TRADING: SDR Many of the economic and social impacts of the COVID-19 pandemic are still to unravel, and the only thing that seems certain, right now, is that they will be severe. Nevertheless, for financial services specifically, the 2008 crash is still the biggest black swan event of the 21st Century. In fact, almost everyone is still experiencing the fall-out from it, in some form or other. One of the reasons for this is the way it fundamentally undermined trust and confidence in the marketplace, by highlighting the role of non-transparent and sometimes unethical practices, which helped to bring the world economy to its knees. The result was a counter-wave of risk aversion and regulation that’s still unfolding today, aimed at preventing any such event from happening again. Securities trading is one of the last remaining financial outposts for reform – and it’s proving somewhat controversial. A new settlement discipline regime (SDR) was supposed to have been fully introduced by now under the Central Securities Depositories Regulation (CSDR), which is designed to harmonise settlement standards and promote competition. But the SDR’s final phase of implementation is facing delay due to lobbying by a range of industry bodies that claim the various counterparties in the transaction chain – as well as the broader ecosystem – need more time to prepare. The European Securities and Markets Authority (ESMA) recently agreed to
postpone implementation for 12 months, until February 2022, after the Association for Financial Markets in Europe (AFME), the Investment Association (IA), the International Capital Market Association (ICMA), the Alternative Investment Management Association (AIMA) and the International Securities Lending Association (ISLA), stood shoulder-to-shoulder on the issue. They wrote an open letter calling for a phased approach to implementation and a rethink of the SDR’s controversial mandatory buy-in clause, which requires initiators to stand behind a transaction, regardless of whether a resulting failed trade is actually their fault. It impacts any buy or sell-side participant that invests in any European market, regardless of where they are based, with significant potential penalties for non-compliance. Market participants will be liable to pay penalties, calculated on a daily basis, on any transactions that fail to settle under the mandated T+2 timeframe. Perhaps the most controversial aspect of the changes is the administrative challenge posed by the buy-in process itself, given that the mandatory requirement that initiators fulfil settlement for any financial instrument not delivered within a specified period, varies according to the type of security. Liquid assets, for example, will need to be brought in within seven days of the intended settlement date, while products like equities and bonds will be required within four days. Small-tomedium-sized stocks will be subject to a buy-in 15 days after the intended settlement date. By decreasing the number
of outstanding settlement obligations between counterparties, the intention is to reduce risk in the market as a whole and, ultimately, make Europe a region where there is no failed trade. But that must be achieved by harmonising the bloc’s 40 Central Securities Depositories (CSD) markets, all of which use different definitions and methodologies. The industry argued that institutions needed more time to introduce IT, messaging and legal infrastructure changes to cope with the SRD, although some commentators speculated that particularly the buy-in side of the trade would use the time to lobby for permanent alterations. While they broadly support the new rules’ objective of improving settlement efficiency, the letter’s authors were concerned about significant negative impacts on both trading and liquidity, given the far-reaching nature of the regime, which affects market participants inside and outside Europe. Many firms in major trading regions, such as Asia and the US, are still not even aware of what is required of them.
Regime change De-risking the European financial markets has finally reached securities trading… but it’s not been an easy ride. Pete Tomlinson, from the Association for Financial Markets in Europe (AFME), and Frédéric Viard, Product Director Securities, at Bottomline, share their views www.fintechf.com
Issue 21 | TheFintechMagazine
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