I once heard it said that if you’re caught up in a bar room brawl, rather than hit the person that just hit you, you should hit the person you’ve really always wanted to hit!  At the time, this analogy was being used to illustrate the perceived response of the regulators post the 2008 crisis i.e. that the regulators’ priority was to penalize various industry participants, mainly banks, for their conduct in the years leading up to this catastrophic event. 

Whilst I think most would struggle to fully subscribe to the theory that the regulators were merely trying to simply punish certain banks and buyside institutions, at times it has been difficult to decipher the rationale behind various elements of the regulations implemented since the Crisis. Or, put differently, to reconcile the actual, real-world impact of the regulation versus its stated objectives. 

It was in this context that I started to think about the forthcoming CSDR regulation.

In short, is it possible to reconcile the regulators’ aims with the actual and/or anticipated impacts?  At Pirum we have spent many (many!) hours discussing this topic with our clients, all of whom are heavily impacted, and I have concluded the following:

As the title would suggest, settlement discipline is at the heart of the new regulation. At a high level, in terms of achieving greater efficiency at various steps in post-trade processing, largely given the penalties for non-compliance, the regime definitely feels up to the task of incentivizing the market to embrace greater efficiency (and fewer fails).

In addition, there is already also plenty of evidence to suggest market participants are keen to go above and beyond simply achieving CSDR compliance. We have observed industrywide engagement in discussions designed to achieve a more holistic solution to the underlying challenges associated with post trade inefficiency in the SFT space. 

It seems therefore, specific at least to Securities Finance, CSDR will, over the longer term, prompt a raft of post trade efficiencies around recalls, fund switches, repo matching etc.  Possibly not the intent of the regulators but positive developments for the markets nonetheless.  (For reference we witnessed a similar response post the implementation of the OTC derivative Uncleared Margin Rules.)

And so, this brings me back to my opening question, is it possible to reconcile the impact of CSDR with its stated aims?  With a single caveat I think the answer is a tentative ‘yes’.  Certainly the ‘mood music’ from the regulated entities would suggest so.  The single caveat I mentioned is that I see a possible scenario where the response from the industry (and vendors) goes to exceed the stated aims of the regulators!  This would definitely be the case where CSDR was the prompt to address those other post-trade inefficiencies I describe above. 

In time honoured tradition, we’ll all get to learn the answer in the coming months, as new operating models are developed to support these new regulatory obligations.  At that point, much of the questioning and hand wringing will have evaporated…or better put, be transferred to the next, new regulation coming down the pipe!

Please contact Pirum at connect@pirum.com to learn more about our CSDR related services.



Karl Wyborn