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in reducing settlement failures . A yearlong collaboration between Citi and JP Morgan on AccessFintech ' s platform resulted in a 30 % reduction in fails , and a 76 % drop in email traffic for operational processes . “ That ’ s what we want to get organisations to do and that ’ s my message to the market : don ’ t push your product and your operational resource into penalty validation , your focus should be on actually eradicating the fails that are driving those penalties in the first instance ,” says Cassells . “ It feels like the industry has lost its way a little bit on that front , and that ’ s where they need to start making changes .” Implementation of such processes have proven to be successful , so perhaps there needs to be more encouragement , or pressure , from the regulators on companies to utilise them – rather than using the threat of the incredibly unpopular mandatory buy-in regime .
The dark cloud on the horizon The mandatory buy-in question has been a contentious one to say the least . Since the initial proposal of mandatory buy-ins back in 2014 , the industry has pushed back , often with particularly colourful language . In its first response to the proposals back in February 2015 , The International Capital Market Association ( ICMA ) noted that its members are “ vehemently opposed to the inclusion of a provision for mandatory buy-ins , which will not only be detrimental to European bond market efficiency and liquidity , but is unlikely to improve settlement efficiency ”. Similar appeals have emanated from across the industry over the course of the last seven years and while they have been successful in the short-term , MBIs continue to represent a dark cloud looming on the not-too-distant horizon . Speaking back in March this year , Emiliano Tornese , deputy head of unit , DG financial services and capital markets union , financial market infrastructure at the European Commission , said that the deferral had been made “ in the context of Covid-19 to avoid duplicative costs ”, but should they not improve , the Commission would not hesitate in implementing the mandatory buy-ins following the threeyear deferral period . But the buy-in proposals in their current state are vague and inflexible – something that the CSDR Refit proposals have sought to remedy . “ The Refit does propose that penalties can be calibrated in the future , which is a good thing ,” says Mohindra . “ It also says that buy-ins will not be introduced until a certain asset class has a key concern in terms of performance , which is also welcome , as not every asset class will be subject to the buy-ins if one particular area is performing poorly .” However , Mohindra believes that the proposals do not go far enough when considering the MBIs . “ There ’ s no provision to retract or permanently suspend future buy-in rulings on particular asset classes , there ’ s no discussion on making buy-ins voluntary rather than mandatory , and no mention of needing to appoint a buy-in agent , despite there being no buy-in agents available anymore .” A more pragmatic approach to the mandatory buy-in question could ease the fears of the industry , while a more open forum between the regulators and the market participants could provide more fruitful results for all involved .
But the directive from the European Commission remains clear : improve settlement efficiency and you won ’ t have the worry about mandatory buyins .
Co-operation and commitment Unquestionably , it has been a rocky start to life under CSDR – but perhaps that is to be expected with such a wide-ranging directive . A catalogue of challenges have plagued the early days of the regulation , but there is a clear commitment from the industry to come together and make it work . “ There is a lot of work going on to try and improve the operation of the penalties mechanisms ,” acknowledges De Paolis . “ There are several industry working groups that are looking at individual problems , and there is an effort to try and draft market standards that would cover the full end-to-end process in the custody chain . This work is a demonstration of the commitment of the market to making the process work .” This co-operation and commitment is key to the future success of CSDR , and with an increasing number of firms implementing automated solutions , partial settlements gaining in popularity , and participants now more used to the workings of the regulation , the industry is moving in the right direction to drive down fails . The consensus from the start has been that success will take time , and perhaps it is a little too early to take stock just yet – but the threat of mandatory buyins looms larger over the industry with every month that settlement efficiency does not improve . Despite the positive sentiment , it is that bottom-line settlement data that will instruct the regulatory hammer .
“ For the mechanism to work properly , there is a critical need for a very high level of accuracy , reliability and straight-through processing throughout the custody chain . Despite some recent improvements , the market as a whole has not yet reached a sufficiently high level of processing efficiency .”
ROBERTO DE PAOLIS , GLOBAL MARKETS MANAGEMENT , BNY MELLON
60 Global Custodian Fall 2022