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Penalty spot: are buy-side firms hitting the SDR target?

Penalty spot kickHow have buy-side firms adapted to the Settlement Discipline Regime and what are the operational challenges that remain? By David Veal, Senior Executive, Client Solutions, at corfinancial®.

The Settlement Discipline Regime is a new obligation stemming from the European Commission’s review of the Central Securities Depositories Regulation (CSDR), which came into force on 1 February 2022. These additional regulatory processes supplement the existing CSDR protocols and focus on enhanced controls and governance around trade settlement.

In this article we highlight anecdotal thoughts and feedback received from market participants and corfinancial clients who have been working with the proposed changes. Full details of this feedback can be found in this Discussion Paper.

Failed Trade Management and T+1 Lifecycle
Buy-side firms in Europe that trade in US instruments will soon have less time in which to allocate and fund stocks, resolve any settlement issues and comply with the CSDR’s new penalties regime.

Having access to a central source of executed trade data and being able to track transactions throughout the entire securities lifecycle is vital to facilitating settlement efficiencies. Clients want robust governance with which to minimise trade settlement failure. However, there are changes to operational processes and potentially regional coverage that need to be considered in future   environments that support global trading from Asia to Europe and the US, especially when a single middle office team manages this. Firms must work towards avoiding trade failure rather than managing this after the event. Having the right tools to achieve this in a near real-time environment is essential.

Cash Penalty Fees Management
The provision of prime broker or custodian statements to support the reconciliation of cash penalty fees is improving, but there is still a way to go. The sentiment we received was that some parties still lack the full infrastructure to manage the timely provision of cash penalty fee data, so some may be choosing to absorb cash penalty fee debits rather than passing them on (although penalty fee credits are being sent). The argument is that penalty fee amounts are often too small, and net/net are not worth passing on. However, this approach certainly goes against the essence of the SDR cash penalty objective.

Automating The Processes
Some feedback focused on the most effective trade records on which to base best practice controls and governance. It was suggested that some solutions base their primary trade position records on the market side of trades, whereas solutions like SureVu® centre on the buy-side view of executed trades. There are clear differences with how solutions in the space have been designed. It is uncertain how these different models will evolve in the lead up to T+1 and beyond.

The SureVu SDR solution from corfinancial was designed differently.

SureVu clients believe it is essential to manage post execution trade settlement positions from their own record of executed trades, not data assimilated by third parties.

For a more detailed assessment of our investigations, please download our free Discussion Paper or contact us at [email protected] and we will be happy to share our thoughts and details of how we help address the SDR challenges.

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