Tsunami of Regulation - The Buy-Side Braces for a - PRACTICAL ADVICE FROM - Global ...
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PRACTICAL
ADVICE FROM
DTCC EXPERTS
The Buy-Side Braces for a
Tsunami of Regulation
in 2020 and Beyond
The Impact of Upcoming Regulations on the Buy-Side
PREPARING FOR THE PIPELINE INTRODUCTION (MTU) Product Management Consultant Buy-side firms face an unprecedented Timeline of Buy-Side at DTCC, says clients preparing for UMR wave of financial and operational Regulatory Compliance Dates will face similar considerations. “Some challenges in 2020 and beyond as they firms may need to transform securities prepare for the perfect storm: the go-live 11 October 2020: SFTR phase- into cash to post collateral or meet of multiple new regulations. Over the three reporting obligations for margin calls under the new rules, which next 18 months Uncleared Margin Rules buy-side firms is uncharted territory for them,” he says. (UMR) along with key provisions of “Their approach may be to start trading the Securities Financing Transactions 1 February 2021*: CSDR’s repo, and that brings them into scope for Regulation (SFTR) and Central Securities settlement discipline regime SFTR and CSDR.” Depositories Regulation (CSDR) will take (SDR) “A firm with limited resources should effect. For the buy-side, this regulatory examine all the regulations to identify tsunami is straining traditional operating 1 September 2021: UMR phase overlaps and synergies in its compliance models and introducing new costs and 5, threshold aggregated average strategies,” says Mark Steadman, regulatory reporting requirements. notional amount (AANA) > EUR/ Executive Director, Repository & UMR’s phases 5 and 6 offer one example USD 50 billion Derivatives Services (RDS) Product of the compounding impact of these Development at DTCC. “A central project multiple regulations and the law of 1 September 2022: UMR phase management office function could unintended consequences. These phases 6, threshold AANA > EUR/USD perform this work. For example, today a will predominantly impact funds and 8 billion firm might choose to forego settling on institutional investors, requiring buy-side time in order to have more time to source firms to perform functions they have its data. But, because all these regulations never before undertaken. Many firms are emphasise timeliness, if the firm moved expected to make securities lending a key funds and other market participants. from manual to automated sourcing, it element of their liquidity management “A period of substantial regulatory could also achieve timely settlement and strategies to offset UMR’s operational change lies ahead for the financial reporting.” and funding costs. In turn, this reliance sector,” says Matt Johnson, Associate “Firms that internally discuss how they on securities lending will increase firms’ Director, Institutional Trade Processing will interpret and address the rules will SFTR reporting obligations and cause (ITP) Product Management at DTCC. benefit,” says Johnson. “Teams should other adverse effects as firms look to “It should prompt a holistic assessment share their information and collaborate as mitigate settlement risk under CSDR. of the impacts on firms’ operations and much as possible.” Relevant authorities recently postponed how firms can prepare for successful In that spirit, we sat down with these the implementation dates of SFTR implementation.” Johnson cites CSDR as DTCC executives to discuss key client phase-one and UMR, with the delay an example: this mandate is expected to priorities and available solutions as firms of CSDR’s settlement disciple regime increase the volume of stock loans and prepare to manage the regulations coming (SDR)* expected by the industry, which borrows as participants look to cover through the pipeline in the months ahead. will help firms maintain their focus short positions. Repos may be also be on managing daily operations during used to cover shorts to enable settlement UMR AT A GLANCE with Duncan the coronavirus pandemic. While this and avoid buy-ins and penalties under Scott, MTU Product Management temporary relief allows firms to postpone CSDR. However, Johnson points out, Consultant, DTCC allocating resources to the technology “all of those repos and stock borrows and operational upgrades needed to meet and loans will need to be reported under The first four phases of UMR have come demands of these regulations, it does SFTR when the first phase of SFTR goes into force in stages since 2016 and have not eliminate the enormous pressure the live this year.” affected banks. Many more firms, most mandates put on asset managers, hedge Duncan Scott, Margin Transit Utility on the buy-side, will come into scope 2 Global Custodian Summer 2020 Supplement
with phases 5 and 6, which are now problem for some firms. Some of those
delayed 12 months to September 2021 and hurdles are removed if you have an
September 2022, respectively. Regulatory existing relationship.
initial margin (IM) in the over-the- In terms of upskilling, maybe you lean
counter (OTC) derivatives space will be a on your specialist settlement staff to
new operational burden for many of these determine what the firm as a whole can
firms. Phase 5 firms with an aggregated do, rather than worry you've never done a
average notional amount (AANA) of more particular thing before in your area.
than EUR/USD 50 billion will need to
exchange IM with their counterparties Besides the operational challenges
for swaps that are not centrally cleared and resource constraints, what other
as of September 1, 2021. The AANA aspects of UMR will be difficult for the
threshold will drop to EUR/USD 8 billion buy-side?
for Phase 6 firms from 1 September, 2022. Keep in mind that as well as posting
IM to a segregated account to secure a
How do UMR phases 5 and 6 affect the counterparty, buy-side firms also have
buy-side? to onboard wherever their counterparty
UMR’s requirements for posting initial chooses to secure them. This represents
and variation margin and mandatory both a documentary and operational
central clearing of OTC derivatives challenge.
are raising margin call volume and
the amount of collateral required How can DTCC help?
substantially. Furthermore, UMR DUNCAN SCOTT, MTU Product Management DTCC helps firms simplify and
mandates that IM be posted by both Consultant, DTCC streamline compliance with emerging
counterparties to each other and this regulations. We saw an opportunity to do
two-way margining be held in segregated this for UMR and developed our solution:
account structures. firms will be very new to these activities the Margin Transit Utility (MTU).
Phases 1 to 4 covered banks but phases and may not have the resources to carry MTU automates the margining process
5 and 6 will predominantly impact funds them out internally. from point of agreement through to
and institutional investors. When these Then, having calculated the amount, settlement. It applies automation to
phases take effect they will put stress on firms must find a way to pay it, bearing in the validation, enrichment, settlement,
buy-side operating models and introduce mind the need to use segregated accounts. reporting and monitoring of matched
new costs and regulatory reporting collateral calls globally. MTU
requirements for these firms. Can you offer guidance for how to incorporates a feed from AcadiaSoft,
evaluate whether to outsource or which provides matching for 70% to
What firms will be impacted? handle in-house? 80% of the industry’s margin calls. We're
The size of a firm’s AANA of derivatives I recommend doing a gap analysis of your connected to the SWIFT network so, very
is the determining factor. Firms can firm’s skillset. If you're already posting simply, we get a message from AcadiaSoft
perform a relatively quick, two-step check margin, calculation of IM may be the only that says party A and party B have agreed
to see when they’ll come into scope. new thing you need to master. And that’s to move collateral in the following form
For phase 5, in-scope firms will have an the piece I would focus on - getting help from one to the other. To get collateral
AANA of non-cleared derivatives of EUR/ with the calculations, using the existing settlement instructions, MTU leverages
USD 50 billion or more - but they need models that are out there. DTCC’s Alert® standing settlement
to start posting initial margin only where Other aspects of meeting the instructions (SSI) database, which is
their IM calculation versus a particular regulations, such as connecting to the industry standard for settlement
counterparty exceeds EUR/USD 50 tri-party providers or a third-party instructions, then SWIFT messages are
million. Then, the AANA threshold will custodian, are within the realm of a lot of generated to the custodians and, tri-party
drop to EUR/USD 8 billion for Phase 6 operations departments. agents and/or paying agents.
firms beginning 1 September, 2022. UMR requires that the model used to
calculate IM is subject to back-testing What about the credit and liquidity
What are some key challenges of UMR and the responsibility to do this testing risk firms incur from UMR?
implementation? remains with each firm. Use of a common MTU also helps firms manage credit
First is the in-scope assessment process. industry model will allow you to meet the and liquidity risk by accelerating the
Second is calculating the requisite initial UMR requirements and minimise your distribution of settlement data. Because
margin, a risk-based calculation. Models compliance risk. MTU acts for both parties, upon receipt
are available to do it and firms need to Also, talk to your settlements of the collateral both payer and payee
decide whether to outsource this piece department about their existing repo, can share the status update. This
of work. Firms should also establish a tri-party and securities lending facilities, transparency allows firms to work with
process for agreeing to the amount with then piggyback off them where possible. real-time settlement rather than assumed
their counterparty. In phase 5, a lot of Account opening is proving quite a settlement, which is quite important
Sponsored by Summer 2020 Supplement globalcustodian.com 3
for credit and risk managers as well as How can firms improve confirmation
treasurers in financial institutions. With and settlement to reduce trade fails?
assumed settlement, by contrast, firms We encourage electronic or automated
book what they assume was paid or confirmation. If you're trading with a
received but the next day may learn there broker that requires an email allocation
was a break or a fail and have to unwind or email confirmation, you may want
or make adjustments. to look at moving confirmation onto an
automated platform.
Why is margin call automation We also advise automating the various
important? steps in the settlement process. Now that
Technology upgrades have accelerated Europe works on a T+2 settlement cycle,
trading and post-trade processing you only have 48 hours after execution to
across many asset classes, yet much of capture the trade, book the trade, confirm
the activity around margin calls and it, affirm it, instruct it, fund it, pre-match,
collateral movement remains untouched then settle. At the same time, you need to
by automation. The result: margin calls make sure the reference data you're using
today still rely in part on faxes, emails - i.e., settlement instructions - are correct.
and manual processes – which slows
processing, impedes transparency and What tools are available to the buy-
increases error rates. side?
MTU delivers the automated workflows DTCC’s ITP no-touch workflow offers
firms absolutely require in order to meet multiple tools to facilitate confirmation
the rigorous operational demands of and settlement and minimise inaccurate
rules like UMR and avoid the financial MATT JOHNSON, Associate Director, ITP or incomplete standing settlement
penalties for noncompliance. Product Management, DTCC instructions (SSIs), which are one of the
biggest reasons for trade failure.
CSDR AT A GLANCE with Matt Confirmation ensures you understand
Johnson, Associate Director, ITP regulation to date in the UK and Europe, what's been bought or sold, what needs to
Product Management, DTCC it changed best-execution rules that were be delivered or received. Ideally it should
referenced in the first iteration of MiFID. also verify the place of settlement and
CSDR aims to harmonise the Best-execution rules for the buy-side location of the relevant accounts. If both
authorisation and supervision of central now require firms to take into account parties provide that information and both
securities depositories (CSDs) across the things like settlement cost and settlement parties have agreed, you've locked in your
EU and improve settlement discipline in likelihood when placing business with economic risk and your settlement risk.
the securities settlement systems they an investment bank or broker-dealer. Using the no-touch workflow eliminates
operate. Its settlement discipline regime These mandates are relevant to CSDR’s your need to pre-match prior to
(SDR), anticipated to go live 1 February, discipline regime because they’re all settlement because it's been done straight
2021, introduces penalty fees for failed about increasing settlement performance after execution as part of confirmation.
transactions and forced mandatory buy- across European markets. In preparation Our central trade matching platform
ins where a failing participant does not for CSDR buy-side firms should start (CTM™) enables same-day confirmation
deliver the financial instruments to the looking at their brokers’ post-trade and matching of trades globally. CTM
receiving participant within four, seven performance. in tandem with our ALERT database
or 15 days after the intended settlement can reduce SSI-related trade fails by
date depending on the asset class of the All markets have failed trades. Is enriching trades with golden-source
transaction. it utopian to try eliminating failed account and standing settlement
trades? instructions. Additionally our ALERT Key
What’s most important for buy-side Failed trades are inevitable, but certain Auto Select (AKAS) feature determines
firms to know about CSDR? strategies can minimise their incidence. the preferred place of settlement and
CSDR’s provisions are very broad CSDR imposes penalties to ensure you are location of accounts.
but a key aspect of this mandate is its not the party responsible for a fail. We encourage clients to populate their
settlement discipline regime. We expect We're telling our clients to take a outbound SWIFT messages to their
the SDR will come into force in February critical look at their trade processing, settlement agent or custodian with
2021 and will have a huge impact on every from execution through to settlement this locked-in data. That way, they’re
single post-trade market participant – to and including the way trades are being distributing the same data they’ve agreed
the point that firms, including on the buy- captured after execution and how they’re with their broker-dealer all the way
side, will have to change the way they being confirmed. through the post-trade lifecycle.
conduct business. The key is prevention, prevention, For buy-side firms we offer the Global
If we look at the Markets in Financial prevention. If you don't fail any Custodian Direct workflow. This tool
Instruments Directive (MiFID II), transactions, you have nothing to worry allows global custodians to manage SSI
probably the biggest piece of financial about regarding the SDR. maintenance and ownership within
4 Global Custodian Summer 2020 Supplement
DTCC’s Margin Transit Utility
(MTU) automates the margin
settlement process for OTC
derivatives transactions and
other marginable products on
behalf of buy-side firms, their
administrators and custodians
and dealer counterparties. MTU
leverages the ALERT® database
to obtain collateral instructions
to minimise trade fails.
MTU Features & Benefits
• Accommodates bilateral,
third-party and tri-party
workflow
• Eliminates the need for direct,
multiple builds to individual
counterparties and custodians
• Validates formatting of
pledge-accepted margin calls
• Integrates with ALERT® to
enable real-time enrichment of
collateral standing settlement
instructions
to settlement. If trades do fail, the gaps, we can help clients plug them -
• Automates outbound exceptions can be highlighted, and by identifying the DTCC services they
settlement instructions the dataset can be shared among the can use or, for those who want to keep
relevant parties to that transaction. some work in-house, recommending
• Eliminates the need for Fixing exceptions prior to trade failure, capabilities they should build in order to
authenticated release faxes or quickly after, allows firms to mitigate mitigate their settlement risk.
where counterparties use a their exposure to regulator-imposed Some clients may achieve top marks
segregated account at a third- penalties and buy-ins. across all four areas of the scorecard
party custodian yet still have trades fail. In that case, the
Can CSDR preparations be scorecard says you're likely not at fault
• Delivers consolidated end-of- outsourced? because your processes are designed to
day reporting Buy-side compliance cannot be make sure the trade is settled with finality
outsourced to a custodian or a broker. on its settlement date.
• Offers scalability and capacity Therefore, firms must look for gaps in One thing that I emphasise to my clients
to handle rising collateral their current trade processes and post- is: make sure you're using your systems,
demands trade lifecycles in terms of what the in-house or outsourced, the way they're
CSDR discipline regime will impose, then intended. If you use a service, utilise all of
run an analysis to judge whether they can its features - it doesn't cost you extra and
plug those gaps internally or need to seek you'll get additional benefit when CSDR’s
out a vendor or third-party system. discipline regime takes effect.
Our clients can do this gap analysis
ALERT on behalf of their buy-side clients using a DTCC best-practice scorecard SFTR AT A GLANCE with Mark
by automating the exchange of SSIs that breaks the post-trade lifestyle Steadman, Executive Director, RDS
between a custodian’s central repository into four components: SSI and general Product Development, DTCC
and the ALERT database. reference data; confirmation and the
In cases where trade failures and automation of confirmations; notification SFTR phase-one, with a three-month
exceptions do happen, DTCC Exception out for settlement; and exception delay, is now scheduled to go live
Manager will allow counterparties to management capture and trade analytics. simultaneously with phase-two on 13 July,
view exceptions when they occur so The scorecard can identify gaps in data 2020. Buy-side firms will be primarily
they can be addressed or fixed prior sources or processing. Where there are captured in phase-three, scheduled to
Sponsored by Summer 2020 Supplement globalcustodian.com 5
take effect on October 11, 2020, followed
by non-financial counterparties (NFCs) DTCC Tools to Minimise Trade
in January 2021. The regulation aims Fails
to reduce perceived shadow banking
risks in the securities financing markets CTM™ enables same-day trade
by imposing conditions on the reuse confirmation and matching by
of financial instruments provided as automating the processing of
collateral and requiring that managers of equities, fixed income and repo
UCITS and alternative investment funds trades from trade execution to
(AIFs) make detailed disclosures to their instruction.
investors regarding their use of securities
financing transactions (SFTs) and total CTM used in conjunction with
return swaps. To provide transparency ALERT® reduces the likelihood
to regulators SFTR also requires both of SSI-related trade fails by
parties to a trade to report new, modified automatically enriching trades
or terminated SFTs and the associated with account and standing
collateral to an ESMA registered or settlement instructions.
recognised trade repository (TR) on a T+1
basis. CTM used along with ALERT Key
Auto Select (AKAS) populates
What are the biggest challenges SFTR preferred place of settlement
poses to buy-side firms? and preferred depository.
I don't think anyone would disagree
that SFTR is the most complex trade DTCC Exception Manager
reporting regime to date. SFTR supports timely settlement by
requires the reporting of the underlying accelerating the resolution of
collateral, not just its netted value, trade exceptions.
therefore collateral reuse reporting
may be difficult to delegate, and then DTCC best-practice scorecard
there is the pain of sourcing the data to helps firms conduct gap
populate 155 fields, including a unique analyses of their post-trade
transaction identifier (UTI) which needs processing.
to be paired and shared. Additionally,
the formatting requirements for SFTR
reports submitted to TRs are strict - they
must be in ISO 20022 - so any firm not
well versed in reporting in XML will face Presumably some buy-side firms have
a challenge. If that isn’t enough, repo, not yet started preparing for SFTR. Do
stock lending and margin lending are very you have advice for these firms?
different products with very different Many of these firms may be unfamiliar
workflows, and each has its own industry with SFTR and the regulatory
representative body. So there's a lot to get expectations around it, so first they should
your arms around. undertake an audit. What security finance
products do you trade? What products
Tell us more about the difficulty of are you in scope for? Who do you trade
collateral reuse reporting for the buy- with today? Start talking to those firms,
side and its implications? especially if you are seeking to delegate
Collateral reuse needs to be reported your reporting.
at an aggregated level for each entity Second, they can gather lots of useful
that reuses its collateral. As its not at a information through industry bodies
trade or counterparty-to-counterparty like the International Capital Markets
level as with all other trade reporting, Association (ICMA) and International
and requires some sensitive information Securities Lending Association (ISLA).
to be provided, this means delegating Each have issued SFT reporting best
this to another party is going to be very practice guides.
difficult to do. Certain restrictions are When it comes to reporting, DTCC
already in place for reuse but, given the is enabling clients to meet their SFTR
nature of reuse reporting under SFTR, reporting obligations through our Global
this regulation may make it too onerous to MARK STEADMAN, Executive Director, RDS Trade Repository (GTR) service. GTR
bother with reuse. Product Development, DTCC is the world’s largest trade repository
6 Global Custodian Summer 2020 Supplement
DTCC’s SFTR Solution: GTR +
DTCC Report HubTM Service
The Global Trade Repository
service (GTR) in combination
with the DTCC Report Hub
service simplifies the trade
reporting process.
DTCC Report Hub’s customisable
suite of quality assurance and
reconciliation tools manage
trade data on the front and
back ends of submission.
The service’s pre-reporting
capabilities include, among
others, data normalisation, data
enrichment, pre-validation and
exception management.
Once the data has been vetted
and formatted, clients submit
it to a DTCC licensed/registered
trade repository.
Post-submission, clients can
use the DTCC Report Hub’s
post-reporting capabilities
to reconcile GTR end-of-day
reports with the data submitted
from their internal books and
records.
for OTC derivatives reporting and it is end, to reconcile reported data with firms’ way for firms to allocate resources
entering the securities financing market as internal records. Yet most firms lack by alleviating the stress on in-house
a registered TR. efficient, rationalised in-house systems technology and staff.
With our years of experience in and procedures to perform this work.
jurisdictions around the world, we We built the DTCC Report Hub to At the start of this conversation,
understand clients’ top pain points serve this unmet need, which will only we discussed the extent to which
around reporting and can advise on best keep growing as reporting mandates are clients can benefit from overlaps and
reporting practices. We’re also committed extended to more jurisdictions and get synergies in preparing for UMR, CSDR
to minimising the client build-out effort more complex. In fact, we plan to adapt and SFTR. Is DTCC looking at new ways
for SFTR. To that end, we have rolled out the service to function across products to connect the dots between services
the DTCC Report HubTM service, a suite and regulatory jurisdictions. to offer greater value?
of tools clients can use in combination The DTCC Report Hub leverages Absolutely yes. We're continuously looking
with GTR to manage their pre- and post- automation technology to translate for ways to join our services together
reporting tasks. transaction data into formats required by into a more seamless offering that helps
regulators, enrich the data using reference our clients. Now that we’ve incorporated
Be more specific about these pre- and data sources, and find and fix errors and/ MTU into our ITP service suite alongside
post-reporting tasks and how the DTCC or missing data before firms submit to a CTM, ALERT, DTCC Exception Manager
Report Hub works. TR. The service also lets users compare and other post-trade capabilities, we offer
SFTR requires extensive effort to their trading books to transactions to clients a fairly comprehensive solution
transform and enrich trade data so that it ensure the trade reports match. for UMR and CSDR compliance. And
meets stringent eligibility, completeness, Because users choose the features they GTR is now working with our CTM team
accuracy and timeliness standards before want, the DTCC Report Hub service is a to develop straight-through processing
it is submitted to a TR in the mandated flexible toolbox for buy-side and dealer from CTM into GTR, which will further
ISO 20022 XML format and, on the back firms, small or large. It is also an efficient streamline SFTR trade reporting.
Sponsored by
Summer 2020 Supplement globalcustodian.com 7
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