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SDRWG Minutes – 16 September 2016
1) Approval of minutes of 18 July 2016 and matters arising
Minutes approved with minor changes and the following items noted;
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
Minutes to be published on EUI website (BoE & FCA will not publish) (ACTION 1)
Correction to minutes and actions to be updated before publishing (ACTION 2)
EUI Ops Bulletin to be sent to highlight work of the standing group and the new webpage
(ACTION 3)
Sponsor gap analysis can be shared with the standing group, but not published because the
information is sensitive – Sponsors to manage
2) Update on trading level gap analysis and task force composition (paper SDR16-07-04):
DS (LSE) advised that their taskforce has been kicked off with BATS, ICAP, ISL, ISE, Peel Hunt and
Winterfloods joining:
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It is possible that it may be widened to include AFME and WMA
Other platforms to be considered e.g. brokers
Possibly more CCPs – ISE for example talking to EUREX
Variations of on/off trading and cleared/non cleared needed
DS was keen to understand if this was the most efficient way of gaining input without over lapping
other work streams? How should each taskforce communicate?
CR suggested that Sponsors should meet to compare the composition of each taskforce, for example
EUREX were already on the LCH taskforce. Sponsors should be open and share minutes (ACTION 4)
LCH advised that they would be happy to share the terms of reference (TOR) of their taskforce. CR
agreed that this would benefit all Sponsors (ACTION 5)
The taskforce discussed the approach of different current buy-in methods (both optional and
mandatory). Existing rules are in place but needed to evolve to align with CSDR. It was also noted
that there was no requirement on trading venues to step in to assist with buy-ins. Actions/thoughts
for the next meeting are:
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
Building close relationships with all relevant CSDs that provide the notary function for
securities traded on venues.
Required structure of communications to ensure that all information is aligned
CP suggested that an independent agent be used to assist with buy-ins. CR agreed that the
possibilities and advantages should be looked at. Guidelines will be required to make the process
clear. Sponsors should take this as a discussion point (ACTION 6).
In response to the open actions, DS advised that they will review the conditions for systematically
failing participants, and how the process should work, noting there do not appear to be common
themes but this was of course more common in less liquid securities. The level 2 does not provide
automatic set process, so the trading venues will need to decide/manage. The removal of the
Market Maker Relief scheme is a particular point of interest as it limits any possible concessions for
Market Makers who deal specifically in small cap securities.
Next meeting date for the taskforce is still to be agreed (ACTION 7).
CR noted that the underlying causes are broader than just the Market Makers and that a wider
review was needed to include instrument type and back office set up. A further one page summary
should be presented (ACTION 8).
CR further noted that the regulators will coordinate discussions with Sponsors in order to define the
criteria needed for suspension of repeat offenders. With respect to Level 3, a separate paper on buyin agents should be presented to the FCA (ACTION 9).
3) Update on clearing level gap analysis and task force composition (paper SDR16-07-03)
CR noted that there are a number of significantly challenging issues (rated 4) and that some of the
questions posed to EUI should also come to the Bank. A separate discussion would be needed
(ACTION 10). The individual risks identified in the gap analysis should be further refined using the
template, and coordinated with the risk register to identify mitigating actions (ACTION 11).
CR further noted that the netting implications were a key area and would need coordination from all
Sponsors. What are the different implications for repo and cash business? How do they work
together? The current level of fines can be expected to multiply by 50 times for RepoClear (driven
largely by the low volume, high value nature of repo trades) presenting a significant impact.
LCH advised that a separate model is needed and it would involve a lot of work. With regards to the
calculation and distribution of penalties the LCH has clear sight of clearing members but do not have
a view of the complete end to end cycle.
CP confirmed that EUI will always assist where possible.
CR noted that T2S should be contacted to assist and provide more information of T+5 buy-in. A good
list of dependencies was needed (ACTION 12).
LCH confirmed that their taskforce consisted of EuroCCP, SISEX, EUREX, LSE, clearing members such
as AFME members and various settlement agents. They were meeting on the 22nd September and
that the terms of reference will be provided. LCH has distributed their own high level impact on
penalties to the taskforce and have asked all CCP’s to do the same.
4) Update on settlement level gap analysis and task force composition
CP (EUI) summarised the statistical charts that had been distributed to the group firstly noting the
challenge faced with open action 12. The volume is large, making it difficult to compare what comes
into the system against what actually settles.
CR noted that while it is a difficult task it would be very useful and that CP should continue to
progress it as best as he can. The following observations on the charts were made: it would be useful
to split fails between LSE and ISE to allow a sense of settlement fails by securities settlement system;
that the security class is useful and should be supported by the value; and finally that it would be
useful to compare the average cost of buy-in against the actual value.
CP will continue with the analysis for the next meeting.
CR further noted that it would be good practice to take a view on current fails/fines and compare it
against how it would look in the future model, asking the group if market participants had
undertaken their own analysis based on the projected increases in penalties estimated by EUI and
LCH against their own settlement profiles. One standing group member had already carried this out
and had found it to be a useful exercise. All non-FMIs were requested to do this with the aim of
sharing the information internally with their management and risk teams. All should report on
progress at the next meeting (ACTION 13).
CP agreed that the fining mechanism and the exact timing was key and that EUI are thinking towards
this on a daily basis. Euroclear as a group were also working towards the creation of a penalty engine
and that a possible solution was in mind.
Finally that the CSD task force had been created and will focus on the following:
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CCPs and the exchange of data
Data for clients in general
Calculations
Corporate Actions
As an AOB, concerns were raised about the impact of the large exposures regime proposal from the
European Commission.
CR agreed that this was something to consider and that more information should be presented to
the group on the impact on overdrafts as part of a wider review on the impact of other regulation
that could impact the design and implementation of the SDR (ACTION 14).
As a closing message CR reminded all that the profile and subsequent impacts of this working group
should be raised at every opportunity.
Actions from 16 September meeting
NO.
ACTION
Raised
by
ASSIGNED TO
1
Minute to be published
on EUI website
CR
EUI – Matt
Pallett
CR
BoE – Chris
Redmond
CR
EUI – Matt
Pallett
CR
EUI - Charles
Pugh
LSE – David
Smith
2
3
4
Correction to minutes
and actions to be
updated before
publishing
EUI Ops Bulletin to be
sent to highlight work
of the standing group
and the new webpage
Sponsors should meet
to compare the
composition of each
taskforce, for example
REQUIRED
DATE
COMMENTS
COMPLETED
EUREX were already on
the LCH taskforce.
LCH – Anna
delChiappo
Sponsors to share
terms of reference for
their task forces, and
subsequent minutes
CR
EUI - Charles
Pugh
LSE – David
Smith
LCH – Anna
delChiappo
CR
LSE – David
Smith
DS
LSE – David
Smith
8
Update to previous
Action 13 from 18 July
meeting – a one page
summary providing
further details on
underlying fails
including instrument
type and back office
set up to be drafted
and presented.
CR
LSE – David
Smith
9
A paper on buy-in
agents should be
presented to the FCA
to assist with
considering issues for
level 3
CR
LSE – David
Smith
10
LCH to meet with BoE
bilaterally to discuss
the number of
significantly
challenging issues
(rated 4) in the gap
analysis.
CR
CCP - Anna
delChiappo
11
The individual risks
identified in the gap
analysis should be
further refined using
the template, and
coordinated with the
CR
EUI - Charles
Pugh
LSE – David
Smith
LCH – Anna
delChiappo
5
6
7
The TV taskforce
should consider and
discuss the use of an
independent buy-in
agent, including the
provision of guidelines
on their use.
Next meeting date for
the TV taskforce to be
agreed

risk register to identify
mitigating actions
12
13
14
Dependencies on T2S
to be identified and
recorded
Analyse fails/fines
under new regime
against current
settlement profile
based on projected
increases in penalties
estimated by EUI and
LCH. To be shared
internally with
management and risk
teams, with progress
reported back at 17
November meeting.
The impact of other
regulation on the
development of the
SDR to be considered
and presented to the
SG for consideration.
CITI – Chris
Brewter
CR
LCH – Anna
delChiappo
CR
All non-FMI SG
members
MC
BNY Mellon –
Michelle Curtin
Raised
by
ASSIGNED TO
MN
CCP - Anna
delChiappo
RG
State Street Rudy Gadenz
MN
CITI – Chris
Brewster
17
November
Previous Actions
NO.
1
2
3
ACTION
CCP clearing for cash
securities interoperability, including
task force and analysis
with Eurex, EuroCCP &
Eurex.
Update of the
implementation
analysis template –
reversal of the impact
rating.
Hold and release issue to be captured in
the risk register.
REQUIRED
DATE
COMMENTS
COMPLETED
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4
5
6
7
8
9
10
11
12
13
14
15
Settlement fine 2
month rolling average
required.
Theoretical 4 day buy
in regime to see what
the numbers would
look like; size, value,
CA events for example
How to manage market
manipulation with
illiquid stocks
Review the settlement
profiles of both the UK
& Irish settlement
systems.
Clearing level gap
analysis - netting
concerns to be added
to the Risk Register.
Share analysis on the
likely impact to REPO
business.
CCP level settlement
fails analysis to be
provided.
Analysis on the impact
of Corporate Actions.
Systematic fails
benchmarked at 15% number of participants
under the threshold
and size of issue.
Underlying causes of
fails and if these would
trigger the threshold
Task force review:
• Are the securities less
liquid
• Look at the overlaps
with LSE.
• Market making rules
– obligations may
change
• Cash compensations
– Venue perspective,
how does this affect
the market
• Reporting Process –
working with other
CSDs, what steps are
required
Task force extension to
TVs and comparison of
level I & II rules.
JS
EUI - Charles
Pugh
MN
EUI - Charles
Pugh
CR
LSE – David
Smith
JS
EUI - Charles
Pugh
AD
CITI - Chris
Brewster
AD
CCP - Anna
delChiappo
AD
CCP - Anna
delChiappo
BS
Computershare Barry Saville
MN
EUI - Charles
Pugh
CR
LSE - David
Smith
JS
LSE - David
Smith / James
Stapleton Winterfloods
CR
LSE - David
Smith



16
Risk Register
Maintenance.
CB
CITI - Chris
Brewster