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“ The situation is unclear on what will develop after June 2022 , and we have clear messages from the Commission to move euro-denominated contracts / products to EU-located CCPs ,” says Haroun Boucheta , head of regulatory affairs at BNP Paribas Securities Services . “ The industry has pressure from the Commission to work closely on operational solutions to migrate euro business , using EU27 CCPs .”
Post-trade fragmentation The lack of cross-border equivalence for not only clearing , but also settlement of securities , means clear lines have been drawn between UK and European posttrade venues . Banks are concerned about the impact of fragmentation on costs for clearing and settlement .
The costs will come from investment firms and banks having to adapt their technology infrastructure to manage a dual post-trade framework . Largersized firms may be able to absorb these costs , but it will make barriers to entry for smaller-sized firms even harder to overcome . As a result , some asset managers could be forced to operate in just one jurisdiction .
“ Firms have broadly adopted a model where you have one system , but you guide the trade processing to different venues , with localised processing funnels ,” says Samir Pandiri , president at Broadridge International . “ A very small second group are firms who basically decided they didn ’ t have the scale in either the UK or the Continent to make it worthwhile preparing to continue service in that jurisdiction .
“ Post-trade solutions need to take into account three variables : trading in
" We have clear messages from the Commission to move eurodenominated contracts / products to EU-located CCPs ."
HAROUN BOUCHETA , HEAD OF REGULATORY AFFAIRS , BNP PARIBAS SECURITIES SERVICES multiple geographies , clients in different jurisdictions and where the post-trade processing is actually done . We did a lot of one-off configuration with new client entities since 2016 , and that ’ s all been working well . But the Brexit work is also enabling a broader re-set on post-trade , with providers needing much more flexible / customisable systems to keep competitive .
“ With trading volumes moving around between venues , post-trade services must now offer much more price flexibility and more variable cost , which will act as a further stimulus to mutualisation . The increased complexity also highlights the necessity of better data models , to spot inefficiencies , such the costs of a fail for example .”
Regulatory fragmentation As outlined , the UK is seeking to overhaul certain European regulations to make itself a more attractive financial services centre . It could appear that the UK is taking a different approach to post-trade regulation , following its decision to not implement the SDR rules . It did , however , state it will consider the future approach of the rules to the UK ’ s own post-trade framework .
The danger here for firms is that regulatory fragmentation could require double the amount of work and resources to stay compliant in both jurisdictions .
“ With the UK opting out of CSDR , there will be separate regimes around settlement discipline ,” highlights Reto Faber , head of direct custody and clearing for EMEA at Citi . “ It may look to align with some aspects of CSDR , but right now it looks like there will be a dual system affecting crosslisted shares . This is going to bring additional and duplicated costs , as well as increased complexity to deal with multiple regimes .”
That being said , the decision by the UK to implement CSDR differently could provide a glimmer of hope for banks and investment managers that the EU will review its contentious mandatory buy-in regime .
“ Fragmentation is going to come on a wider scale throughout the year . With the UK implementing SDR separately , the regulation may come back to the table very differently where they could make the buy-in optional rather than mandatory ,” says Linda Gibson , head of regulatory change at BNY Mellon ’ s Pershing .
“ But the market is waiting on how the UK will implement SDR , causing some operational challenges to firms that are international . Those that have project plans
34 // TheTRADE // Spring 2021