What are the common standards for managing collateral 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 primary aim is to further enhance European financial market integration and promote a single market across Europe. With a critical focus on harmonization, these efforts are expected to increase efficiency, reduce risk, and lower costs for market participants moving their securities and collateral between European countries. This can only be fully achieved when all participants adhere to these standards, so will the costs of harmonization outweigh the benefit?

Corporate actions (CA) were identified as one of the 10 key areas needing harmonization of processes, workflow, and messaging as part of the rulebook. The AMI-SeCo Collateral Management Harmonization Task Force (CMH-TF) worked upon, agreed, and published the corporate actions standards in Dec 2019, which were further updated in December 2021.

With the first wave of implementation of SCoRE currently scheduled to go live in November 2023, this leaves only 18 months for firms to get their systems and operations staff ready.

Within the rulebook, there is a set of 15 AMI-SeCo corporate actions standards that cover the processing of corporate actions and meeting events relevant to debt instruments, equities, and investment funds issued in issuer Central Securities Depositories (CSDs) in Europe. These aim to harmonize corporate actions processing for bilateral and triparty collateral management. These corporate actions standards are based solely on ISO 20022 corporate action and proxy voting messaging standards and are entirely consistent with other existing standards and globally agreed market practices defined by Corporate Actions Joint Working Group (CAJWG), Corporate Actions Sub-Group (CASG), and Securities Market Practice Group (SMPG).

Slow adoption of corporate actions standards

The European Central Bank (ECB) published the third compliance and progress report in March 2022 that assesses SCoRE compliance for different entities. On the providers' side, the readiness of CSDs, Tri-Party Agents (TPA), and the custodians have been evaluated. On the users' side, only issuers have been surveyed. There is work to be done to meet the proposed deadline.

• Amongst the 38 CSDs, the compliance levels for those standards that primarily relate to market practices e.g., rounding rules, business day conventions, securities amount data and payment times, have been reported as implemented because all such standards are already in place owing to the SMPG guidelines and ISO 15022 usage in most of the markets. However, the standards related to workflow and messaging are lagging behind the schedule for approximately 75% of the CSDs because they need an agreement from various markets on common corporate actions workflows, e.g., negative cash flow, reversal of corporate actions, and handling of fees. Also, the messaging-related standards mandate movement to ISO 20022 messaging is yet to be taken up by the market participants.
• Similarly, two of the eight TPAs surveyed should achieve full compliance soon. However, the TPAs use custody services provided by CSDs or custodians to disseminate corporate actions information to collateral givers and takers. And, meeting-related workflows have been responded to as Not Applicable (NA) by TPAs, which is expected to be clarified in the next round.
• On the custodian front, it is a mixed bag. More than 50% of custodians reported being on schedule in 14 markets, whereas in the rest of the markets, custodians had not started analysis or did not report. The key reason is that CSDs must comply first, and then only the custodians will follow. Also, there are competing projects such as Target2 Securities (T2S), and some markets have prioritized them. These market infrastructures do not have separate SCoRE-related projects, and they propose to implement these standards as part of T2S.
• From the issuer's or issuer agents' perspective, the awareness of their obligations is low across most markets. Less than 25% of the markets had a significant number of issuers/ issuer agents reporting any knowledge of their obligations under SCoRE. The CSDs will need to promote SCoRE within their markets to create more awareness about different actors' commitments and the compliance imperatives.

Based on the above progress report from the ECB, while many corporate actions standards might have already been adopted, many market participants are still oblivious to their implementation and do not foresee the stickiness toward the November 2023 deadline.

So why are there impediments to adoption?

The major challenge for CSDs, TPAs, and custodians across Europe is the low adoption of ISO 20022 messaging standards. Firms have invested and adopted ISO 15022 to achieve increased operational efficiency and automation, resulting in reaping benefits over the past years. However, many firms have little or no business case or a financial incentive to switch to ISO 20022. SCoRE is applicable within Europe, but many firms must continue to support ISO 15022 outside of Europe.

The absence of a mandatory migration deadline will lead to a cost-intensive and extensive coexistence period that will require many players to support both standards and any proprietary ones until at least 2026, adding further overhead and complexity to day-to-day operations.

In addition to the standards, adopting uniform business processes across a fragmented jurisdiction for multiple customer types has always been challenging. For example, different financial intermediaries in the custody chain often prefer other default options based on their investment strategies and customer groups.

Additionally, the migration to the required standard for processing corporate actions for negative cash flows has raised the concern of credit risk for Danish mortgage bonds if the redemption payment is processed before the negative interest payment and there is an insufficient balance to debit.

So, some of these proposed standards are yet to be disseminated and thrashed out by respective local markets on the feasibility and relevance to their business.

Imperatives for CSDs, TPAs, and custodians

The transition from current disparate manual processes and content to ISO-based standardized messaging and workflows will need elaborate electronic mechanisms and will likely add a significant burden on all financial intermediaries involved, i.e., the CSDs, TPAs, and the custodians.

The obligations under SCoRE trigger systemic change in European markets and the financial intermediaries servicing them. The need for better technology to standardize and automate the processing of corporate actions and meetings raises the bar for firms that should carefully develop compliance programs in advance.

While SCoRE standards aim to drive harmonization toward everyday workflow and messaging for corporate actions, they have been competing for attention against other regulatory initiatives in the European Union (EU).

Securities Financing Transaction Regulation (SFTR), Shareholder Rights Directive (SRDII), and Central Securities Depositories Regulation (CSDR) have monopolized resources over the COVID-19 period, and T2S harmonization initiatives are still a priority in many markets. As a result, SCoRE has not yet received the necessary attention from market participants. Many large sell-side market participants have already announced the long coexistence with ISO 15022 standards that runs beyond the currently proposed November 2023 deadline. With no financial implications for non-compliance, it seems that take-up for the harmonization efforts via SCoRE will be slower than initially anticipated, and the envisaged benefits will take much longer to realize.

At S&P Global Market Intelligence, our corporate actions solution is aligned with adopting SCoRE standards. Our solution has extensive business process configuration capability and market practice-based workflow spanning each step of the corporate actions and meeting event lifecycle. With dual support for ISO 20022 and ISO 15022 messaging standards, the solution is placed to address SCoRE requirements for all involved.

Posted 22 July 2022 by Deepak Jain, Director, Product Management for Corporate Actions, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

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.