The bulk of the people who make up the securities industry are working at home due to Covid-19 or, if they are going into the office, it is on an intermittent basis. This is an adjustment that has been complicated by the fact that processing volumes have increased sharply during the same period, creating enormous stress in the securities services model. In fact, more than 77% of respondents told a survey conducted by the Network Forum (TNF) that their work levels had increased during the pandemic. Despite the market volatility and meteoric rise in trading and settlement activity, however, the industry has remained calm and composed.

And during these unprecedented times for the industry, it was only right that it was met with an unprecedented, digital event. Between 29 June and 2 July 2020, leading figures from across the industry convened virtually for The Network Forum (TNF) Virtual Summer meeting. While 2019 offered attendees the ornate surroundings of Athens, this year the home office provided the backdrop for discussions on Covid-19-led digitalisation, the incoming Shareholder Rights Directive II (SRD2) and delays to the Central Securities Depositories Regulation (CSDR) – and to great success, with 98% of the audience reporting that the event had either met or exceeded their expectations.¹

Throughout the forum, the topic of digitalisation was a key theme. The securities services industry has made some exceptional strides during the last six months of lockdown, the impact of which will be hugely beneficial for end institutional clients. In addition to seamlessly adopting online communication platforms en masse, the amount of manual processing involved in various transactional activities has been dramatically streamlined across the board. Physical annual general meetings (AGMs) and in-person voting at company events have been digitalised and efforts are also underway to upgrade inefficient customer onboarding processes.
 
At the same time, the industry has made it clear that antiquated requirements demanding that wet signatures be mandatory on certain documents are no longer fit for purpose. Instead, there are now calls for e-signatures to be more widely embraced. “Covid-19 has given the industry an opportunity to adapt itself and fast-forward the development of new and innovative technologies,” Rebekah Flohr, Global Head of Securities Services Sales and Head of Securities services Americas, Deutsche Bank. And, in the last few months, the conversion to e-signatures has taken out a lot of the complexities and costs in post-trade processes.

The disruption has resulted in banks accelerating a number of their technology initiatives. A consortium of providers including Deutsche Bank, for example, have given their backing to Proximity, the electronic proxy voting platform.² Among the platform’s benefits are that it facilitates real-time and transparent electronic voting, post-meeting vote confirmation and full automation of shareholder ID requests. In a Covid-19 operating environment, the benefits of Proximity are becoming increasingly apparent.

Elsewhere, Flohr says that custodians are also concentrating on developing application programming interfaces (APIs) to ensure clients receive accurate risk data in a timely fashion. “I anticipate many of these technologies will reach the market faster than originally expected. It is crucial the industry does not lose urgency though when adopting this new technology,” she explains. Covid-19 has also sped up trials in other innovative technologies, including artificial intelligence (AI), natural language processing, machine learning, cloud, and distributed ledger technology (DLT).

Flohr went on to add that underlying technologies, such as Salesforce have been incredibly useful during lockdown – helping to facilitate global coordination and manage customer engagement. That said, some banking organisations and infrastructures are now beginning to work on strategies to bring employees back into the office. Flohr points out that major providers have demonstrated it is possible to work remotely but there is now a critical mass of people who have since said that they want to return to the office. “We have sent out internal surveys to our staff to gauge their views on returning to the office,” she says. Although a number of employees – depending on their personal circumstances – have thoroughly enjoyed working from home, this is an experience not shared by everyone. Flohr highlights it is essential that the mental wellbeing of staff be closely monitored during this period.

“Covid-19 has given the industry an opportunity to adapt itself and fast-forward the development of new and innovative technologies”
Rebekah Flohr, Global Head of Securities Services Sales, Deutsche Bank

The EU’s Shareholder Rights Directive 2 (SRD2) impacts nearly all participants in the investment chain between issuers and beneficial owners.³ Under the rules, asset managers – including those regulated under MiFID (Markets in Financial Instruments Directive), UCITS (Undertakings for the Collective Investment in Transferable Securities), AIFMD (Alternative Investment Fund Managers Directive) and other institutional investors – must disclose information about their shareholder engagement policies and report on how these fit in with their wider strategies.

The rules are designed to encourage institutional investors to be more active in how they engage with the companies that make up their portfolios – something regulators believe will have a positive impact on corporate governance. Custodians and central securities depositories (CSDs) will be affected, as they will be directly responsible under SRD2 for communicating information between issuers and investors without delay. The data to be shared will include shareholder identification details and meeting and voting information. This will require custodians and CSDs to automate a number of their operational processes to ensure data is transmitted to issuers and investors on a timely basis.

Speaking during a breakout session at TNF, Mike Collier, European Product Management at Deutsche Bank, says custodians largely see SRD II as a constructive development that will help them better serve institutional clients. “I believe from an industry perspective that we are all unanimously in agreement with the spirit of the Directive in that it is promoting best market practice,” he says. Collier adds that the industry – through both the Securities Market Practice Group (SMPG) and SWIFT – have collaborated closely to develop a standardised messaging structure in a new ISO 20022 format (released in May 2020) to facilitate SRD II information sharing across the custody chain.

Although a number of market regulations – including the EU’s Securities Financing Transaction Regulation (SFTR) and global requirements on bilateral margining for uncleared OTC derivatives – were delayed because of the Covid-19 pandemic, SRD II is not among them. In May 2020, the European Commission (EC) told the industry that the rules would be implemented as planned on 3 September 2020. This was despite calls by several leading industry groups – including the International Securities Lending Association (ISLA), the Association for Financial Markets in Europe (AFME) and the Association for Global Custodians (AGC) – for a 12-month delay to SRD II to account for the impact of Covid-19.

The associations warned SRD II’s implementation risked being undermined by various Covid-19 related disruptions, such as the postponement of AGMs, the redeployment of IT staff to more critical activities, and delays to dividend distributions.⁴ While the pandemic has been a major distraction, Collier says many of the problems facing SRD II actually precede Covid-19. “The transposition of SRD2 into local law by member states should have been completed by June 2019, yet some member states have yet to do this. However, the pandemic has not helped matters as national parliaments are obviously focusing on bigger things right now than SRD II,” says Collier.

Making matters worse, he adds, is that there is a lack of harmonisation across member states, an issue that could sow confusion among market participants operating in multiple EU jurisdictions. SRD II has not been transposed in major markets, including France, Portugal and Spain, as Collier notes, and, while the rules have been transposed by Italy, the country’s regulator, Consob (Commissione Nazionale per le Società e la Borsa), is yet to publish clarifications on how they will be implemented.

SRD II is forcing custodians to adapt their business to ensure a rapid, free flow of information and data between issuers and investors. “We are developing technology so that we can disseminate information on a same-day basis, or by 10am the following day if the information request is received after 4pm, as per the regulations,” says Collier. “In addition to our capital investment in Proximity, we are spending a lot of time improving our API capabilities so data can be shared quickly with all parties.” In time, he adds, the bank may begin to use DLT during the SRD II data transmission process, although concedes some clients have yet to buy into the technology. Most significantly, Collier highlights that Deutsche Bank is communicating regularly with customers about the implications of SRD2.

Like SRD II, the Central Securities Depositories Regulation (CSDR) is designed to improve efficiencies in the post-trade industry. By giving CSDs the right to impose fines and mandatory buy-ins on CSD participants for late settlements under the Settlement Discipline Regime (SDR), the European Commission (EC) is looking to put an end to delayed or failed settlements. Emma Johnson, Head of Securities Services Regulation and Market Reform, EMEA at Deutsche Bank, agrees that CSDR is a positive call for action, adding the rules should hopefully remove inefficiencies in the settlement process such as SSI-related trade fails. This, she argues, will help mitigate risk and promote investor confidence in the EU’s capital markets.

55%
of respondents admitted they were not on track to be compliant with CSDR
TNF participant survey

While the European Securities and Markets Authority (ESMA) acquiesced to industry requests for a delay to SDR’s implementation – with the rules now coming into force in February 2021 due to Covid-19 – regulators have refused to make any compromises on the mandatory buy-in regime. Many within the industry have urged ESMA to either defer or re-think the buy-in rules, pointing out such requirements would have been potentially catastrophic had they been applied during the volatility peak in March 2020, when there was a spectacular jump in settlement fails due to the increased trading volumes.⁵ Many TNF participants would welcome changes to CSDR. In fact, a survey conducted at the event found 55% of respondents admitted they were not on track to be compliant with CSDR.

Ensuring compliance with CSDR is not solely a post-trade issue. It will also require structural improvements to be made in the front office. Johnson says post-trade is not the weak link in the chain, but rather the traders, many of whom often book their transactions in late, suffer from poor Standard Settlement Instructions (SSI) and have inadequate operational practices. “CSDR compliance is something that requires a front-to-back approach,” she adds. Again, the industry has onboarded this, with 61% of respondents telling TNF that they had discussed CSDR’s impact on trading with their front-office colleagues.

As with many other regulations, CSDR has prompted banks to enhance their technology infrastructure and capabilities. Johnson says the securities services industry is going through a period of digitalisation, and providers, including Deutsche Bank, are prioritising investment into APIs, big data analytics and machine learning technology to detect and even predict potential settlement fails in what should help clients reduce the risk of being subjected to SDR fines or buy-ins. Such tools, continues Johnson, will be essential in improving the accuracy and timelines of client settlements.

“CSDR compliance is something that requires a front-to-back approach”
Emma Johnson, Head of Securities Services Market Advocacy, Deutsche Bank

Covid-19 has propelled the securities services industry towards enormous change over a very short time. Significant automation of operational activities has been implemented very quickly, and it is likely that market participants will not revert to past practices now they have realised the benefits. Nonetheless, a number of regulations are coming into force, most notably SRD II and CSDR, both of which are hugely complex and will require sizeable gap analysis and change management. Despite the market stresses being caused by Covid-19, regulators have made it clear that they expect the industry to comply with the rules at the go-live dates. As such, now is not the time for complacency.

Sources

¹ See https://bit.ly/2DewVP1 at assets.swoogo.com
² See https://bit.ly/2BRmKiC at proximity.io
³ See SRD II affects us all at flow.db.com
⁴ Global Custodian (June 1, 2020) European Commission rejects post-trade industry calls for SRD2 delay
⁵ Global Custodian (May 29, 2020) Trade settlement fail spikes at height of Covid-19 crisis spark debate over CSDR