Volume 15, 2022-2023

Each volume of Journal of Securities Operations & Custody consists of four quarterly 100-page issues. Articles scheduled for Volume 15 are available to view on the 'Forthcoming content' page.

The articles published in Volume 15 include:

Volume 15 Number 2

Editorial
Simon Beckett, Publisher
Papers
The move to T1: Why are we talking about it?
Pardeep Cassells, Head of Financial Products, AccessFintech

The move to a one-day settlement cycle (T1) in the US will encourage market participants to streamline settlement processes and reduce associated risk. A recent statistic from a tier one bank showed that, based on a trading volume of EUR2.5bn per day, almost 30 per cent of this (EUR700m) is locked up due to failing trades. An 80 per cent reduction in time given to settle means sustaining settlement rates will be challenging for organisations unless fundamental changes to processes are made. These changes fall into three categories: behavioural, procedural and technological. To make behavioural changes, organisations should: understand root causes of failures to increase efficiency, such as the need for several rounds of matching; maximise automation so teams in all regions have access to the same better-quality data across time-zones via the same infrastructure; and adopt data-sharing protocols for a more collaborative ecosystem with greater access to data. Procedural changes include changing batch times, giving middle and back-offices visibility into inventory and ensuring Standing Settlement Instructions are readily available and properly maintained to combat multiple in-house and vendor platforms that do not communicate. Technological advancements include the move to streamline technology stacks and operate through fewer settlement systems, avoiding the need to manage data in Excel spreadsheets and multiple platforms. Single-source providers like AccessFintech offer connectivity to vendors and drive down additional application programming interface (API) connection build costs. The market must focus on increasing automation and better interoperability and data sharing between counterparties to prepare for a proposed go live in 2024.
Keywords: securities; settlement; T1; post-trade; data collaboration
The sustainability agenda and its implications for post-trade technology adoption
Corinne Neale, Managing Director, Sustainability Thought Leadership, BNY Mellon Securities Services and Sarah Smart, Head of Aladdin Oversight and Data Enablement, Aviva Investors

Environmental, social and governance (ESG), referring to the process of integrating ESG factors into investment decisions, and sustainable and impact investing, referring to the intent to deliver an environmental or social outcome on top of financial performance, are growing very rapidly. BNY Mellon and Aviva Investors reflected on implications for post-trade technology adoption. Rapid growth in demand is accompanied by increased expectations from a range of parties including regulators with a focus on disclosures and labelling, international institutions seeking greater alignment and lobbying groups asking for more data. All of this is affecting data to be sourced, controlled and reported, and reporting is complicated by lack of consensus on ESG definitions and difficulty in comparing data and incorporating investors' preferences across jurisdictions. Each party in the post-trade custody chain depends on reference data and needs access to the same accurate sustainability ESG reference data. Missing, different and inaccurate reference data creates errors and discrepancies. Sustainability data acquisition is thus becoming an emerging area of focus for post-trade servicing teams, particularly finding, formatting, correcting and monitoring updates and maintaining asset coverage, creating a shift in operating model. Technology is a critical enabler given the growing volume of data, lack of a single ESG definition and the need to prove product claims and support clients' preferences throughout the custody chain.
Keywords: sustainability; ESG; technology; governance; controls; cloud
Evaluating risk and stress-testing challenges for central counterparties
Franck Viollet, Senior Risk Expert, CCP Directorate, European Securities and Markets Authority

This paper discusses the types of challenges that stakeholders face in evaluating risk and margin models for central counterparties (CCP). Two important tools to evaluate the adequacy of CCP resources to cover potential future exposures are back-testing and stress-testing. The paper discusses challenges when designing and analysing back-tests, including the use of unit tests and the inclusion of add-ons. The design and specificities of supervisory stress-testing are covered with a particular focus on liquidity and concentration risk.
Keywords: back-testing; stress-testing; margin model; statistical performance; add-ons; model risk
Review of the EU post-trade legislation: Draft regulation to amend CSDR and regulation on a DLT pilot regime for markets infrastructures
Pierre Marsal, Attorney at Law, European Issuers

This paper aims to examine the two most recent EU initiatives to update the existing regulatory framework for central securities depositories (CSDs). First, it analyses and evaluates the draft regulation released on 16th March, 2022, which amends the existing CSDs Regulation (CSDR) of 2014, including simplifying the passporting process and enhancing cooperation among competent and relevant authorities. It also establishes a more targeted scope for the CSDR's settlement discipline regime. The proposed simplification measures indeed appear timely, but it remains to be seen whether they will increase competition and improve settlement efficiency. Secondly, it assesses the challenges of the existing EU legal framework for digitalising post-trade activities. It concludes that the existing framework does not permit the full tokenisation of the settlement of token securities, and thus it requires adaptation. Against this backdrop, the paper fully supports the stepwise regulatory approach followed by the EU. The recently adopted regulation creating a pilot regime to test Distributed Ledger Technology (DLT) market infrastructures and allow them to be exempted from some existing requirements temporarily will help identify possible medium-term options for a suitable legal framework. Meanwhile, users should remain alert to the fact that exemptions remain proportionate and are conducive to improving CSDs' efficiency.
Keywords: central security depositories; draft regulation 2022 amending CSDR; pilot regime; distributed ledger technology; market infrastructures
Are your back offices missing the AI train?
Nathalie Zeghmouli, Vice President, Digital Transformation

For the last few years, there has been no conference, no top management meeting where digitalisation and artificial intelligence are not part of the agenda. However, the reality shows that the financial industry in general and back offices in particular have undergone little transformation to date. While there are numerous white papers and analysis demonstrating how crucial it will be for the industry to rethink the operating processes, the published business cases remain relatively ‘shy’ and are addressing single areas, these being HR, legal or reconciliation. Those digitalisations provide targeted satisfaction and efficiencies but do not address the ageing, not to say dying, infrastructure and inherent inefficiencies. Back in 2017, a Capgemini survey1 demonstrated that 60 per cent of customer dissatisfaction arises from the back office. It is time to restructure back offices to remove those inefficiencies. To overcome the multiple challenges resulting from the legacy infrastructures, it will be key not only to modernise and digitalise the systems but also to recognise that efficient digital transformation cannot be decoupled from a fundamental back-office process remodel and mindset shift. It is important to be clear that artificial intelligence is not the ultimate solution but a suite of tools that supports this transformation. We, human beings, need to analyse, define and organise the back offices of 2025.
Keywords: back office; back-office inefficiencies; digitalisation; artificial intelligence; core banking systems transformation; digital transformation
Resolution planning framework constraints: An analysis based on the Sberbank Europe AG resolution case
Leonhard Riebl, Bank Sector Analyst, European Banking Authority

The paper aims to assess the effectiveness of the resolution planning framework based on the example of the Sberbank Europe AG case. This case is noteworthy, as it was the only one to date involving a banking group that was undergoing a resolution situation and that was, before this event, already fully subject to SRB's resolution planning standards. Furthermore, in this situation, the authorities decided on a resolution strategy materially different to the one prepared as part of the resolution planning. Thus, the paper focuses specifically on the effectiveness of the resolution planning measures that had to be implemented under this very different resolution situation. The paper does not aim for an assessment of the general effectiveness of the whole resolution framework in this case (such as effects on financial stability). However, the paper includes an analysis on potential improvement potentials in the framework in order to support the resolution planning efforts to contribute more significantly to the authorities' decisions and actions in a resolution situation. It thus aims at strengthening the planning efforts for the benefit of both the authorities (in case of a resolution event), as well institutions by allowing them to better align the resolution planning with their general crisis management efforts. This paper is thus addressed to actors active in the resolution planning area both in the industry as well as the authorities.
Keywords: resolution planning; Sberbank Europe AG resolution case; SRB expectations for banks effectiveness; resolution preparation; resolution strategy change

Volume 15 Number 1

Editorial
Simon Beckett, Publisher
Papers
Why should I start worrying about EMIR Refit 3.0?
Melanie Bristow, Sinead Stringer and Rachel Hewitt

The industry is expecting that the European Market Infrastructure Regulation Refit Technical Standards for Transaction Reporting (EMIR Refit 3.0) will be published shortly, but past regulatory implementations indicate that there are practical steps that could already be considered in preparation to be operationally ready and compliant. EMIR Refit 3.0 constitutes a significant number of changes for the industry, using past experiences this paper looks at some of the key challenges of EMIR Refit 3.0 as written in the draft regulation and what firms could consider as part of the planning phase of the programme to get a head start. Initiating the programme early on, frontloading operational readiness and considering the client journey are themes that are explored further for practical application.
Keywords: digitalisation; post-trade; technology; financial market infrastructures; regulation; trade settlement
Adaptation of CCP and CSD services for the new era
Pataravasee Suvarnsorn, Senior Executive Vice President and Head of Operations Management Division, The Stock Exchange of Thailand, Managing Director, Thailand Clearing House, The Stock Exchange of Thailand Group

As the world is moving towards innovations and new technology to engage new customers and new expectations, central counterparty (CCPs) and central securities depositaries (CSDs) should consider not only maintaining their positions as financial market infrastructures for fostering market confidence, but also strengthening their roles and the services they provide and they should be ready to move with agility for any upcoming new experiences. This paper discusses how CCPs and CSDs should adapt so as to nourish their values in their traditional environment and also utilise their capability in order to move synchronously with new trends and technology. Four aspects are mentioned for consideration namely 1) increasing agility via good collaborations to cope with new environments and customer needs, 2) enhancing core businesses to maintain trusted entity roles, 3) preparing for local and global connectivity via international standard messages to support longer service hours and 4) embracing new technology to accommodate new products and services.
Keywords: CCP; CSD; adaption; trusted parties; harmonisation; synchronisation; DLT
Distributed ledger technology: Cutting through the paradox
John Siena, Associate General Counsel, Office of the General Counsel, Brown Brothers Harriman

Despite recent market turmoil, distributed ledger technology (DLT) is expected to accelerate its transformation of the financial services industry. Assets made available for investment using DLT will extend beyond cryptocurrencies, non-fungible tokens (NFTs) and the like to embrace assets of all kinds, including equity and fixed income securities, loans, real estate and others that today generally are supported by highly fragmented legacy proprietary frameworks. DLT offers the prospect of a safer, more cost-efficient, more widely adopted operating environment across all types of assets and transactions. However, legal and regulatory frameworks for financial services have taken time to adapt to this sea change. While certain regulatory and legislative developments have grabbed headlines, less appreciated is the state of play of so-called ‘private law’. Private property law addresses ownership rights in digital assets as well as whether and how these rights may be asserted indirectly through intermediaries, requisites for transfer of ownership, rulesets for resolution of disputes regarding ownership and whether and how interests in such assets may be secured by collateral arrangements. More broadly, and more fundamentally, as the UK Law Commission has recently noted, ‘property law is default law’ and is particularly useful because, in principle, property rights ‘are recognised against the whole world, whereas other — personal — rights are recognised only against someone who has assumed a relevant legal duty’. This distinction is especially important where a party having responsibility for an asset becomes insolvent. Within individual legal systems, digital assets and methods for their transfer have struggled to integrate themselves with existing laws such as the law regarding property rights and laws addressing the impact of insolvency. Each legal system by and large has addressed this challenge in its own way and in its own time, complicating prospects for a broad, scalable take-up of DLT as a replacement for current inefficiencies and fragmentation as well as for new types of assets. This is likely to be especially problematic in the context of cross-border investments, holdings and dispositions — especially if the law of more than one jurisdiction might apply to the same investment. This paper argues that it is essential that legal systems grappling with digital assets are mindful of the risks and pitfalls of inconsistency with other legal systems and that in this respect consistent application of governing law and choice of forum especially should be considered. In particular, the efforts of the International Institute for the Unification of Private Law (UNIDROIT) should be supported in order to establish a conceptually sound set of principles for all jurisdictions to apply, regardless of the peculiarities of their respective legal systems.
Keywords: digital assets; distributed ledger technology; DLT; crypto assets; property law
The data revolution in operations management: Unlocking innovation by embracing change
Duncan Cooper, Head of OMNI Digital Services, EMEA and Steve Taylor, Head of Data Management Platforms, BNY Mellon

This paper analyses how, for too long, back-office operations teams within investment organisations have endured the ongoing tension between ‘running the organisation’ and ‘changing the organisation’. Although there are many impediments to change, the cost of inaction is too risky to sustain. With the rise of new and different asset types and the resulting explosion of datasets that need to be consumed at increasing velocities, investment organisations must transform their data management operations, or they will not be able to run their organisations efficiently. A data transformation that takes data out of the exclusive domain of IT teams and empowers operations teams with both access and accessibility can not only break down data silos and unify fragmented technology, but it can also free up time for uncovering valuable insights. That being said, a successful transformation means embracing change within an agile business model that values progress over perfection. The benefits of doing so create a flywheel effect that builds momentum as users deploy these solutions: improved data management generates trust in the data; improved outcomes fuel interest; data discoverability drives insights; and accessibility opens the door to creativity and innovation.
Keywords: transformation, data, investment, technology, accessibility, change
Expansion into private markets fuels outsourcing demand
Kevin Moran, Managing Director, Global Head of Business Process Outsourcing, Broadridge Financial Solutions,Inc.

As cost and performance pressures continue to escalate, traditional and alternative asset managers are looking for ways to drive growth. In many instances, this is being achieved via product diversification. For example, there is an abundance of long-only and hedge fund managers launching private equity, private debt or even infrastructure products. Although diversification or hybridisation does have strategic advantages, it only works if the process is well thought through. Accordingly, investment firms need to think carefully about how they structure their operations when moving into the highly esoteric world of private markets. A sensible approach to outsourcing will therefore be necessary if managers are to achieve reduced costs, risk mitigation and performance enhancements.
Keywords: asset management outsourcing; managed services; private markets; business continuity; automation; risk mitigation
Accelerating the settlement cycle: An opportunity to modernise across the industry
Robert Walley, Principal, Deloitte Risk and Financial Advisory, Deloitte & Touche

The financial services industry has analysed the benefits and barriers of accelerating the US securities markets to trade date plus one day (T + 1). The focus of this paper is on the areas impacted and the need for driving industry modernisation efforts through technological advancement and operational scalability while at the same time seeking to mitigate risks and operational inefficiencies in the capital markets infrastructure. The purpose of the paper is to provide the reader with an understanding of the impacts across the different brokerage functions, businesses, behaviours that need to be considered, in order for individual firms and the industry as a whole, to transition to a T + 1 settlement. Firms will need to prepare for the transition which will be effective 28th May, 2024.
Keywords: accelerated settlement; T + 1; brokerage operations; settlement; securities operations
The new world of meta finance and its yet to be tested efficiencies
Christopher Edmonds, Chief Development Officer and Ashwini Panse, Chief Risk Officer, North American Clearing, ICE

Technology has been a long-standing catalyst for change, innovation and the emergence of new business models. As technology evolves and matures, the financial services industry revisits its current processes and capabilities to assess if leveraging more modern technologies can drive additional client and business value. There are some proposed use cases for distributed ledger technology (DLT) that propose disintermediating the entire financial industry. There is no doubt the broader financial industry agrees DLT presents an opportunity to shape the future vision of capital markets and recognises the value inherent in the shared DLT platform that can build security, privacy and auditability into every financial transaction and could potentially eliminate costly reconciliation. However, DLT, like any emerging technology, must be thoroughly vetted through rigorous testing. Moreover, regulators across the globe are promoting responsible innovation and fair competition among markets and market participants. And for innovation to be responsible and competition to be fair, it must comply with regulations. Meta finance aka decentralised finance (‘DeFi’) that runs on decentralised infrastructure, remains immature and volatile, with several economic, technical, ethical and public policy issues still waiting to be addressed. DeFi enthusiasts claim that meta finance is doing to money what email did to postal services, with a promise to provide a secure financial platform that is open to anyone with access to a computer and an internet connection. It has the potential to transform global finance, but activity to date has focused on the community of digital asset owners. DeFi offers efficiencies driven by automation and disintermediation, powered by blockchains and smart contracts with a vision of a more efficient payment system, with instant transactions and lower costs no matter where on the globe one is located. Its efficiencies and safeguards, however, are yet to be tested and the broader community feels safe and secure with the belts and braces traditional finance offers today. DeFi is not devoid of risks relating to high volatility, market manipulation, fraud, illicit finance and lack of governance, which collectively could severely damage market integrity and investor confidence.
Keywords: decentralised finance; digital assets; innovation; traditional finance; distributed ledger technology; smart contracts; blockchain
The art of the recovery: How the changing ESG landscape adds alpha — and risk — to securities class action and foreign withholding tax recovery
Ali H. Kazimi, Managing Director, Hansuke Consulting, Len A. Lipton, Managing Director, GlobeTax and Jeff Lubitz, Managing Director, ISS Securities Class Action Services

Securities class action recovery and foreign withholding tax reclamation drive investment performance for investors and provide a competitive advantage for financial institutions that offer robust services. Emerging environmental, social and governance trends offer enticing new opportunities for increasing returns from these services while adding complexity and risk for asset servicing professionals. This paper summarises both the emerging opportunities and wider changes in the regulatory landscape, concluding with considerations for restructuring asset servicing business models to adapt to the shifting landscape.
Keywords: withholding tax recovery; class actions; risk management; ESG; operational alpha