Andrew Dyson, chief executive officer, and Adrian Dale, director, regulation and market practice at the International Securities Lending Association (ISLA), explain how greater industry-wide standardisation can enable creativity to flourish and touch on the association’s role in developing these standards.
How is regulation driving the need for standardisation between entities in the market, as well as between desks and departments within enterprises?
Two particular pieces of legislation are forcing the market to rethink many of its existing practices and procedures. The Securities Financing Transactions Regulation (SFTR) has for the first time given our markets a taxonomy that has never existed before.
We at ISLA have argued for some time that it is important for market participants to look past the initial technical burden that surrounds the implementation of SFTR, and think about the longer-term benefits that a standardised data set together with a consistent language for describing life-cycle events could bring.
Whilst SFTR is a simple reporting regime, the Central Securities Depositories Regulation (CSDR) also arrives in 2020 and brings with it real and often harsh penalties for failing trades, together with a mandatory buy-in regime. We have raised concerns around elements of the mandatory buy-in process, which in our view, could have a detrimental effect on market liquidity.
We do however, recognise and generally support the rigour behind fines for failing trades. To minimise the potential impacts of CSDR, the market needs to look at the cause and effect of failing trades together with clear and market-wide remedies. This will demand greater standardisation and consistency amongst our business community and beyond.
How can firms break down silos and optimise collateral management on an enterprise-wide basis?
Legacy business and operational silos will reflect both pre-consolidated legal entities and legacy technology platforms. Data standardisation and adoption of common data standards will facilitate enterprise-wide solutions for the future. In the short term, it is unrealistic to expect firms to replace key parts of their infrastructure, but adoption of common standards and procedures will deliver efficiencies in the interim.
What are the benefits of harmonisation and standardisation at an industry-wide level? What progress has the industry made in this area to date?
Adoption of common standards and harmonisation of communication frameworks and protocols will lead to higher settlement rates. Higher settlement rates will reduce the need for expensive trade support teams as well as limit the impact of CSDR fine regimes. When looking at the cost of these potential enhancements, they should not be judged as a simple cost but should be viewed in the context of reduced infrastructure and regulatory costs that will accrue from these changes. Ongoing regulatory imperatives, notably SFTR, are forcing the pace of change. So, we are moving in the right direction but perhaps the industry as a whole hasn’t recognised that this should be looked at more holistically.
To what extent could industry-level standardisation and interoperability be achieved? Would regulation or a common standard be required to bring change about? Or could industry-led cooperation be the answer?
Interoperability can only be achieved against a backdrop of industry-wide standardisation. ISLA is already working on an ‘Agenda for Change’ that will drive the development of these standards across the industry. We have already published best practice guidelines around our post-trade world, and we will be releasing further work in this area, notably around CSDR. Subsequent to that, we will also be publishing our initial thoughts around the digitalisation of our markets.
How can the industry allow for effective standardisation and interoperability while still providing space for innovation and competition?
It is important here not to confuse standardisation with restriction. By creating a common understanding around data points and life-cycle events, as well as the digitalisation of master agreements and collateral schedules, we can create a business environment that will allow creativity to flourish. By creating standards, we are not restricting what people can do within the framework but simply ensuring that people adopt a common development language or a series of protocols as they develop their systems and solutions. By doing this, the market will increasingly deliver interoperability, higher levels of straight through processing and avoid the need for costly reconciliation systems or services.
To what extent could digitisation be viewed as an enabler for change in this area?
We are all living in a progressively digital world and our markets are not immune to these changes. Whilst it is easy to simply say that this should be an enabler for change, I think we need to think about what that means. To move to a digital world that delivers real and tangible benefits, there has to be recognition that this can only be done on the back of industry-wide standardisation. SFTR has forced our markets down a road where much of the work needed to create that standardised world is already being done. What we as an industry have to do, is to think where this technology and broader common domain models can take us. So digitalisation is perhaps the carrier rather than the enabler of the digitalised world for our markets.
This Q&A features in the Collateral in 2020 Guide. Download the full guide here.