CSDR Client Concerns: Part 1

Insight

CSDR Client Concerns Part 1: Pre-matching & Returns

CJ Emson

Jan 2022

February 2022 sees the implementation of the Third Phase of Central Securities Depositories Regulation (CSDR), which has a specific impact on the securities lending market.

EquiLend surveyed our community of clients across Europe and beyond to understand the most pressing issues facing market participants pertaining to CSDR ahead of go-live and beyond. Of the most-raised issues from across the securities finance community, we’ll tackle each of the below individually over the coming weeks.

Industry Concerns

Across our client community, common concerns emerged around a handful of themes across the borrower and lender space, including:

  1. Pre-matching & Returns
  2. Standard Settlement Instructions (SSI) 
  3. Collateral agreement

Do these CSDR concerns echo your own? Add your voice to the discussion on LinkedIn here.

Issue 1: Pre-Matching

Where pre-matching or matching at point of trade occurs, such as that offered in EquiLend NGT, there is a significant advantage to be gained downstream where trades are less likely to fail if matched early, benefiting both sides of the trade. Efficiencies can also be found within the returns process for both counterparties. EquiLend Settlement Monitor  can help keep sub fund bookings in line and display lender SSIs to help ensure the return is booked against the correct sub fund and SSIs .

Delays in affirmation and under-utilization of pre-matching and other trade lifecycle management tools increase the risk of delayed settlement with every trade. CSDR compounds the risk by adding a potential financial penalty to these not-insignificant risks. Further impact on liquidity will be significantly lessened and the potential for settlement fines greatly reduced with increased uptake of pre-matching tools across both borrowers and lenders. 

Returns

Returns are one of the most impacted trade flows as a consequence of CSDR, and the importance of timely settlement has increased dramatically as talk has turned to how these will be managed under the regime. Returns volume has significantly increased with market growth and returns the most problematic trade flow to settle: shape mismatches, incorrect SSIs, manual processes, lack of inventory and late-booked trades all contribute to inefficiencies.

The practice of processing returns manually via email and telephone does persist and creates deeper inefficiencies for clients and their counterparties as these are time consuming to book, often introduce new opportunities for mis-bookings and subsequently increase the chances of failure dramatically.

With multiple interconnected solutions, EquiLend offers a number of options available to better manage returns including EquiLend Settlement Monitor and EquiLend Exposure. Clients can choose to submit returns directly into our platform via the simple OneFile upload process to reduce these issues. Our solutions provide clients the opportunity to take advantage of STP processing and late cut-off times for accepting returns.

EquiLend’s automated returns product enables clients to confidently book same-day returns as late as up to 30 minutes before market cut-off time. Clients can be confident that the booking will be correct, accepted and instructed, delivering both financial and reputational benefit. Borrowers will not incur costs for unnecessary over borrows, and lenders will not be penalized for late matched or failing trades. What results is a true benefit in any process, and financially beneficial under CSDR. 

The Year of CSDR and Beyond

As CSDR comes into force, we anticipate an increased volume of same-day returns to reduce the potential of late-matched trades and trades failing due to short inventory. This puts tremendous strain on the booking model. Ensuring the greatest accuracy at point of trade with pre-matching tools through NGT ensures trades go on quicker, and same-day returns booked through EquiLend’s automated returns products ensure these will settle, reducing the cost burden for all market participants. 

Who We Are

EquiLend is a global financial technology firm offering trading, post-trade, market data, regulatory and clearing services for the securities finance, collateral and swaps industries. EquiLend has offices in New York, Toronto, London, Dublin, Hong Kong and Tokyo.