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CSDR: Improving Settlement Efficiency with Data Governance

21 May, 2020  |  By PeerNova   |  Published in Articles,

CSDR: Improving Settlement Efficiency

The 2009 financial crisis highlighted severe gaps in the financial industry’s regulation. Regulators began to enforce stricter compliance and better risk governance. Various regulations (e.g., BCBS 239, Basel IV, CCAR, Dodd-Frank, and more) were implemented to ensure financial institutions could better anticipate, manage, and assess risk to weather future economic downturns. Ultimately, the regulatory goal was to improve the functioning and stability of the financial markets, to both recover from past economic crises and prepare for future ones.

In 2014, G20 leaders (an international forum for the governments and central bank governors from 19 countries and the European Union) agreed to reform the current financial markets through strict regulatory frameworks to:

  1. Enhance the resiliency and supervision of banks
  2. End Too-Big-To-Fail (TBTF) banks and scenarios
  3. Promote and mandate central clearing for certain asset classes
  4. Regulate the non-banking financial sector

Stricter Regulations: CSDR

The Central Securities Depositories Regulation (CSDR) is the latest in a series of regulations aimed at increasing the safety and efficiency of securities settlement and settlement infrastructures (CSDs) in the European Union (EU). It attempts to provide a set of common elements for CSDs’ operating securities settlement systems (SSSs). The regulation is a part of the overall EU regulatory reforms, which include the European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive II (MiFID II).

While CSDR was published in the official journal of the EU in 2014, the regulation was first introduced in 2010 – with a 10-year roadmap for completion. It is currently in the process of being implemented with some of its provisions enacted in phases.

In February 2021, the Settlement Discipline Regime (SDR) will step in to reduce the number of securities transactions that fail to settle on the Intended Settlement Date (ISD), and to reduce the duration of such settlement failures (Source). These additional rules provide penalties for failed settlements and a mandatory buy-in mechanism after four business days of failing. Ultimately, SDR aims to improve settlement efficiency on a much larger scale.

data governanceMain Objectives of CSDR

According to DTCC, the main objectives of CSDR are to:

  • Increase the safety and efficiency of securities settlement and settlement infrastructures (CSDs) in the EU
  • Create a level playing field amongst CSDs to harmonize settlement processes and standards across the industry
  • Improve settlement efficiency rates, shorten settlement times, and reduce overall risk for the industry
  • Impose penalties on counterparties that fail to settle within prescribed timelines
  • Suspend any systemically failing entities

Additionally, CSDR complements the current asset management, banking, CCP, trade repository, and exchange regulations (UCITV V, AIFD, CRR/CRD IV, BRRD, EMIR, MiFID II/MiFIR). The regulation is an additional piece to the giant regulatory compliance puzzle.

Trading Timeliness and Process
CSDR focuses on both harmonizing the CSD landscape and providing clarity on both the timelines and the associated penalty charges that would be imposed if trades fail. The regulation provides assurance that the exposure relating to any trade that “fails to settle” on the intended settlement date (ISD) creates exposure for a maximum period of 10 business days before the transaction is either canceled or cash-settled. CSDR significantly improves the industry’s overall exposure to risk while reducing the capital add-ons that banks incur today.

Data governance

Key Challenges with CSDR Implementation

Financial institutions face many challenges in effectively managing the implementation and impact of CSDR. CSDR affects many parties across the financial industry. Currently, there is no uniform tool that can support them. While the CSDs (and in some cases CCPs) are the ones to administer penalties for failed transactions, the actual responsibility is placed on the banks. Banks must have effective tools and processes to ensure settlement on the ISD. With increasing volumes of data and transactions, even the most efficient and prepared financial institutions struggle.

Very few banks have true end-to-end (E2E) workflow solutions that can effectively manage the various events associated with CSDR, such as:

  • Efficient and timely preparation of trades ahead of ISD
  • Inventory optimization to mitigate settlement failures
  • Effective lineage and insights to appropriately attribute SDR penalties either internally or externally

Since 1980, the value of financial transactions has more than tripled. While there are no definitive statistics as to the collective value of “failing” transactions, even a rough calculation post-CSDR implies a broad range of $5 billion–$1.5 trillion of daily failing trades. The range is wide due to the differing settlement efficiency rates by product, geography, and medium of execution (CCP/OTC). If similar growth is maintained, there is added pressure on Operations teams. This results in a significant cost to an or this industry where firms are already under pressure to manage and reduce costs.

Lack of E2E Visibility
Currently, most financial institutions have fragmented, siloed visibility into their trade landscapes. This poses significant challenges for banks, clients, custodians, counterparties, and service partners who need to ensure they have sufficient insight across pre-trade, trade, and post-trade events. To gain required insights, these institutions require an E2E, integrated view of all their data to support timely root cause analysis and resolution of exceptions before the ISD.

E2E Data Quality Challenges
The complexity of multiple trade flows, systems, and actors involved both internally and externally raises many data quality challenges. To stay compliant and meet ISDs, enterprises must be able to make specific quality assertions about their data—a significant challenge when data is stored in multiple systems. FIs have deployed a combination of tools and resources to manage the quantum of exceptions with limited success due to continued data quality issues. CSDR only adds further pressure to a fragmented process in the absence of an effective and integrated E2E tool.

Difficulties in Measuring Quality Indicators
Data custodians will experience significant time pressures to manage the increase in trade status messages relating to trade rebookings, cancellations, and partially settled trades as a result of any buy-ins. Global custodians will have similar challenges and added pressures to ensure quick turnaround times at the sub-custodian level. This is required to ensure trades are confirmed as “settled” as close to real-time to minimize client queries. The current “claims” process on failing trades will be inadequate to support the new settlement discipline regime, which will require an effective monitoring tool to measure the performance of all parties relevant to a trade at every stage of the settlement timeline.

CSDR Compliance with Effective Data Governance

To achieve CSDR compliance, an effective data governance model is key. An effective data governance framework:

  • Continuously monitors E2E data quality across the institution’s trade landscape
  • Facilitates real-time root cause analysis for efficient and timely resolution of exceptions
  • Provides full auditability and traceability of life cycle events for appropriate attribution of penalties
  • Supports all users (Front/Middle/Ops/Finance/Risk) with a consistent, unified view over the data

While there are many tools available on the market, most solutions lack the necessary E2E data governance framework.

An Alternative Approach: PeerNova’s Cuneiform Platform

As an active data governance tool, PeerNova’s Cuneiform Platform is uniquely positioned to support the implementation and impact of CSDR on financial institutions. The solution provides an E2E integrated data management and governance platform that proactively tracks, monitors, and manages trades through to final settlement.

With E2E visibility across trade transactions, banks have a unified view of all workflows (from pre-trade to post-trade to settlement or fails), to promptly address issues and avoid fines. This added visibility provides transparency and allows for the trade lifecycle events to be seen by the front, middle, and back offices for timely preparation of trades ahead of the ISD. Additionally, the Cuneiform Platform provides full auditability and traceability to ensure the allocation of fines or penalties to the appropriate parties (both internal and external). This E2E visibility allows for better management of the settlement process.

PeerNova’s Cuneiform Platform perpetually runs Data Quality (DQ) and Timeliness Rules on live data across enterprise sources. These data quality checks ensure that data is correct, consistent, complete, and timely—irrespective of any event within the trades’ lifecycle (for example, cancel/correct, partial settlement), thereby claiming confidence in the trade data. Financial Institutions (FIs) can trust their asset inventory levels and liquidity so that they can more efficiently utilize their capital. This results in better capital ratios and returns for the FIs or their clients, as the case may be.

PeerNova’s Cuneiform Platform provides a holistic solution to manage the implementation and impact of CSDR. To learn more about how PeerNova’s active data governance tool can help your enterprise with the settlement process and regulatory requirements, be sure to get in touch with us and request a demo today.

DTCC. “CSDR.” DTCC, 2019, Link
LCH. “The Settlement Disciple Regime of CSDR.” LCH.

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