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CSDR: how penalties and mandatory buy-ins will hit banks

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CSDR: how penalties and mandatory buy-ins will hit banks

By Kerril Burke, CEO of Meritsoft 

What trades will we have to pay penalties on and how much will we need to pay? Which ones are we at risk of being bought in?

Which ones will we have to buy in our best customers on? A roll of the eyes followed by an inevitable sigh and a bloated puff of the cheeks may be the least of the reactions. The response of all too many financial institutions when hearing news of yet another piece of regulation. But certain rules, perhaps more than others, go to directly to the heart of a bank’s profitability and client relationships.

Take the Central Security Depository Regulation, more commonly referred to as CSDR. Far from being another way for politicians to squeeze more revenue out of market participants, on the penalties side, this rule has been constructed in a way that means one side gains, and the other loses on a “fault” basis.

Kerril Burke CEO of Meritsoft

Kerril Burke CEO of Meritsoft

In basic terms, CSDR will require impacted European CSD’s and ICSD’s to apply financial fines for failing to complete transactions on the Contractual Settlement Date and award these penalties to the other side of the transaction. Instead of having a formal agreement between the buyer and seller, there will now be a legal obligation for one side to pay a penalty fee, while the other side receives cash if the trade is not settled on time where they are settling through an impacted CSD or ICSD. Worked out on basis points, these penalties are dependent on the type of instrument transacted, with different rates applying to Equities than to Corporate Bonds, Government Bonds etc.

The problem is that there could, of course, be any number of factors as to why a trade fails to settle. It may be something fairly straightforward such as one side failing to instruct an order to be placed at a certain time. It could be something far more disconcerting, such as the buyer of the security not having enough cash. Conversely, and this the major headache facing banks, the seller may not actually have the security to sell. Or, more likely, may not have enough of the security to fulfil the full delivery obligation and hence fail to deliver the full amount unless a partial settlement is agreed.

However, we all know that in many cases the CSD member receiving the charge may be acting not on its own behalf, but on behalf of their customer. The question then becomes – who should pay the penalty? Should the CSD member being required to pay the penalty pass it on, even though the penalty arose due to an end customer issue? Even more complicated is the question of who should receive the penalty when a credit is received? Even if a firm accepts charges and therefore accepts credits, the question then becomes can it do so due to Client money and other similar regimes?

It’s complex right? And Penalties are by no means the only element to be dealt with. “Mandatory Buy ins” are also being introduced, whereby the buyer of Securities will be obliged to Buy-in their counterpart according to rules. These will not go through CSD’s, but instead be direct obligations between the trading counterparts. Therefore, any situation where a firm can’t deliver what it has promised starts to unravel the inherent complexity of CSDR. For example, firms often sell a security in the hope that the price would fall in order to make profit. However, what happens if the price moves in the other direction, and the firm gets caught on the wrong side of the trade? If the price starts to move sharply, say 15% to 20% in the other direction, the firm may get caught on a short squeeze under the CSDR mandatory buy-ins. This is a process where shares are forced to be repurchased if the seller does not deliver the securities in a timely manner.

Under CSDR buy-ins, what is deemed a liquid security is due to be settled after four days, while an illiquid asset needs to be settled after seven. The trouble is, how does a firm determine what’s liquid and illiquid? In the non-exchange markets, there is likely to be a range of different judgements based on market consensus.

Instead of the trade being valued at the price on which the deal was struck, firms have to revalue the security everyday that the price falls. This highlights the heightened importance of banks doing one calculation based on a joint market view. There is just one sticking point, such services do not exist yet. And this is where problems will start to occur. After all, one firm’s penalty will be different to another firm’s credit. Currently, with no standard market practice for dealing with this issue, market participants will need to try and figure out a way to share information around buy-ins and penalties. Until a solution is found that generates potential buy-in notifications and validations, investment and custodian banks will find that this particular law costs them more than they initially thought.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 1

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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Wall Street bounce, upbeat earnings lift European stocks

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Wall Street bounce, upbeat earnings lift European stocks 2

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

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Miners lead FTSE 100 higher on earnings cheer

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Miners lead FTSE 100 higher on earnings cheer 3

By Shivani Kumaresan

(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.

BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.

Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.

“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.

The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.

The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.

Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.

Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.

WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)

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