CSDR – get ready for tomorrow, today!

There are a lot of good things about Central Securities Depositary Regulation (CSDR). Having a clear regulatory regime for such vital market infrastructures is more than welcome.

However, getting ready for CSDR’s Settlement Discipline Regime (SDR) was always a challenge. Not just for custodans, for the whole market. That is without having to also prepare for Shareholder Rights Directive II (SRDII) and even before the disruption resulting from Covid-19.

The breadth of the Settlement Discipline Regime

SDR seeks to improve almost every aspect of settlement – allocations, confirmations, tolerance levels, the population and matching of settlement instructions, cancellations, hold and release, partialling and recycling. It covers a great deal.

So it is no surprise to hear that much of the post-trade industry is struggling to be ready for February 2021. It is not far away. Time is short.

To learn more about CSDR you can read our handbook or listen to our podcast. Our toolkit, to be published shortly, will provide more in-depth insight of the changes to SWIFT instructions.

Still some uncertainties

We are still waiting for key information from most CSDs. We need to know how and what they will communicate about penalties, if they will have appeal processes and what transaction codes they will use. This is core information. Without it, neither custodians nor their clients can prepare properly. Let alone test.

Four priorities

There is much that we can all do to minimise settlement failures now. And, of course, such improvements will be even more beneficial come February.

Four things worth focussing on are:

1. Having accurate and up-to-date Standard Settlement Instructions (SSIs) is essential. This requires having a process to update any SSI information that causes a fail and to engage quickly with trading counterparts to remediate where appropriate. It sounds simple, but many firms have had problems with this for years.

2. Managing inventory to ensure that stocks are in the right place to allow settlement. Most often, this is about realigning between the International Central Securities Depositories (ICSDs) and the domestic CSDs.

3. Being able to process partial settlements is key for settlement efficiency. Even if the buy-side has not been particularly keen on partial settlements (particularly for bulk trades with many allocations).

4. Reviewing how to best use fails coverage programmes. The economics around them is shifting as the cost of failure increases.

Sorting these issues out will improve settlement efficiency and save much time, effort and money. Even more so, come February.

Alan Cameron Head of Brokers Market Strategy BNP Paribas