In July this year we learned that the European Securities and Markets Authority (ESMA) had asked the European Commission for a further delay to the 结算 Discipline Regime (SDR) to February 1, 2022.
The buy side’s readiness requirements are daunting. Those requirements will bring considerable planning followed by significant organizational change, with heavy repercussions should they fail to comply with SDR, namely financial penalties and potentially expensive buy-ins. 监管 preparation advice often focuses solely on technologies, systems or cultural change. 就SDR而言, preparations will most likely require the implementation of new middle and front office processes. 然而, firms should take advantage of the extra time for SDR’s deadline to work on adjusting and streamlining processes to avoid difficult conversations with their brokers and custodians once the regulation goes live.
SDR will require assessment of the settlement performance of brokers, and for those who are continually underperforming, firms may have to initiate difficult conversations. In parallel, SDR requires mandatory buy-ins should trades fail to settle beyond a certain period. In combination with MiFID II’s best execution rules, SDR creates a potential scenario where middle office managers may begin advising their front office to avoid certain brokers who are causing settlement failures resulting in higher costs and increased administration effort on an ongoing basis. 相反, brokers may raise their commission rates for asset managers that have lower settlement efficiency or are deemed to have problematic 帖子-trade processes.
SDR requires the appointment of a buy-in execution agent, so the buy-side will need to expand their relationships. This requirement will affect both the buy- and sell-side, 但对买方来说，这是一个更大的问题, which will need to conduct more buy-ins than the sell-side. The rules state that the buy-in agent cannot have been part of the original transaction, so asset management firms must appoint a separate broker (buy-in agent) - and possibly, 不止一个——进行买入.
合规 with this requirement is further complicated by the fact that to date, there is only one provider that has announced they will offer services as a buy-in agent, presenting serious challenges around bandwidth, 可用性和潜在流动性.
Once the buy-side has identified a suitable buy-in agent, the relationship work continues through an additional onboarding process wherein all the necessary documentation must be completed in advance of the SDR implementation date to allow a buy-side firm to become a known party to the buy-in agent.
Additionally, there is a very realistic scenario where a buy-in request may be unsuccessful. 根据特别提款权规则, 如果在两次尝试后买入不成功, the transaction is resolved via cash compensation rather than physical delivery. A recent 存 survey highlighted that over 80% of buy-side firms did not know how they will obtain an accurate price for the cash compensation model.
SDR will also impact the buy-side’s relationships with their custodians and brokers. Buy-side firms must understand the levels of service that custodians will deliver to their clients for SDR requirements. 在最近的存客户调查中, 例如, 40% of buy-side firms still don’t know how their custodian will provide a view on what their daily failed trade penalty rates are. Some custodians will provide daily reports on issues such as the status of financial penalties, 而其他公司则按月报告. This inconsistency is further complicated because often, it is the underlying fund that determines which custodian services a particular fund. 结果是, the middle office will require an accurate understanding of the varying levels of service which each custodian provides and then must make adequate provisions.
SDR’s implementation requires a best practice approach to 帖子-trade processing to expedite timely settlement. This increased automation ultimately will help to minimize the impact on relationships between the buy-side and their brokers, 还有他们的监护人. While the timeline for SDR implementation has been extended, given the scale of changes the regulation requires, buy-side firms should be addressing the issues raised above sooner rather than later to ensure they are ready for February 2022.
This article first appeared in Funds Europe on October 7, 2020.