Enhanced securities processing solution will provide the foundation for custodians and broker-dealers to support the cash penalty regime under SDR.
IHS Markit has enhanced its post-trade securities processing framework for custodians and broker-dealers to accurately calculate the cash penalty regime under the incoming Settlement Discipline Regime (SDR).
The enhanced securities processing solution will provide the foundation for custodians and broker-dealers to support the cash penalty regime, a key component of the Central Securities Depository Regulation (CSDR).
Under the rules, custodians and broker-dealers will be required to calculate and pass down cash penalties for trades that fail or are late to settle.
The new penalty processing functionality, within the existing interbank messaging framework, will require changes to message management and user interface. The posting of debits or credits to client accounts must be automated, with the ability to accrue, waive and pass fees on an ad-hoc basis when required.
Foreign exchange transactions will also require automation to ensure risk and inefficiencies associated with manual processing are avoided. While reconciliation of fees and penalty dispute handling appear challenging, they will be necessary for institutions to attribute the correct monies correctly and transparently to their underlying clients.
“Net fees derived from a combination of matching and failing penalties on the same transaction may result in unexpected outcomes, for example, a buyer being charged a larger penalty than the seller because the buyer failed to match a trade for a greater number of days than the seller, who was short to deliver beyond the intended settlement date,” said Richard Wilson, director, corporate actions and securities processing, IHS Markit.
“Different calculation methods across asset classes will also require sophisticated software enhancements, as well as new data models in order to source, and generate, the correct rates for calculation. Solutions for managing CSDR must provide real value with a high level of automation.”
Within IHS Markit’s post-trade solution, fines will be held against each transaction and then posted on a net basis per underlying client once per month, with each posting processed to reflect the net cash movement from the CSD and then further netted per individual custody account.
Supplementary information will be added to transactions regarding the daily fees calculated and will be presented to end clients via the client decision making portal.
“The development of these new features will seamlessly integrate the processing aspects of the cash penalty regime into our solution, with the goal of making it as continuous and automated as possible,” Wilson added.