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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; 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: 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: 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: 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 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