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The Chair welcomed those who had joined the meeting of the Post-Trade Task Force (the “Task Force”) and thanked the participants and their respective institutions for their engagement since the previous meeting. The Chair noted that there had been good progress by each working group (“WG”) and the key issue now was to ensure that there was clarity on the proposed next steps and on who or what body could take them forward.
Working Group Updates
The Chair of each WG gave an update on progress and the conclusions and recommendations that the WGs had arrived at.
Non-Economic Trade Data
Robert Lamb (“RL”) gave an update in respect of the Non-Economic Trade Data WG. RL reminded members that the WG had met regularly over the last 12 months and that there had been good engagement from its members. RL explained that the WG had focussed on two main issues, namely, the insufficiently wide and early use of Legal Entity Identifiers (“LEIs”) and the lack of standardisation and adoption in relation to Standing Settlement Instructions (“SSIs”). RL noted that these issues lead to a lack of clarity around who is trading with whom and where and how to settle and caused a material proportion of disputes and breaks.
RL explained that there are solutions in flight for both issues and that the WG had tried to understand why these issues nevertheless persisted. One key challenge that was identified was the difficulty in persuading industry participants to adopt standards and invest resources to reduce exceptions. RL noted that one of the recommendations of the WG was outreach to smaller market participants to ask about the challenges they faced in adopting automated solutions. RL added that it was important to get the involvement of senior personnel in organisations to influence change.
Andrew Douglas (“AL”) remarked that in the past certain solutions had been provided for no cost, but even then some participants had not adopted them. AL noted that a survey of participants would be helpful to understand the barriers to adoption of services which would help with these issues.
Marcus Robinson (“MR”) asked whether there should be an attempt to identify a specific asset class where it might be easier to adopt LEIs and then prioritise that. This might help prove the value and benefit of using LEIs and make it easier to promote their adoption in other asset classes.
RL noted that the publication of metrics could also be an incentive for behaviour to improve.
Philip Glackin (“PG”) explained that the approach of the WG had been to put together a detailed overview of the end-to-end lifecycle of margin processing, analyse existing solutions that enabled firms to automate those processes, meet with service providers and come up with recommendations.
PG explained that the group had decided to focus on three key areas in which to make recommendations, where they thought it most likely that progress could be made. The first of these was further engagement with vendors and service providers including a discussion about easing adoption for counterparties who do not want to use automated solutions, increasing counterparties’ awareness that not all solutions would necessitate building additional pipework and working with vendors to increase interoperability.
The second was to evolve industry-wide metrics about pain points, dispute rates and settlement failure rates and to set benchmarks with the aim that better reporting would drive better behaviour.
The third was the full digitalisation of the collateral and margin settlement process. PG observed that a tokenised solution would reduce overheads but accepted this would require significant development and was therefore a longer term aspiration. PG also mentioned that ISDA would be a good industry body to work with to further all three recommendations as they have already undertaken a significant amount of work in this area.
The Chair noted that the first and third recommendations were similar but on different time horizons. The underlying theme was the need to engage with vendors to assess the problem and gain insight to work towards a long-term solution.
Siobhan Clarke (“SC”) provided an update in respect of client onboarding. SC noted that the WG had honed in on the issue of KYC and why various automated solutions have not been successful. At the outset the WG looked at the blockers to a more efficient process. A key issue is a lack of standardisation because every bank has its own risk appetite and different requirements as to the KYC information that they need. SC observed that the WG thought it would be useful to develop standards setting out appropriate documentation for KYC based on client type. These standards should cover the universe of documents required per client type and matters such as the acceptable age of documents and precise form of document that would be acceptable e.g. whether original/ certified copy/apostilled copy etc. SC noted that any standards developed would need official endorsement for them to have a meaningful impact.
SC explained that the WG had also focused on the issue that, although there are a large number of platforms to capture KYC information, these platforms do not interact with each other. SC noted that the WG had concluded that one approach to solving this fragmentation of information was to create one centralised passporting platform to hold and update the core documents that might be required for client onboarding. However, this would require significant support from the public sector. SC noted that as a result the WG thought that a more workable solution might be the development of APIs for existing platforms to adopt so that they could become more interoperable. This would enable documents to “passport” across platforms.
SC observed that developing a centralised passporting platform or APIs would involve a lot of work. Such a project would require funding and dedicated resources and could not be carried out by a working group or Task Force such as this. At this stage therefore, the intention of the WG was to put forward their suggestions in the Task Force report to provide focus for ongoing discussions within the industry.
The Chair asked whether it was likely that someone would read the report and press forward with creating a digital passporting platform. SC said that previously some vendors of digital solutions had invested significant amounts in developing solutions but for various reasons, including the lack of standardisation of requirements and the fact that liability for KYC ultimately still resides with the firm itself and cannot be outsourced, these had not succeeded. These solution providers were unlikely to be prepared to invest any more money in this area unless there was significant support from public bodies and regulators for the project.
AL noted that for Non-Economic Trade Data and Uncleared Margin there are solutions in the market and the problem is that market participants are not using those solutions. Currently there is no solution for client onboarding KYC inefficiencies, however, if a solution was built it would likely encounter the same issue in terms of uptake. SC agreed and noted that it is likely that a regulatory mandate would be required to ensure that any solution gained the critical mass needed for success.
The Chair noted that if the issue is framed as simply a cost problem then it is unlikely to be seen as a priority for regulators. However, if it can be shown that it creates systemic risk, or market inefficiencies, for example, in terms of uninvested funds, then regulators will be more likely to prioritise it. AL agreed and made the point that this would be true for the work of all the WGs which have noted that regulator input would be helpful. Another useful argument to try to bring all these post-trade issues further up the regulatory agenda would be to emphasise how addressing them would help, post-Brexit, in making the UK a more efficient and attractive place to do business.
Next Steps and Closing Remarks
The Chair noted that the WGs are close to finishing their reports and that work would now commence to amalgamate those documents into an overarching report to be published by the Task Force. Additionally, both the Non-Economic Trade Data and Uncleared Margin WGs have proposed the creation of a new cross industry body to continue the work of this Task Force in those areas and further thought needs to be given as to what form that group might take and whether the participants of this Task Force have the appetite to continue participating in it.
The Chair suggested that the Task Force meet again in October to consider the draft of the full Task Force report and debate the form and make up of the body that could take on the work of the Task Force after the report is published. The Chair thanked all the attendees for the debate and closed the meeting.
David Hudson (Chair), JP Morgan
Chris Bush, Bank of America (attendance TBC)
Gerson Riddy, Barclays (attendance TBC)
Robert Lamb, Blackrock
Jeremy Lewis, Credit Suisse
Andrew Douglas, DTCC
Gareth Jones, Euroclear
Risa Lederhandler, Goldman Sachs
Marcus Robinson, LCH
Siobhan Clarke, M&G Investments
Philip Glackin, JP Morgan
Sanjay Dhir, JP Morgan
Merav Pepere, Morgan Stanley (attendance TBC)
Akbar Sheriff, State Street
Michael Irwin, XTX Markets
William Rawstorne, Bank of England
James Tulloch, Bank of England
Michael Kent, Linklaters
Olivia Murphy, Linklaters
Anabel Thomson, Re:link
Clair Graystone, Morgan Stanley
Aamanveer Binning, M&G Investments