08 May 2018 Engineering

Ensuring Timely Settlements and CSDR Compliance with the Elastic Stack

By Michael Down

The finance industry is once again accelerating in its adoption of innovative technological solutions to solve complex problems, regardless of whether the adoption is driven internally or externally. With many CSDs (Central Securities Depositories) being re-authorised under the new European CSD Regulation, the time for the adoption of a modern,  innovative technological solution has arrived as CSDs will soon face penalties for settlement fails.

Central Securities Depositories Regulation (CSDR):

The 2007-2008 financial crisis provided a powerful impulse for establishing a new financial regulatory framework with the intention to make the financial industry more resilient. Although tightly regulated under both domestic and international laws, the regulation of CSDs across Europe lacked consistency, the need for which was only highlighted by the establishment of the TARGET2-Securities (T2S) pan-European platform for securities settlement in central bank money.

To ensure that important securities infrastructures are subject to common EU rules, the European Commission published in the Official Journal of the EU (OJ) on 28 August 2014 the Central Securities Depositories Regulation (CSDR) as part of its agenda to improve the stability and prudence of the European system.

CSDR, also referred to by its full name as “Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012”, harmonises how CSDs across EU operate.

It also mandates the Regulatory Technical Standards (RTS) for the recording of securities in book-entry form and the implementation of Settlement Discipline with cash penalty and buy-in regimes to put off settlement fails in Europe.

“The regulatory initiative is a key component of the CSDR’s framework for settlement discipline, as outlined in Article 7 of the 2014 CSDR, alongside the requirement for CSDs and CCPs to monitor and report participants that consistently, systematically fail transactions (“name and shame”), and a mandatory buy-in regime”

Andy Hill, a Senior Director in ICMA’s Market Practice and Regulatory Policy group puts it in the association’s quarterly report. He notes that “the objective of the cash penalties regime is to create a standardised, harmonised penalty regime across the EU to be applied in the event of settlement fails.”

CSDR’s Penalty and Buy-in Regimes:

Participants are required by CSDR to settle their transactions on the intended settlement date. To provide a strong incentive for timely settlements, CSDs are required to monitor settlement fails and report them to relevant authorities.

Cash penalties, calculated on a daily basis and closely related to the value of financial instruments that fail to be delivered, as covered in CSDR Article 3, are put in place as a deterrent for those who cause settlement fails. Furthermore, a mandatory buy-in process, covered in CSDR Article 7, has been imposed by CSDR on financial instruments which have not been delivered within an agreed period.

The implementation of CSDR:

As with many other EU regulations, CSDR is implemented in stages. On 17 September 2014, the regulation entered into force in all EU member states, following a twenty-day period after its publication in the Official Journal. The RTS for the recording of securities in book-entry form and the implementation of settlement discipline and buy-in regimes went into force in June 2016 with a two-year delay to provide CSDs with enough time to implement any necessary technological upgrades necessary to comply with the regulation.

The deadline for compliance with the new CSDR requirements detailed in the RTS is May 2018, and the deadline for compliance with Settlement Discipline requirements is June 2019.

How can the Elastic Stack help with CSDR compliance?

The golden source of information empowering organisations such as Goldman Sachs to build a trade flow analytics service is to mine data from transaction logs. Although sounding simple, the inherent nature of the settlement process (where there are many different systems and settlement lifecycles durations that can range from seconds to months depending on trade type) adds additional complexity.

Charles Babcock describes for InformationWeek how the Goldman Sachs technology division has utilised the Elastic Stack to build a trade tracker system that can pull data from multiple systems, ship it all to Elasticsearch, and find meaningful insights by performing searches across all of the data sets.

Ilya Gaysinskiy (VP and Technology Fellow in Engineering at Goldman Sachs) presented at San Francisco Elastic{ON} 2016 conference where he walked through the multiple phases of the Goldman Sachs Trade Flow Tracking project. He made two critical points:

  • The importance of an ability to move from a flexible data structure during initial investigations to an optimised structure when operationalising the algorithms at scale
  • How Elasticsearch helps increase the efficiency of Goldman Sachs engineers by enabling them to use their programming languages of choice

These core aspects are built upon the incredible speed of Elasticsearch to provide low latency responses to complex questions asked of the data. Ilya goes on to talk about how this data not only helps them understand where a trade is during the settlement cycle, but also provides insight into the health of each system, aids in effective capacity planning, and more. The Elastic Stack makes it effortless to implement a trade flow tracking system to understand and report on which trades are unlikely to settle before the trade deadline for CSDR compliance. The benefits of such a platform include:

  • Real-time visibility across systems
  • Advanced search capabilities with sophisticated filters
  • Easy integration with existing solutions thanks to Elastic Stack system independence
  • Customisability and flexibility with a RESTful API interface
  • Comprehensive reporting features
  • Large scalability and high resilience provided by automatic data replication

These and other qualities make Elastic Stack a perfect solution for complying with the new CSDR requirements.

Conclusion

Central Securities Depositories Regulation (CSDR) seeks to create standardised, harmonised penalty regime across the EU to be applied in the event of settlement fails, and it mandates CSDs and CCPs to monitor and report failed participants. To comply with this regulation, a comprehensive system for tracking trades throughout their lifecycle is necessary, and Elastic Stack is a perfect (and proven) candidate for its implementation.