Emma Johnson and Mike Clarke | Deutsche Bank

Deutsche Bank’s Emma Johnson and Mike Clarke share how, in the changing regulatory landscape, technology can enable compliance and deliver better outcomes for clients

What technology offerings is Deutsche Bank delivering in an effort for better outcomes for clients?

Mike Clarke: Deutsche Bank Securities Services is focused on aligning its technical innovation with client outcomes and engaging clients in its innovation process as appropriate to ensure it is creating value in either greater efficiency or improved client experience.

Specific innovations include:

Chatbot solutions: to gain faster access to standard query information

Open API access: to allow clients to call functions for the entry or query of information

Digitalised documentation management: to remove current manual and physical documentation transfer

Data analytics: to provide insight on settlement efficiency, liquidity usage and custodial services

Real-time data streaming: to provide clients with “as processed” data updates to feed directly into their systems and analytics platforms

Distributed ledger technology: to provide workflow and data solutions that can streamline multi-party workflow with inherent data security. Note: not all distributed ledger technology (DLT) solutions are reliant on blockchain

How is Deutsche Bank helping clients to comply with regulation?

Emma Johnson: The market advocacy team within securities services is responsible for responding to and front-running the impact of regulatory change to its clients, products and services. It has a seat at post-trade industry associations such as the Association of Financial Markets Europe (AFME) and the Association of Global Custodians (AGC) where it advocates for change and engages directly with the regulators through the eyes of the client, Deutsche Bank and for industry best practice.

When it comes to implementation, the impact on the bank and its clients is at the fore in terms of compliance. When analysing and addressing changes emanating from the regulatory agenda, the market advocacy team highlights the opportunities, recommends solutions for implementation and solves for threats, partnering with clients to ensure that any changes in service, legal contracts and risk management are understood. The Central Securities Depositories Regulation (CSDR) is a great example of the necessity of client advisory given the dependence on provider and consumer behaviour. Hence, we believe that creating awareness through collaboration with clients and industry peers helps to develop the next generation standards and solutions.

How is Deutsche Bank helping with CSDR compliance specifically? What can it offer through data and real-time liquidity insights?

Johnson: Deutsche Bank Securities Services has been at the forefront of the regulatory discussion from the initial publication of the draft CSDR rules in 2012. Since then we have been actively and directly engaged with regulators and through industry bodies such as the AFME, AGC, and the European Banking Federation (EBF) in addition to the local trade associations in the markets we operate in. This participation has helped to ensure that our voice is heard and that our clients are fully represented.

Deutsche Bank Securities Services is leading the bank-wide implementation programme. The programme is a core change initiative with board level supervision. It is hugely important for us and we know it is a priority for our clients too.

We have been doing a significant amount of work understanding and preparing for the requirements of the Settlement Discipline Regime (SDR). We are looking at CSDR not just on a regional basis but on a global basis to ensure that our clients and relationships, regardless of their domicile, are fully considered and supported to comply with the regulation.

We are certain that CSDR has a true interdependency on the operational performance and compliance between the provider and client relationship. The consequences of failure are a priority to avoid. We recognise that a provider’s client service ethos and operational performance is a differentiator. We are currently leveraging our data and innovation teams to review our client’s current operational behaviour and settlement efficiency rates and model them against future CSDR outcomes. This gives us a baseline to identify any inefficiencies and weaknesses which we will work on with our clients. Further, we are exploring how real-time data and settlement analytics can provide our clients with a risk view of their settlement horizon including a view of trades at risk of penalty and buy-in. By combining our deep understanding of CSDR with our innovative real-time data processing, we feel confident that we can help our clients avoid or minimise penalties by portraying settlement risk on a near real-time basis so that the client can respond timely with decisive action.

How does CSDR differ from other regulations that the industry has been preparing for in recent years? And what implications does CSDR have for custodians?

Johnson: SDR, although complex in its execution, is quite simple in its intention; to incentivise timely settlement. Repercussions for settlement failure due to booking, operational or counterparty inefficiency will be felt at a trading level and therefore CSDR is essentially a ‘call to action’ to be operationally more efficient top-down and bottom-up. From timely and accurate trade bookings through to allocation, confirmation, settlement and inventory management—front, middle and back offices are impacted. SDR binds trade and post-trade together. This is where CSDR is different to previous regulatory regimes like the European Market Infrastructure Regulation (EMIR) and directives such as the second Markets in Financial Instruments Directive (MiFID II). Institutions may be performing many different roles; trading through to settlement, which might also include being a participant of a CSD, which means cash penalties for late settlement and trading book risk for buy-ins. Poor performance will prove costly.

The custodian will play the role of a valuable information conduit sitting between the CSDs, their clients and their trading parties. Unlike buy-ins which are managed at a trading party level, cash penalties are a vertical process levied by the CSD debiting the CSD participant which caused the failure and crediting the non-defaulting CSD participant. Where the CSD participant is not a trading party, the custodian will apply the penalties to their clients debiting and crediting where appropriate. Crucially, the custodian’s role as a trusted intermediary comes in to play turning around information received from the CSDs and performing daily quality assurance checks for the validity and calculation of penalties by the CSDs.

One of the current challenges for custodians is ensuring that custody contracts incorporate the relevant legal language for the buy-in procedure to be enforceable in every market where trading and settlement takes place. This is particularly pertinent for clients who are not based in Europe but have accounts or transact in activity which settles in a European CSD. Education is required to ensure that they abide by European law and that the legal language mandates this.

CSDR requires custodians to offer segregated accounts to their clients and inform them of the costs and risks of the different account arrangements, what implications/opportunities will this cause?

Johnson: Disclosure and account offerings are a post-crisis regulatory mainstay and in this regard, we see the provision of Article 38 as an extension to what we offer today, where segregated markets are currently supported.

The requirement to publically disclose the levels of protection and the costs associated with each account structure including details of the main legal implications and the applicable insolvency law is something we are well versed in now following EMIR and MiFID II.

We believe clients are well versed on account structures in Europe having experienced what has been a lengthy regulatory exercise. We have seen no change in behaviours or expectations from clients and so it is a moot point.

We feel that benefits to disclosure and investor transparency will occur outside of regulation, albeit the influence comes from regulations such as CSDR and the second Shareholder Rights Directive.

We are excited to explore how data and new technology—specifically DLT—can provide beneficial owner transparency and this forms a key area of focus for us; taking a common regulatory trend and developing a tangible solution which will benefit the client and us as the client’s provider.

How are Deutsche Bank’s new technologies helping with client account queries and balances?

Clarke: The first example to highlight this is our pioneering work on our chatbot ‘Debbie’.

‘Debbie’ is an automated solution developed to provide client trade status information quickly, securely and accurately.

Launched in June last year, just a few months after discussions with the client began, ‘Debbie’ currently connects with the client’s chatbot (for bot-to-bot communications) via the Symphony platform to help improve the client’s and their clients’ experience in gaining access to status information.

Secondly, in relation to account balances, we are currently working with clients for the exposure of cash balance data, and then subsequently securities data, via the open application programming interface.