Pardeep Cassells

I would say that from an AccessFintech perspective, when we’re speaking to the market at the minute, I’m seeing an interesting approach to readiness. So we have some organisations who are telling us that they’re ready this which could be like tomorrow and everything’s going to be fine. And then I was actually speaking at a conference a few weeks ago where 34% of the respondents in a survey in the room during the panel said that they either hadn’t started preparing or were just starting to prepare.

And that was in London. Is that something that you think we should be worried about?

Peter Tomlinson

Yes, that sounds a bit worrying. I guess it depends. You know, I think with every sort of major projects of this nature, you see, I think the dividing line is often people sort of side buy-side versus sell-side, but really it’s about size and sophistication of the institution. If that’s not kind of very rude way to put it.

Pardeep Cassells

No, I would yeah, I would have put it in a much ruder way I think so. No, that’s perfect because I definitely agree. I think the smaller size is and the ones who are maybe less technologically advanced are potentially just not as on top of this as their larger cousins.

Peter Tomlinson

I think that there’s two sort of ways of looking at this. You’ve got a technical readiness point, and that’s obviously where the firms who started earlier are sort of farther along that journey. And then moving on actually to looking at the knock on impacts apart from the actual, you know, technical process of settling the transactions on time and meeting the allocation confirmation requirements, then looking at the wider ecosystem impacts, as I say, you know, I think we all know that the the kind of the system is kind of fragile.

You poke one thing and other things start, start moving around. So the concerns that we hear from that I’m hearing from larger institutions are typically around, as I say, these associated processes like FX, securities lending impacts, potential impacts on market liquidity. Maybe one other thing to add from an AFME perspective and where I think we can add value or we’ll need to do further work with our members is on kind of scoping out some of the edge cases scenarios.

So securities which are, you know, traded and settled on on both sides of the Atlantic. ETFs, crest depository, instruments, for example, you know, working out those edge cases, what’s what should be the market convention or what is the regulatory requirement in each of those instances.

Pardeep Cassells

I know your membership, obviously some of them will have branches in the US, and in the iPAC region, I guess one of the other patterns that I’ve seen in the preparation for T1 and North and Central America is that the North Americans are obviously all over it. The Europeans are kind of chasing them, but we’re still speaking to organisations out in Asia who really don’t seem particularly engaged.

And I think in terms of time zone impact and crush, that’s where we’re going to be hardest hit. Are you hearing similar from your membership? Are you in contact with any market bodies in that region to to try and provide support?

Peter Tomlinson

So we have another cousin in Asia

Pardeep Cassells

A big family!

Peter Tomlinson

Yeah, exactly. ASIFMA. So we, of course, are engaged with them and they’re engaged with, with SIFMA as well in terms of, you know, looking at the impacts. But as you say, the time zone challenges are even more pronounced for those farther east. And I think actually, you know, one of the lessons to be learned from the US, when we kind of come to talking about this in Europe is how do we make sure that non-domestic market participants are engaged at an early stage of a process, and the impacts on them are sort of considered and taken into account.

Pardeep Cassells

So, Pete, obviously just having referenced the European conversation as well, let’s move into that territory a little bit. What work your membership is doing at the minute in relation to the potential change to a T1 cycle, I guess both in the UK and across continental Europe? I don’t know if you want to tackle those separately.

Peter Tomlinson

Yeah. it’s probably best, although I think, you know, the first point to make maybe is that, you know, we would like them to be tackled simultaneously. I think that they’re certainly, you know, benefits to a highly coordinated approach across, you know, everyone within the geographically European region, within geographical Europe. Similar to what we’re seeing in North America, Central America, there is that high degree of coordination.

Pardeep Cassells

Because they’re trading most actively with each other. Right. So that makes.

Peter Tomlinson

Exactly. And and I think just the way that, you know, firms are aligned, having multiple implementation dates across like a wide range lengthens the sort of project time for these firms and also creates complexities in the scope. If you have, as you say, you have sort of more trading across across borders within the region, you have instruments traded and settled in, both, you know, instruments with underlying that straddle both or multiple jurisdictions.

So again, kind of having, having alignment in terms of implementation timelines means you can have a simpler scope of implementation. And you kind of have to think a bit less about these edge cases. So in terms of what we’re doing with our membership, obviously the priority on the European side now is responding to Esma’s call for evidence, for which responses are due by the 15th of December this year.

And we’re expecting on the back of the Esma to report it to the commission and provide their cost benefit analysis by kind of mid 2024.

Pardeep Cassells

While away! Right?

Peter Tomlinson

Well, yes and no. Because I think their mandate, you know, is 12 months from the entry into force of CSDR refit, which has not yet entered into force. So they have a longer timeline. But I think recognising what’s happening in other places, including the UK,  there’s a desire from the European authorities to to kind of accelerate the conversation, in the EU as well.

Pardeep Cassells

Which feels desired. Right? So when we’re speaking to organisations at the minute, and talking to them about T1, people in the main seem to have one eye on what’s happening in North America and the other very much on how quickly is this going to take effect in Europe.

Peter Tomlinson

So for globally active institutional investors, the sort of desirable end state is to have those all of those major jurisdictions aligned on T plus one that simplifies many of their processes. The sort of game theory side of this for UK and Europe is finding the balance between how long you live with that period of misalignment with the US versus how long you, you know, or potentially rushing the implementation timeline here and doing it in a uncoordinated way, not supported by the necessary market changes that we think are required to sort of do this in a way which doesn’t, you know, doesn’t end up creating new risks, new inefficiencies and new costs in the market.

So that you have that sort of balancing act, you have back alignment question. US versus Europe as a whole, and then you have that alignment question within geographical Europe as well. Picking the best approach, which balances those different considerations.

Pardeep Cassells

Because I guess up until now, it seems to we’re both on His Majesty’s Treasury Task Force for the UK and then there’s obviously the AFME conversations that you’re spearheading as well. And I guess up until this point, it feels like there’s been appetite to move the UK fairly rapidly behind the US and Canada. But I believe that the lead times that were being cited for Europe previously were significantly longer.

So do you think this is going to require the UK to slow down or Europe to speed up?

Peter Tomlinson

I think the question for the UK will be what is the benefit of, moving ahead of the EU? What, you know, what does that does that bring anything tangible in terms of increased attractiveness of UK markets or does it just create problems for the major UK market participants?

Pardeep Cassells

I really fair question. And I guess they have misalignment. What the thought that’s come to mind there is that our first step in not being aligned with the rest of the European geographical region was to opt out of CSDR ultimately. Right? So the concern is that there is a continuation of that. And I guess from a CSDR perspective, people were quite relieved.

Right? It wasn’t the most fun regulation to implement. But in this particular scenario, it doesn’t feel like the benefit would be so significant as to cause that amount of disruption?

Peter Tomlinson

Yeah, absolutely. I think as I, as I kind of said earlier, you’re creating additional complexities and things like the scope you’re lengthening the implementation projects for, for all of the firms affected by kind of both transition. So it’s definitely something that, you know, we’re encouraging UK and EU authorities to sort of have coordination on.

Pardeep Cassells

Yeah. Collaboration is key right. Right?

Peter Tomlinson

Absolutely!

Pardeep Cassells

But I guess the summary is UK to fall back and instead of rush ahead. So, Pete, AFME me recently published a paper in partnership with Deloitte entitled “Improving the Settlement Efficiency Landscape in Europe”, as an aside, I do think it would be much better branded as Pete’s AFME paper, which is what I call it internally. But really, really interesting documentation.

We were delighted to be asked to, to support by providing some data to that as well. Along with, I think other partners, including Dtcc, what do you think are the most interesting findings that have come out of that piece of work?

Peter Tomlinson

I think, well, firstly, thanks very much. I think calling it Pete’s Paper, you know, there was definitely a lot of support from other of the AFME staff members, Deloitte, of course, you guys and other data contributors. And then the membership.

Pardeep Cassells

Well done to all of them as well!

Peter Tomlinson

The most interesting findings: so I think what was, you know, particularly resonated with me as we, as we went through the paper, was really the importance of kind of pre-settlement matching processes in terms of making that link into timely and accurate settlement. One of the stats I think that came through from, from AccessFintech was that, you know, in Europe, sort of over 3% of transactions there was some kind of mismatch on Pset, place of settlement, other jurisdictions like, North America, that’s kind of way below 1%. So, you know, 3% isn’t massive, but in comparison to, 3% of all transactions compared to a fraction of percent, it’s a lot. Right? And that’s a uniquely European problem, I would say, you know, other markets like the US, you kind of you pretty much know where a trade is going to settle.It’s going through Dtcc, European markets. Obviously we have multiple CSDs, which there are many advantages to. But in terms of the complexity of the Post-trade ecosystem, it’s this additional very important matching fields, which kind of creates a whole lot of, you know, additional complexity, additional issues to manage. And, you know, it’s pretty obvious that field needs to be part of the trade level matching.

Pardeep Cassells

It’s an interesting one. Right? So I remember, in my career back working for an outsourced middle office provider, seeing those Pset issues come up. And this is the first time I think, that market wide, we’ve been able to put a number against that and say, this is how often they’re coming up. There are so many different factors that seem to feed into that.

It can be asset managers not having actually even communicated their preferred place of settlement, to their custodians, to their brokers, or they change their mind and don’t let people know. I’m aware of global custodians who perform sweeps, so they’ll move holdings out of a Euroclear stream into domestic markets where it’s cheaper to retain them. And their asset managers seem to not always be aware that that sort of stuff is going. So I’m so familiar with the different environments in which that pops up and becomes a problem.

Peter Tomlinson

And then feeds into the sort of inventory management issues as well, because as you say, if you sort of agree on a trade in one market or one CSD rather than the position is held elsewhere, you know, affecting that sort of realignment on trade day it becomes really problematic.

Pardeep Cassells

Problematic because for the timeframes to do that are shortening. Right? And I think historically there obviously is a Pset field and Swift messaging, other market industry standard messaging is available. But it doesn’t seem to have been ever really enforced. Organisations have been reluctant to pay to make the changes that they need to make because it’s not a mandatory field.

So I know that at AccessFintech, we’ve turned it into part of our minimum data set, which is how we were able to get that stat to you. But then what I would love to be able to do is tie it back into the place of safekeeping, because that gives you that opportunity to flush out the inventory issue.

I speak to a lot of people who don’t even know what a PCF is. So I think there’s maybe market knowledge sharing that needs to be done in that space to help organisations understand just why this is so important in Europe.

Peter Tomlinson

Absolutely. And I think it’s, you know, there’s definitely a school of thought that, you know, one of the benefits of essentially shortening the settlement cycle will be to, let’s say, increase the urgency of resolving issues like this, increasing market awareness of issues like this. And this becomes part of that solution towards achieving T plus one in a way which, as I say, doesn’t ultimately result in an increase in settlement fails and costs and inefficiencies in European markets.

Pardeep Cassells

Yeah. Because it feels like something that should be fixable. And like certainly we’re at a point where I’ve walked into clients offices and said, with this custodian, you have a problem with like your Spanish Pset. And if you were to fix this, that’s 70 less trades a day that you would have to be touching and manually amending and risking failure with, so behavioural comes into it as well as like the tech side of it.Right?

Peter Tomlinson

Yeah, absolutely. And I think actually one of the other sort of key learnings of a paper is, you know, we’re not we’re not really talking about anything particularly radical. We’re not proposing that the whole sort of ecosystem needs to be ripped out and replaced with DLT. These we’re sort of moving into the actionable, practical recommendations to make a tangible progress. So maybe, you know, one of the other data providers or case studies from the paper was Euroclear Sweden, who have improved their settlement efficiency from 85% to 96%.

Pardeep Cassells

It’s amazing!

Peter Tomlinson

It’s massive. Right? In two and a half years, like I say, they haven’t done anything radical to achieve that. They’ve increased the availability of partial settlement and they’ve extended the DVP cut off. That’s pretty much it. Obviously CSDR penalties coming in to replace their previous penalties regime has an impact as well. So you can’t really sort of attribute the increase to each specific change. They haven’t rebuilt anything, they’ve made incremental improvements. And the results are clear to see. So I think more precise and more action, less talking is really what we’re calling for.

Pardeep Cassells

So you mentioned, less action, more talking. But you mentioned the CSDR there and I guess for me, that’s potentially one of the points of concern, because if the introduction of CSDR didn’t, I’m going to use the word “force”, but I really mean h4ly encourage organisations to implement this type of achievable change, why will T plus one lead to those changes being introduced?

Peter Tomlinson

Well, I think we are seeing some positive impacts from the CSDR penalties regime as well. It wasn’t a step change overnight. I think actually work was done in advance of February 2022 and impacts were felt there but sort of even measuring from late 2021 to now, particularly in equities, which we know have the highest penalty rate.

Pardeep Cassells

Interesting! Because their first declaration was that they fail rates overall across the CSDR impacted universe had actually increased in that first 12 months, right?

Peter Tomlinson

Yeah. So I think things have moved on, since the first 12 months. But I think also what we have to consider is that if you’re taking security settlement as a whole, including all asset classes, the vast majority of the value of settlements is in government debt instruments, which have a fairly low and stable fail rate of, I think, around 4%.

So, you know, improvements to asset classes, which have higher fail rate, but make up a lower sort of value of the overall puzzle. It doesn’t actually impact that bottom line that much. But when you sort of drill a layer deeper into the data, I think there are definitely some, some positive signs there.

Pardeep Cassells

That’s good! A relief.

Peter Tomlinson

Absolutely.

Pardeep Cassells

After all that work!

Peter Tomlinson

Yeah, yeah.

Pardeep Cassells

What are the next steps following the publication of the paper? what’s the response been?

Peter Tomlinson

We’ve had a great response to the paper. I think it’s, in some ways, as with all of these things, it has an educational aspect to it. I think it it does do a good job of laying out the kind of current state of the ecosystem, and where the problems lie, as you say, we sort of committed to action, and we’re very, very conscious to frame our recommendations or our next steps, our roadmap around AFME member led actions. I think we’re aware that actually progress requires input from all types stakeholders. So we’re definitely keen to keep soliciting views from other constituencies like the buy side, like the market infrastructures and in their view what can be done to to improve things. But, you know, the back of our paper does set out our plan for 2024, some ten or so items and, and tangible things for us to take forward with our members.