By Matt Johnson, Product Management & Industry Relations, DTCC

Despite the one-year delay to the implementation of the Settlement Discipline Regime (SDR) of the Central Securities Depositories Regulation (CSDR), most firms have kept on track. The delay was in response to the impact of Covid-19, providing some extra time for firms to make informed decisions about their compliance plans and put the requisite post-trade processes in place. Now, several weeks following the announcement of the regulatory relief, most firms have retained their CSDR project teams and are keeping it at the forefront of their regulatory preparation plans.  

Firms that were close to deciding what platforms and service providers they would use to help improve their operational processes in readiness for SDR now have more time to evaluate and are unlikely to make final decisions before Q1 2021. There is also additional time to consider which processes firms will conduct in-house and which they will outsource to third parties and external providers.  

It is likely the expanded preparatory period will result in increased focus on improving operational efficiency and workflows to improve trade affirmation rates and prevent settlement fails. SDR mandates penalties and mandatory buy-ins for failed trades and so the capability to quickly capture, assess and resolve failed trades is a critical component of compliance. This priority is supported by data from the European Central Bank’s (ECB) T2S annual report, published in June 2019, indicating that the trade fail rate increased in 2019 versus 2018. Although the increase was moderate, it means a rise in costs due to SDR’s failed trade penalty regime. What is more, market volatility generated by the emergence of Covid-19 highlighted existing shortfalls in post-trade systems, as record trade volumes resulted in record trade exceptions and settlement fails occurred.  

The downside of a failed trade is not limited to costs or administrative burdens – a failure can also have a detrimental impact on relationships in the market. SDR mandates that a counterparty must take responsibility for the failure, which could lead to some difficult conversations between clients and their brokers and custodians regarding who should cover the cost of a failed trade. 

The best approach for firms to prepare for SDR and avoid financial penalties and costly buy-ins is to ascertain why a trade has failed. Often, failures are the result of error-prone manual processing. Therefore, preparations should focus on automating the post-trade process and leveraging standardised protocols, such as using validated SSIs, automated trade confirmation and matching and leveraging additional data sources such as place of settlement and Legal Entity Identifiers (LEIs) into their post-trade process. Not only will this support compliance with a key component of CSDR, but automation facilitates wider benefits, such as increased operational efficiency and risk mitigation. 

In recent months, DTCC has been working diligently to move the industry forward in preparation for the upcoming CSDR mandate. For instance, DTCC now supports 11 global custodians who directly submit their exceptions data to DTCC’s Exception Manager platform, which integrates custodian, broker, and depository data. This enables buy-side clients to manage exceptions from a centralised location and subsequently reduce any delays in settlement.  

The European financial services industry is no stranger to the prospect and impact of delays to regulatory mandates. Most recently, the industry welcomed a three-month delay to reporting under the Securities Financing Transactions Regulation (SFTR), from April to July, which was also in response to the impact of Covid-19. This relief provided additional time to undertake extra testing and collaborate with the industry to ensure readiness, resulting in a smooth implementation. Market participants should follow suit and spend the next 18 months continuing to prioritise their preparations for SDR.