Warning - Unintended CSDR Consequences Ahead

CREST Matching is Changing

CREST has been operating successfully for over 20 years and has been part of the Euroclear Group since 2002. For the majority of that time its rules and processes have remained stable, known, and well understood. Larger market players have integrated their settlement processing into the CSD via the GUI, FT, or ISO interfaces, and achieve high STP and settlement success rates. CREST settles approximately £340bn in value, daily. [source: BoE Q2 19]              

However, we are now close to a series of small but fundamental changes which could have significant short term impact on market efficiency and costs.  Domain Matters believes that direct participants and others need to understand – now – what is coming down the pipeline.  And yes, similar changes are expected across the Euroclear and Clearstream landscapes.  For today, let’s take a look at the CREST world specifically …

What’s all the fuss about?

Driven by the adoption of EU-wide CSDR regulation, CREST is changing to accommodate the revised Settlement Discipline Regime. These central technology and data changes are being deployed in November 2019 and February 2020, as currently advertised.

[The detail is available from Euroclear UK & Ireland in their June 2019 White Book: New Transactional Data Requirements]

This means, in particular, adding new fields to instructions; replacing one existing field, and – crucially – increasing the number of data-points which are mandatory from a matching perspective.

Doesn’t sound like a big deal?  Well, it could be …

Specific changes to add Transaction Type and replace Place of Trade (segment MIC) will require outbound CREST interfaces to be enhanced and tested in the next three months.

Making (a) Place of Trade MIC and (b) Trade Date mandatory matching fields means that it is possible that a significant volume of transactions, which currently match seamlessly, will start to fail …

… an unintended short-term consequence of CSDR adoption, which includes cash penalties for buy-ins with effect from September 2020 (assuming of course relevant CSDs are licensed under CSDR by their National Authorities by then).

It therefore seem apparent that CSDR driven change for the CREST world will have three short term impacts, across the Run the Bank (RTB) and Change the Bank (CTB) agendas:

1. Technology and Data changes for all direct participants to upgrade their interfaces, underlying reference data and derivation logic to avoid currently clean trades being rejected by CREST, meaning:
   • new and replacement fields become mandatory by February 2020 in CREST which implies work needs to start now (if it hasn’t already)
   • changes impact not only DVP trades, but also SBL and Repo transactions (where Trade Date mandatory matching becomes problematic)
   • internal lookups, derivation processes and reference data sources, in particular for segment based MICs, need to change in an aligned fashion.

1. Existing fail and STP rates need to be understood at the counter-party and transaction type and location (MIC) level to enable a level of impact analysis to be performed; matching depends on both parties and hence counter-parties can damage internal STP or external fail rates on this basis:
   • whilst buy-in driven cash penalties may not come in until September 2020, new internal costs will arise if (when) STP and fail rates worsen;
   • this will not only affect breaks and, hence, Operations Control (people) costs, but also hard costs: funding, liquidity, debit caps etc.

1. Change (project) portfolios are no doubt locked for 2019 and being finalised for funding, priorities, and resources for 2020 in the current budget cycle.  However, the data field level work and impact analysis is required now.  This presents challenges:
   • the SWIFT 2019 November release effort will be consuming the key resources including people, test environments and data managers
   • December-January change moratorium policies ahead of a mandatory February CREST central change make the implementation window very crowded. Transactions of all main types which do not include revised and new fields will be rejected from this point onwards.

To conclude: CREST changes are mandatory and imminent.  ‘Do Nothing’ is not an option.

Direct participants will need to have designed, built and tested a multiplicity of internal changes before 31st January, 2020.  Change will be needed, not just to Settlement Engines, but also to allied Reference Data masters and, possibly, upstream Front Office transaction capture applications. Changes will be required for SBL and Repo transactions in addition to core DVP flows.  Even if this deadline moves out by a few months, the problem remains.

Major players should consider whether to prepare for a significant short term spike in CREST rejects and fails, with effect from February 2020, with an impact analysis of the resource and hard financial cost which will result.

Funding and planning-in the required effort for the 2019-20 change portfolio will not be straightforward, against the backdrop of, inter alia, current priorities and the year-end code freeze.  Industry initiatives around buy-in workflows and centralised ledgers will not prevent the need to re-engineer participant local CSD interface architectures.