infrastructure across the trade lifecycle will be the biggest winners in the longer run, according to Karan Kapoor, head of regulatory change and technology at Delta Capita.
On 28 August, the European Securities and Markets Authority (ESMA) published its final report on draft regulatory technical standards (RTS) to postpone the implementation of CSDR’s settlement discipline regime until 1 February 2022.
The RTS on settlement discipline covers measures to prevent and address settlement fails including rules for the trade allocation and confirmation process; cash penalties on failed transactions; mandatory buy-ins; and monitoring and reporting of settlement fails.
Kapoor explained that the delay “should act as a cue to either revive the initial strategic plans for firms who can, or they can even go back to the drawing board to design optimal CSDR solutions that would best balance achieving regulatory compliance and driving strategic agendas”.
He suggested that many market participants were prioritising improving operational efficiencies, and mitigating root causes of settlement failure over developing CSDR workflows until COVID impacts and other regulatory priorities caused a tilt towards more tactical approaches.
In its final report, ESMA highlighted the “severe impact” of the ongoing COVID-19 pandemic on the overall implementation of regulatory and IT projects by central securities depositories (CSDs) and their participants as well as by other financial market infrastructures.
ESMA explained it would be “extremely difficult” for market stakeholders to comply with the requirements of the RTS on settlement discipline by the current deadline of 1 February 2021.
Kapoor suggested the key will be to make settlement efficiency improvement a joint objective for front-office and operations teams.
He said: “Enhanced front-to-back transparency and control over real-time trade lifecycle events will allow teams from the front office and operations to pursue the efficiency agenda better.”
“Furthermore, better collaboration with clients and counterparties to reduce settlement friction will not only reduce the cost of CSDR consequences by avoiding penalties and buy-ins but also promote good market citizenship”, he added.
The delay will also allow other vendors and technology solutions to mature their offerings to better support broader objectives. Kapoor suggested: “This will also be an excellent time to be on the lookout for new strategic partners.”
He noted: “Firms should be looking for solutions to fuel straight-through processing (STP), identify and remediate settlement failure root causes in real-time and better manage CSDR cost allocation across various levels of aggregation.”
“Fuel strategic agendas using CSDR as a driver as no good regulation should go waste and become just about minimum compliance.”
Kapoor concluded: “CSDR has its heart in the right place. More efficiency in the securities markets is an outcome that would benefit the entire industry.”
Other key market participants also welcomed the news of a potential further delay.
Derek Coyle, global custody product, vice president, Brown Brothers Harriman, suggested that ESMA’s confirmation “aligns with what has been discussed in industry circles in the past weeks, factoring in the market trading volatility of COVID-19 impacts in March and April of this year, and also accounting for feedback from various groups and forums concerning regulatory items which needed to be addressed”.
