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tolerances that were there for EMIR might
not be there for SFTR.” They add that this
time around, “ESMA has learnt from the
disaster that was EMIR”.
The rules will also be far-reaching. SFTR
will cover any counterparty established in the
EU, regardless of location of the individual
branch, plus EU branches of non-EU firms.
It will also cover SFTs reused by EU coun-
“People might say ‘I’ll bear the cost’ but as a
custodian you can’t do that.”
KERRIL BUKE, CEO, MERITSOFT
terparties and SFTs reused by third-coun-
try counterparties, whose transactions are
operated from an EU branch or are provided
under a collateral arrangement by a coun-
terparty established in the EU, or by an EU
branch of that third-country counterparty.
The other set of rules on the horizon is
Central Securities Depositories Regulation
(CSDR). This particular new set of measures
for the authorisation and supervision of
EU Central Security Depositories (CSDs) is
aimed again at increasing the safety and effi-
ciency of securities settlement and harmo-
nising the way CSDs across the EU operate.
On the horizon
The regulation is tied into the objectives of
the Target2Securities (T2S) system by the
introduction of a securities settlement disci-
pline regime, while the rules also provide for
mandatory buy-ins for settlement fails, and
strict prudential and conduct of business
rules for CSDs.
“The CSDR regime has been on the agenda
for a number of years, but implementation
guidance has just arrived in May of this year,”
says Kerril Buke, CEO of Meritsoft.
Burke explains how the penalties regime
will be one of the biggest focuses of CSDR,
particularly when it comes to settlement
fails and the buy-in regime. With penalties
likely to land quickly in an area unfamiliar
with such financial penalties, the debate will
be around who absorbs the fines.
“Depending on the nature, the type of secu-
rity and the fail, there will be a late matching
penalty which will be calculated on a daily
basis,” adds Buke.
26
Global Custodian
Fall 2018
“They are also introducing a buy-in regime.
If you haven’t delivered the shares I could
issue you with a buy-in notice.
“At the moment on the interest compensa-
tion side of things, you need the appropriate
systems to identify it. In the future on the
penalties side for every single fail that is
going through a CSD or ICSD in Europe,
they will be subject to mandatory penalty
calculation. Certain service providers might
say ‘I’ll bear the cost’ but as a custodian you
can’t afford to do that. If that transaction
you are settling is on behalf of a client, if the
cost is a few hundred dollars a day, then the
economics don’t really make sense. In addi-
tion, in the event that rather than receiving a
penalty you receive a credit, you will need to
pass that on.”
Time to put your feet up
“It’s all going to be down to who’s fault is it.
But in terms of impact, they will certainly
have to gather the evidence. From a custodi-
an perspective, a lot of funds are offered con-
tractual settlement, and that hasn’t mattered
before because of penalties and compensa-
tion claims netting out, but in this case, there
will be some issues, particularly around
penalty related credits,” added Burke.
Much like SFTR, the expectation is that the
rules will go live in 2020, with CSDR pen-
cilled in for September. At the risk of being
blamed for a lack of preparation in a couple of
years, could there be room for other priorities
than regulatory groundwork right now?
There is a great opportunity for market
participants to focus on more business-led
decisions and shoring up their data quality.
An eye still needs to be kept on upcoming
regulations such as SFTR, CSDR and how
geopolitical events will impact the future.
There may also be rules incoming which
haven’t even been officially announced yet.
“Regulation related to ESG is going to
come down the pipe,” adds Mirsky. “As ESG
becomes more of a required component,
regulators are starting to take more notice.
The problem with ESG is that there isn’t a
regulatory model.”
Along with ESG rules, we could soon be
looking at EMIR II, AIFMD II and MiFID
III, all of which are primed for revisions.
So, enjoy this downtime, because as the
tenth anniversary of the collapse of Lehman
Brothers has reminded us it’s been a pretty
hectic spell of regulations since the financial
crisis, and more are on their way.