CSDR’s asset segregation rules spurring complexity and costs

Asset segregation rules laid out under the Central Securities Depositary Regulation (CSDR) will have significant cost impact for funds, a panel of experts has said.

Speaking at the European Beneficial Owners’ Securities Lending and Collateral Management conference, panellists discussed the impact of current regulations on securities lending, with asset segregation a headline topic.

“CSDR provisions under discussion at the moment are about having much more segregation of assets in the hands of depositaries and the intermediary chain through which securities are held,” said Habib Motani, partner at Clifford Chance. “This is incredibly complicated and potentially costly so there is a big debate about how far you go.

“If you assume that anytime anything is done to the financial infrastructure it is going to cost money and if there are several layers, there are several layers of money.

‘There is a subset of this when maybe pension funds for example, think that though securities lending is good, maybe the costs coming down the road might not make it worth it so that affects the funds’ approach as this black and white approach by the regulator may have an effect.”

Having received approval by the European parliament in 2014, CSDR enforces a buy-in regime for both securities and short-term financing transactions.

This means the lender of a security will have to enter the market to buy back the security on loan if the borrower has failed in the transaction.

This could potentially lead to a loss of market liquidity and push institutional lenders away from the securities lending market.

Fellow panellist Angus Canvin, senior advisor for regulatory affairs at the Investment Association, also addressed the issue of upcoming Basel requirements.

“Part of the issue with existing Basel rules is that it has made it either more expensive for the broker dealers on the sell-side to trade and offer clearing services to the buy-side or alternatively they just won’t do it primarily due to the leverage ratio requirements,” he said.

“We are also concerned about the impact off the changes to come in, particular under Basel IIII that bank’s ability to use internal models to calculate their capital requirements is reduced and that they will have to adapt to a standardised approach, which might see capital requirements for the banks going up which is likely to have a detrimental effect for the buy-side.”

The panel also concluded that Net Stable Funding Ratio (NSFR) requirements could lead to a change in the shape of the market along which would see banks move away from short-term securities finance transactions.