The Securities Finance Times Technology Symposium offered a digital discussion on Margin Reform and UMR, Digital Markets, SFTR and the Liquidity Chain, by leading experts in the securities finance industry
What are the main challenges the industry faces with CSDR?
Frost: The first big challenge is figuring out what the Settlement Disciplinary Regime (SDR) will bring. We are less than three months away from the commissioning of the SDR component of the Regulation on Central Securities Depositories (CSDR), and we still do not know whether the mandatory redemptions are really in the scope or out of the scope. of application for February 1, 2022. Subsequently, and suppose that the mandatory redemptions will be delayed or eliminated, it will be difficult to manage the consequences of the cash penalties, in particular for the financing of securities where the nature of the activity means that there are a lot of subsequent deliveries and potential failures along the chain.
Another challenge, for borrowers in particular, is that in many cases they will need to settle before the Delivery Against Payment (DvP) deadline, rather than the actual market deadline on each business day, to make these subsequent deliveries. This is going to be a challenge for the flow of the whole market, especially when it comes to early collateralisation and automation.
Finally, organizations can face many causes of failure, from incorrect bookings, mismatched standing payment instructions (SSIs), delayed collateral, or pre-payment changes such as reallocations. – that borrowers must now process manually. It is crucial to ensure that the platform is in place so that lenders can release prepaid loans on time to experience the benefits down the road.
What do you hear from your customers in terms of possible approaches to meet these challenges?
Morgan: Frankly, prevention is the best medicine, whether it’s having visibility, improving business processes, identifying where fines are going to go, analyzing and resolving root causes. Rather than dealing with the after-effects, it is better to deal with the causal elements.
Overall, this is the correct approach. But, inevitably, there will be failures. When defaults do occur or are likely to occur, clients consider partial settlements, as well as last-minute borrowings or loans to cover defaults. In some cases, they may reverse instructions on or before the settlement date to prevent the trade from failing in the first place.
In many ways, this segment of the industry is coming full circle. Before there were other streams of securities lending activity and income, much of this activity was driven by default coverage. In a perverse way, this regulation will affect the spot markets and the financing of securities. Potentially, there could be a strengthening of the default coverage which, in a sense, was the foundation of the securities lending and borrowing activity. I find that quite interesting.
What was the driving force behind the new service Pirum recently launched?
Morgan: The first phase of our new service is called Trade Risk Manager (TRM), which is part of our Front Office Services product suite. It has been fascinating to watch. In many ways, this replicates our approach to Securities Financing Transaction (SFTR) regulation by speaking with clients to understand if there is likely a problem and therefore a need for a solution. Our job as a service provider is to solve the problems. Frankly, if there is no problem, it should not be built.
Over the past year, particularly since the SFTR was delivered and implemented, our clients’ attention has turned to the upcoming settlement disciplinary regime. The approach we have taken is based on ongoing engagement and conversations, as we do in all of our product development. For the past six to twelve months, we’ve also been releasing a Fines Report, which gives customers an indication of the penalties they would see if the SDR were in effect. This has been quite daunting for many clients in terms of awareness of the impact of regulation. Clients have shown great interest in this as it will have a direct impact on the profitability of the securities finance desk. Operational inefficiency has always been unwelcome, but previously the profit and loss implications of this inefficiency were less obvious. However, CSDR will make these P&L consequences crystal clear.
So this launched a call to arms for the industry and created a real catalyst for our customers. This is the reason why we have developed the product over the past six months together with our customers. I’m happy to say that we have 21 clients that will be live when we launch in the next four weeks. We have a design partnership group and we are confident that we will help our clients manage and minimize the impact of penalties.
What are your future development plans with Trade Risk Manager?
Frost: CSDR was the first solution our customers wanted us to solve with the new product suite, but it’s really just the start. Over the next 12 months and beyond, TRM will become the unique tool for managing risk throughout the post-trade lifecycle.
Soon we will be launching rate breaks in real-time contract comparison, followed by other types of risk and other post-trade processes. It’s not just about managing your risks and breaks in one place, it’s also about providing additional automation. We take a look at the manual processes that still exist today, especially within the front office, which take their time and distract from trading.
We’re also taking a close look at other changes happening in the industry, such as the proposed move to T + 1 regulation in the United States. It’s going to require a lot more automation, real-time data, and real-time processing, which our services are well positioned to deliver.
Working with our clients has been absolutely essential in hearing the challenges they face. Through this design partnership, we set priorities based on consensus within the group about what to deliver next. Like I said, there will be a lot more stuff we deliver throughout 2022 and beyond.
How does this fit with Pirum’s FutureTech initiative?
Morgan: Our FutureTech initiative, as the name suggests, prompts us to focus on future technological innovation. An essential element is to stimulate operational efficiency and to meet the requirements of regulatory adaptation. Indeed, our main strength as a company is to automate the entire workflow in secured markets, such as equity lending, repo and, increasingly, over-the-counter derivatives.
As a technology company, we are clearly aware that distributed ledger technology, the common domain model, and the move to the cloud, among others, are increasingly of interest in the market. We are looking to use this new technology to solve some legacy technology issues.
We are in a privileged position to have over 100 clients who come to us with their problems. Hopefully over the past 20 years we have shown that we can be trusted to provide solutions to these problems. The FutureTech initiative is therefore designed to ensure that we maintain our position at the top of solution development, not only for the present but for the future, whether it’s changing the ecosystem or adopting new technologies. . However, there are many other elements of this initiative that you will be hearing about over the coming year.