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A New Year always brings a revised sense of hope and expectation. But as we enter a new decade, the financial industry seems to be facing some age old problems. Two key questions for both the sell and the buy-side are: “do we truly understand exactly what our client costs are across the business?” and “how do we improve our Return on Equity (ROE)?”
Hardly a week goes by at the moment without another big name reviewing and retrenching from certain asset classes as they review ROE by asset class and region. Indeed some are deciding to get out of the Cash Equities business altogether to focus their attentions on the debt and currency markets, while others are centralising cross asset processes and technologies globally. Given the punishing low-rates of interest, the continued competitive squeeze on fees and commissions, following reduced rates by automated houses, the general growth in global competition and the increasing cost of multiple regulations (MiFID II, EMIR), not to mention the abundance of new Tax regimes (FTT, 871m), it is understandable why some are deciding to focus on their core strengths in specific markets. After allif you are good at something and can make money from it, then why not focus on that specific area?
One particular regulation with a very prominent profile is the Central Security Depository Regulation, more commonly referred to as CSDR. The Settlement Discipline part of CSDR comes into force at the end of the year, and requires European CSDs to automatically apply financial fines (penalties) to market participants who fail to complete transactions on the Contractual Settlement Date; awarding these penalties to the other side of the transaction. Worked out in basis points, these daily penalties vary by the type of instrument transacted, with different rates applying to equities than to corporate bonds, government bonds etc. Additionally, the legislation requires houses to then manage a new enforced “Buy-In” process.
From investment banks, brokers and fund managers, to custodians, CSDs and clearing houses, numerous market participants are all directly affected by CSDR. While each participant is affected differently, the regulation needs to be seen by all as not only a 2020 need to understand failures reasons and costs, but as a chance for operational departments to help COOs drive operational improvements around penalties and buy-in processes, making the front office and the board take notice.
One firm’s penalty will be different to another firm’s credit. Between now and the enforcement of CSDR, large sections of the market need to get their houses in order. Multiple CSDs need to work out a standardised way for calculating fines and penalties, custodian banks need to figure out a more efficient way of validating penalties and passing on key information to their clients, all while investment banks and brokers adopt new settlement processes, and fund managers start trying to deliver securities on time. There is, literally, no hiding place for any of these market participants. For those that act now there is an opportunity pre-regulatory go-live to deliver benefits and reduce the financial impact of the regulation. But for those that fail to act, they will quickly find that this particular law costs them much more than they initially thought.
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