Single booklet of collateral management rules for Europe: 1-0 or no score for corporate actions?

What are the common collateral management standards in Europe?

The Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo) has proposed a Single Collateral Management Rulebook for Europe (SCoRE)
. The main objective is to further strengthen the integration of the European financial market and to promote a single market throughout Europe. By emphasizing harmonisation, these efforts should increase efficiency, reduce risk and reduce costs for market participants transferring their titles and guarantees between European countries. This can only be fully realized when all participants adhere to these standards. Will the costs of harmonization outweigh the benefits?

Corporate Actions (CA) has been identified as one of 10 key areas requiring harmonization of processes, workflow and messaging under the settlement.
The AMI-SeCo Collateral Management Harmonization Task Force (CMH-TF)
worked on, accepted and published Corporate Actions Standards in December 2019, which were updated in December 2021.

With the first wave of SCoRE implementation currently scheduled for November 2023, this leaves only 18 months for enterprises to prepare their systems and operating personnel.

In the regulations, there is a set of 15 AMI-SeCo corporate actions standards that cover the treatment of corporate actions and meeting events regarding debt securities, shares and investment funds issued in depositories securities exchanges (CSD) issuers in Europe. These aim to harmonize the processing of securities transactions for the bilateral and tripartite management of collateral. These Corporate Actions Standards are based solely on the ISO 20022 Corporate Actions and Proxy Voting Messages standards and are fully consistent with other existing standards and globally agreed market practices defined by
Joint Corporate Actions Working Group (CAJWG),

Corporate Actions Sub-Group (CASG)and Securities Market Practice Group (SMPG).

Slow adoption of securities trading standards

The European Central Bank (ECB) has released the third compliance and progress report in March 2022 which assesses SCoRE compliance for different entities. On the provider side, the readiness of CSDs, Tripartite Agents (TPAs) and Custodians was assessed. On the user side, only issuers were interviewed. There is work to be done to meet the proposed deadline.

  • Among the 38 CSDs, compliance levels for standards that primarily relate to market practices, e.g. rounding rules, business day conventions, securities amount data and payment deadlines, were reported as implemented as all of these standards are already in place through the SMPG guidelines and use of ISO 15022 in most markets. However, standards related to workflow and messaging are behind schedule for around 75% of CSDs, as they need agreement from various markets on common corporate actions workflows, e.g. , negative cash flow, cancellation of corporate actions and expense management. . Additionally, the mandate movement from messaging-related standards to ISO 20022 messaging has yet to be embraced by market players.
  • Similarly, two of the eight TPAs ​​surveyed are expected to achieve full compliance soon. However, TPAs ​​use custody services provided by CSDs or custodians to disseminate corporate action information to collateral givers and takers. Additionally, meeting-related workflows have been assigned a Not Applicable (NA) response by TPAs, which should be clarified in the next cycle.
  • On the side of the guards, it is a mixed bag. More than 50% of custodians reported being on time in 14 markets, while in the rest of the markets custodians had not begun analysis or reported. The main reason is that CSDs must comply first, then only custodians will follow. Moreover, there are competing projects such as Target2 Securities (T2S), and some markets have prioritized them. These market infrastructures do not have separate projects related to SCoRE and propose to implement these standards within the framework of T2S.
  • From the point of view of the issuer or issuer agents, knowledge of their obligations is low in most markets. Less than 25% of markets had a significant number of issuers/issuer agents claiming to be aware of their SCoRE obligations. CSDs should promote the SCoRE within their markets to raise awareness of the commitments of the various players and the requirements for compliance.

Based on the ECB’s progress report above, while many corporate actions standards may have already been adopted, many market participants are still unaware of their implementation and fail to anticipate rigidity towards the November 2023 deadline.

So why are there barriers to adoption?

The main challenge for CSDs, TPAs ​​and custodians across Europe is the low adoption of ISO 20022 messaging standards. Companies have invested in and adopted ISO 15022 to increase operational efficiency and automation, which which has reaped profits in recent years. However, many companies have little or no business case or financial incentive to move to ISO 20022. SCoRE is applicable in Europe, but many companies must continue to support ISO 15022 outside of Europe.

The absence of a mandatory migration deadline will result in a long and costly coexistence period that will require many players to support standards and owners until at least 2026, adding overhead and complexity to daily operations.

In addition to standards, adopting uniform business processes in a fragmented jurisdiction for multiple types of customers has always been a challenge. For example, different chain of custody financial intermediaries often prefer other default options depending on their investment strategies and client groups.

In addition, the migration to the required standard for processing corporate actions for negative cash flows has raised the issue of credit risk for Danish mortgage bonds if the redemption payment is processed before the negative interest payment and the balance to be debited is insufficient.

Thus, some of these proposed standards have yet to be disseminated and debated by the respective local markets on the feasibility and suitability for their business.

Requirements for CSDs, TPAs ​​and Custodians

The transition from current disparate manual processes and content to standardized ISO-based messaging and workflows will require elaborate electronic mechanisms and is likely to add significant burden to all involved financial intermediaries, i.e. CSDs, TPA and Custodians.

The obligations imposed by the SCoRE are triggering systemic change in European markets and the financial intermediaries that serve them. The need for better technology to standardize and automate corporate actions and meeting processing raises the bar for companies that must carefully develop compliance programs in advance.

While the SCoRE standards aim to harmonize day-to-day workflow and messaging for corporate actions, they compete for attention with other regulatory initiatives in the European Union (EU).

The Securities Financing Transactions Regulation (SFTR), Shareholder Rights Directive (SRDII) and Central Securities Harmonization of T2S remains a priority in many markets. Therefore, SCoRE has not yet received the necessary attention from market participants. Many large sell-side market players have already announced the long coexistence with ISO 15022 standards that extends beyond the currently proposed November 2023 deadline. Absent the cost implications of non-compliance, it appears that uptake of harmonization efforts through SCoRE will be slower than originally anticipated, and the envisioned benefits will take much longer to materialize.

At S&P Global Market Intelligence, our Corporate Actions solution is aligned with the adoption of SCoRE standards. Our solution has extensive business process configuration capability and a market practice-based workflow covering every stage of corporate actions and the meeting event lifecycle. With dual support for ISO 20022 and ISO 15022 messaging standards, the solution is designed to meet SCoRE requirements for everyone involved.

Posted on July 22, 2022 by Deepak JainDirector, Securities Operations Product Management, S&P Global Market Intelligence

IHS Markit provides industry-leading data, software and technology platforms and managed services to meet some of the toughest challenges in financial markets. We help our clients better understand complex markets, reduce risk, operate more efficiently and comply with financial regulations.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.