With SFTR deadlines looming, it is easy to ignore CSDR. Most of the regulation is already implemented, wasn’t directed at market participants and has had no tangible impact on securities finance practitioners. However, there is just one small section remaining to implement and that won’t happen until September 2020 and this should not be ignored.
The settlement disciplines that are to be implemented next year need some careful consideration, and if not now, very soon.
The regime will impact all transactions settling in European CSDS or ICSDs and for all entities trading in Europe regardless of domicile. The regime will apply a daily settlement fine from settlement date (SD) until transactions settle, and depending on secondary market defined liquidity, will impose buy-ins on SD+4 or SD+7, with cash-out clauses for transactions not being successfully bought-in over a period of time. Buy-in agents will need to be appointed to manage this and someone will have to pay.
From a securities lending perspective the impact is yet unclear in some aspects and focus from the market has been on considering what causes fails in the finance markets and trying to address these.
There are still outstanding questions like whether some lending transactions might be exempt, how fines will be imposed on free of payment transactions and how buy-ins work when stock has been recalled to cover a sale transaction which is also being bought in against, but the unknowns don’t diminish the recognition that the regime will add cost and complexity to the business.
The complexities will be managed by the agents and will likely involve minimising fails by improved practices and possibly applying larger stock buffers. Following the work ISLA is doing in this space will be critical and meeting SFTR reporting obligations will help ensure accurate information flows. The regulators also need to consider timings for settlements FOP and DVP intraday, which in itself may cause sales with recalls to fail.
The costs are another concern. No matter how robust processes and practices are, fails will still happen and who shoulders the cost on the lenders side is controversial. Where fails are caused by actions of the underlying beneficial owner (such as un-notified sales in the portfolio) there may be a case for the costs to be passed through, and if the fine is uncured because of an agent’s actions then, the liability Is clear. However, there may be situations where a fine is incurred by a transaction that gets cancelled through no fault of either party and yet fines are incurred; who’s responsibility is this cost? There are many other scenarios where the liability is unclear.
Certainly, there is much to be done both now, and as the application of the rules becomes clearer and liabilities relating to CSDR need to be clarified and documented between parties prior to the September implementation.