Manuj Awasthi, Managing Consultant, Financial Services Securities and Capital Markets at Wipro Limited
As with most things in life, people want harmony and efficiency. Market regulators are no different – they are geared to achieve that harmony, and clarity of operation is a good way to achieve it. However, recognising human nature, the EU has asked for harmony while holding on to mechanisms that make non-compliance not an option. Achieving compliance and avoiding the strict penalties has now become the priority for participants in the securities markets. Global Banking and Finance Review caught up with Manuj Awasthi, Managing Consultant, Financial Services Securities and Capital Markets at Wipro Limited,to discuss the topic:
What is Central Securities Depositories Regulation (CSDR)?
Central Securities Depositories Regulation (CSDR) is a legislation in the European Union that regulates the Central Security Depositaries (CSDs). In August of 2014, CSDR was published to harmonise the different rules applicable to the CSDs in Europe, to establish a level playing field among these CSDs and to increase the safety of securities settlement and the settlement infrastructure in the EU. The wider reach of CSDR has an indirect impact on all market participants who are involved with securities settlement.
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What was the impact of CSDR on the industry?
With the implementation of CSDR all EU member states are required to apply for a universal license in order to operate. This license also includes an EU passport for CSDs to operate in the EU. The license lays out minimum sets of operational and performance standards that need to be fulfilled by the CSDs. Why is this needed? Well, this helps all CSDs avoid and avert the possibility of major financial or settlement risks. With this requirement, testing the CSDs’ operational resilience and governance standards, enhances the governance standards are taken if needed. However, the impact of CSDR is not just limited to CSDs. The regulation impacts all participants in the post-trade space, i.e. custodians, clearing house and clearing banks.
What does this mean for the industry?
Well, this means a number of things. The strict regulation and requirements for obtaining licensing and a passport could result in the reduction in the number of CSDs and would therefore reduce the level of fragmentation in the market. Buy-ins and cash penalties would discourage settlement failures, thereby reducing them considerably; and having separate bank licenses and services would draw a clear line between investment and banking services.
What’s next for CSDR?
In March 2017, the EU Commission published regulatory standards on authorisation and supervision of CSDs, prudential requirements for CSDs, reporting of internalised settlement and cash penalties. Since then, we have seen the technical standards of CSDR enter into force and the deadline for CSDs to apply for re-authorisation. In March 2019, we are set to see the enforcement of level 2 legislation on the calculation of cash penalties and internalised settlement. This will then be followed by the start of the revision process of level 1 legislation in September 2019.
Also, CSDR requires the securities to be issued and transacted in a dematerialised or immobilised format. The majority of the EU has already moved in this direction, except for a small minority in Ireland and the UK. The authorities have implemented a timeline of 2023 for the complete dematerialisation of the new securities issued and 2025 for existing securities in physical form.
How is Wipro responding to all this?
Wipro is responding in a number of different ways. Firstly, through digitisation and process simplification to help the process of dematerialisation of physical/paper securities. Secondly, through data analysis. Artificial Intelligence (AI)has the potential to help analyse data of settlement failures, to arrive at plausible causes of default, entities with the maximum default probability, with the help of history of defaults data.
Another way is through Wipro’s Transform X which can provide significant benefits here, since this engine is designed to transform the non-standardised formats into standardised formats. This will quicken the settlement process by increasing the STP rates. Finally, by moving to a T+2 settlement cycle it means that post trade processes must be executed and completed faster. This also points to the need for a faster and more accurate reconciliation process. Wipro provides solutions with our partners that ensure a faster, simpler and more effective real time reconciliation.