For the first time, the Association for Financial Markets in Europe (AFME) is merging its Post-trade and Technology and Operations conferences as OPTIC (Operations, Post-trade, Technology & Innovation) because of a growing convergence of participants and content. We speak with experts from AFME, Goldman Sachs and Citi about the trends being highlighted at the conference, which takes place on September 27-28, and how securities finance markets fit into the bigger picture.
AFME plays a role in understanding the challenges and opportunities financial institutions face, often advocating an industry-wide view gathered from across its membership on regulatory developments as well as keeping tabs on trends shaping European markets.
Among closely watched technologies in the post-trade space, distributed ledger technology (DLT) has emerged as a forerunner and drawn significant interest and agenda space alongside digital assets, said Peter Tomlinson, director of Post-trade at AFME. The two-day event will also highlight issues related to the future workplace and implications of ESG (environmental, social and governance) investing, as well as innovation in capital markets related to developments in cloud, data and artificial intelligence.
The combination of technologies that make sense for a given firm, however, is a matter of identifying objectives for the problem needing to get solved, said Ian Waterworth, director of Technology and Operations at AFME. He added that before embarking on any tech project, there should be a solid analysis of the challenges associated with disrupting existing legacy systems.
“Bringing in new technologies is not straightforward, so an appreciation for what goes into delivering change to support that and manage business operations subsequent to that change as well, is a big element of not only forecasting budgets but also to manage change in the technology stack beyond the delivery lifecycle (and) into operations,” he explained.
When it comes to securities financing, there’s significant cross over with a wider industry focus on improving settlement efficiency and reducing fails, which securities lending plays an important role to solve, Tomlinson added.
View from Europe on T+1
One of the panels will be looking at the looming move to a T+1 settlement cycle in US and Canada from a European perspective. The T+1 shift can be viewed as a “stepping stone” to a more accelerated future of real-time settlement, said Sachin Mohindra, executive director for Market Solutions at Goldman Sachs and a speaker on the panel.
“If we embrace this change we can use it as a positive driver, as a catalyst to improve post trade efficiency… but it has to be done in a very calculated and structured manner,” he said.
Mohindra works in Goldman Sachs’ global markets division, and is responsible for keeping an eye on large-scale market wide transitions related to regulatory change, advocacy, as well as fintech incubation and growth. He is one of the core leads for the T+1 change at Goldman Sachs and serves as co-chair of AFME’s Post-trade Transaction, Clearing and Settlement Committee.
For the US, this shift is hardly trivial, but market structure is largely siloed and that’s providing some transitional benefits as a result, which may also end up being the case in the UK in the future. In a global context, there are expected to be issues related to time zone and other kinds of coordination.
AFME is expected to release a discussion paper at the conference for a closer look at the implications, and one of the eye-catching figures is that moving two days to one day is not a 50% reduction in time, rather, market participants will be moving from having 12 hours to 2 hours of post-trade operations time, an 83% reduction.
The necessary compression, Mohindra explained, is related to middle office processing, and that is where industry focus needs to be: “[T+0] can be done, and we know that the infrastructures today in Europe can support it. It’s not a settlement problem, it’s not a trading problem, the problem is the middle – matching allocation, exchanging all the details, reference data, picking up the SSIs [standing settlement instructions].”
He also noted that European market participants are still “licking their wounds” from implementing CSDR, and overall there needs to be more tightening, harmonization and automation to support a T+1 shift.
European harmony
The coordinated legislative and regulatory front in Europe has numerous moving parts under the banner of the Capital Markets Union (CMU), some of which are mandated by the European Commission and national authorities of EU member states, but also derived from private sector initiatives related to central securities depositories, central counterparties and the role of the European Central Bank (ECB), explained Marcello Topa, director for EMEA Market Policy and Strategy at Citi.
Topa covers advocacy efforts for Citi Securities Services as a member of the Post Trade Executive Committee and of various other technical committees in the Post Trade division. He will be moderating a panel at OPTIC on “Europe Post-trade Regulation in 2022 and what’s next”. Some of the focus will be on CMU progress in developing integrated financial markets in Europe, a massive undertaking that works in tandem with the European Central Bank’s Target2 for cash payments and Target2Securities as well as collateral harmonization efforts under the single rulebook, dubbed the Eurosystem Collateral Management System (ECMS).
“It is important to see the ECB as the catalyst for development of integrated markets, efficient markets and seamless transfer of securities investments in the European Union,” said Topa. On the ECMS, he noted that “this collaborative effort is something that, if adopted by all actors in the industry, will be conducive to greater efficiency around collateralized transactions.”
Securities financing markets have come to the fore as industry focus on settlement efficiency and operational process improvements have intensified on the back of CSDR, which is now under regulatory review. At this stage, mandatory buy-ins have been postponed, with the ECB recommending they be scrapped entirely, or at least exclude SFTs.
Cash penalties meanwhile were introduced in February, with recent estimates pegging total fines at €77 million in the first two months, according to figures from AccessFintech.
Topa said that “there are a number of ways where cash penalties are going in the right direction, triggering the attention of market players into making sure that their processes are more effective, more efficient than without this type of pressure.” He also noted that there are modifications being proposed by the European Commission as part of CSDR Refit that the industry would welcome, such as making mandatory buy-ins a “last resort” type of tool.
While there’s no doubt that the industry is weary of regulatory burdens, SFM has heard that the largest waves are subsiding, and discretionary budgets are expected to open up for use beyond pure compliance.
“Regulatory and market initiatives are going in the right direction,” said Topa. “Through collaborative approaches that will help ensure a balanced book of work, we are all trying to develop the existing processes and infrastructures in ways that would likely provide benefits to everyone.”
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