On 13th September, the final regulatory technical standards (RTS) on settlement discipline were finally published in the Official Journal of the European Union following numerous delays. With the RTS on internalised settlements reporting finalised in March 2017, many firms in the industry have been greatly anticipating its publication. Central Securities Depositories (CSDs), custodians and investment firms in the context of securities settlement now have two years to implement and fully comply with the technical standards.
The RTS on settlement discipline will come into force on 13th September 2020 and sets out measures to prevent settlement fails, as well as measures to address these fails. These predominantly include cash penalty mechanisms for each day securities settlement fails, and a mandatory buy-in process to ensure the securities are delivered to the “buyer”. These measures present a substantial implementation challenge, in particular to firms with significant transaction volumes and a high settlement fail rate, due to the potential impact on P&L.
Whilst there have been no material changes since the draft RTS from February 2016, many in the industry had placed Central Securities Depositories Regulation (CSDR) on the “back burner”, given the requirements had not been finalised and the resource demands of other competing regulations such as MiFID II and GDPR.
Recent conversations have also highlighted a general lack of awareness and engagement on the subject across the industry as impacts were expected to be minimal – however, it is not that simple and implementation promises to be more challenging than expected. Below are some key success factors for consideration based on our understanding of settlements processes and our extensive experience delivering regulatory change:
- Regulatory interpretation – Production of a regulatory decomposition document is key to structure the analysis, confirm assumptions to be used, and ensure traceability
- Data sourcing and current state assessment – It is key to collect historic settlement data and conduct a detailed current state analysis of the front-to-back settlement process to assess the level of impact. This will help build a data driven, root-cause analysis of settlement fails in order to identify and prioritise efficiency and automation opportunities by function, product type etc.
- Coordinated approach – Having one key sponsor accountable for the end-to-end implementation will significantly reduce delivery times by championing the vision and driving global compromise. A collaborative and coordinated approach across all impacted functions (including Compliance, IT and Operations) will help implement the regulatory requirements in the most effective way
- System rationalisation – With potentially a large number of applications impacted, there is an opportunity to consider settlement systems rationalisation that will help streamline or standardise processes and reduce costs
- Business involvement – Given the potential significant impact on the business, it is key to have all business lines involved. The introduction of cash penalty and a mandatory buy in process will have potentially significant P&L impacts and a clear strategy should be agreed with the business to help mitigate this risk
- Legal documentation and client outreach – Firms should fully consider the legal and client implications from an early stage in order to ensure the appropriate outreach documents and client agreements are in place.
With pressing regulations such as MiFID II now live and in BAU, now is the time for firms to start looking at the challenges ahead of them. It is critical that firms start taking more concrete steps toward implementing CSDR and assessing the impact of settlement discipline obligations on their respective operating models.