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AFME welcomes UK consultation on implementation of Basel rules
30 Nov 2022
Following the publication of the Prudential Regulation Authority (PRA)’s consultation paper on the UK implementation of Basel 3.1 rules today, Caroline Liesegang, Head of Prudential Regulation and Research of the Association for Financial Markets in Europe (AFME), said: “Today’s consultation from the PRA is important as Basel 3.1 is the final step to implementing post-crisis reforms in the UK and is welcome by the banking industry. AFME will be responding on behalf of its members, which are the largest systemically important banks with active presence in Europe. “AFME is pleased to see the PRA has struck a good balance in its approach to implementing the international Basel standards. It is positive that the UK regulator has sought to ensure a coordinated approach through the proposal of a 1 January 2025 deadline, which is in line with the EU’s proposed timeline. It is also good to see that the proposal addresses certain UK specific issues in the implementation, a regional approach the EU has also taken to address its own requirements. “However, while there have been a number of positive adjustments, such as the treatment of unrated corporates, this has been offset by the removal of preferential treatment elsewhere in the framework, for example, in the SME supporting factor and the increase in capital requirements for trade finance.AFME believes that risk sensitivity and preferential treatment for certain asset types should be retained as they enable banks to support the real economy at a time when the financial, corporate and retail mortgage sectors are under enormous economic strain. “The combined effect of all these changes will need to be carefully assessed to ensure that the overall calibration of UK regulation is appropriate.” - ENDS -
AFME and EY highlight growing investor demand for nature-related finance, but banks face challenges to scale products
30 Nov 2022
The Association for Financial Markets in Europe (AFME) and EY have today published a new report “Into the Wild: Why Nature May be the Next Frontier for Capital Markets”. The report, published in the lead up to the COP15 UN Biodiversity Conference, explores how finance can be channelled to help address nature loss. With more than half of global GDP dependent on nature, nature capital is rising up the agenda for policy makers and the financial services sector. The global biodiversity financing gap has recently been estimated at USD 598-824 billion per annum. While growing investor demand is creating new opportunities to develop nature-related financing products, the report finds banks and other market participants are struggling to mainstream and scale nature finance products. Banks also face challenges in particular from a lack of available data and common metrics for nature and biodiversity. The report also provides an overview of the natural capital finance products currently in the market and showcases a number of case studies of innovative practices currently being used by AFME members. Oliver Moullin, Managing Director, Sustainable Finance at AFME said: “The reorientation of capital in support of nature is a critical and urgent priority. AFME members have been key drivers of innovation in developing the products and financing solutions to help address the biodiversity financing gap and harness investor demand. We need to build on this momentum and proceed at pace with the work underway to create a strong global nature reporting framework and develop clear metrics for the measurement of investments’ impact on nature and biodiversity. We hope that COP15 can catalyse progress and the public and private sectors can work together to maximise the capacity of private finance to support nature.” Gill Lofts, EY Global Financial Services Sustainable Finance Leader said: “The protection and restoration of nature is essential for future economic growth and development and should be a priority for governments and all economic actors, including the financial services sector. Without sustainable finance we cannot achieve a sustainable future. We need an effective post-2020 biodiversity framework, underpinned by a strong global nature reporting framework, consensus around measurable and meaningful metrics to define biodiversity impact, and the development of a currency for nature.” The report concludes by examining the current regulatory landscape and makes five key recommendations for policy developments that can help direct capital towards solutions to conserve and restore nature: Gathering and translation of nature-related data into decision-grade data for financial services; A strong global nature reporting framework; Agreement on how to define measurable, meaningful impact on biodiversity through metrics and key performance indicators (KPIs) Standardisation of product classifications; and Development of a currency for nature. The report provides a useful guide for those looking to understand the critical role for capital markets. Ahead of COP15, AFME hopes this paper will continue to stimulate dialogue and market initiatives to harness the full potential of capital markets to finance the protection and restoration of biodiversity. -ENDS -
Funding to European corporates and SMEs at risk from Basel III regulatory changes finds new study
22 Nov 2022
The Association for Financial Markets in Europe (AFME) has today published a study, commissioned from Risk Control Limited (RCL), examining the impact on the European securitisation market of the introduction of the Standardised Approach (SA) Output Floor. This rule change forms one of the final elements of the Basel III set of reform measures and will affect how banks calculate their risk-weighted assets, the denominator in their capital ratio. The study finds the effect of this rule change, as currently proposed, will vary considerably across regulatory asset classes. Notably, the study shows securitisations of large corporates and SME loans are likely to be severely negatively impacted, making them scarcely feasible. At the same time, securitisations of consumer loans, including residential mortgages, auto loans and other consumer loans, may be boosted. Shaun Baddeley, Managing Director of Securitisation at AFME, said: “It is very concerning that securitisations of bank loans to SMEs and corporates are likely to be largely eliminated should the SA Output Floor be introduced in 2025 in the EU as part of the Basel reforms. The uncertainty created by its implementation may cause many issuers to immediately stop using significant risk transfer (SRT) as a tool to transfer risk and free up capital. This could hold back the tool’s potential to support the European economy at a time when it is under severe pressure from tightening monetary conditions. “We are therefore calling on policy makers to urgently review these rules to support bank lending to corporates and SMEs. To illustrate the importance of SRT transactions, last year in Europe, this tool freed up capital which could be used to support more than EUR 80 billion of lending, representing nearly 10% of SME lending in 2021. It therefore has an important role to play in lifting Europe out of recession and supporting Capital Markets Union objectives. “Our study also highlights the contradictory effects that this rule change will have, meaning that while securitisations of SMEs and corporate loans are unfairly penalised, securitisations of consumer loans will be boosted. This demonstrates that these rules are not soundly rooted in an understanding of the relative riskiness of different asset classes.” William Perraudin, Managing Director at Risk Control Limited, said: "We show that sub-sectors areaffected differently depending on a 'horse-race' between the effects of floors on the underlying assets and on the securitisationsthemselves. Securitisations of corporate loans in Europe will be more or less precluded under the new regime. This will occur just ata time when the coincidence of rising capital charges and economic downturn will make the safety valve of securitisation particularlyimportant. Such unintended consequences appear to be a general feature of the current securitisation regime. While problems maybe ameliorated by provisional adjustments, what is really needed is a review of central aspects of the approach at the Basel level." Among the key conclusions of the analysis are: Corporate securitisations, both for large corporates and SME portfolios, will be largely eliminated by the introduction of the SA Output Floor as currently envisaged. This could contribute to a significant reduction in the availability of bank funding to European firms. Existing transactions done for risk management purpose, especially corporate ones, are likely to fail the significant risk transfer (SRT) test applied by European supervisors and therefore will have to be terminated. Some of the negative effects of the SA Output Floors on existing transactions would be substantially mitigated if internal ratings-based (IRB) approach banks were required to evaluate SRT tests only at an IRBA level, even if the SA Output Floor is binding. The SA Output Floors regime will encourage greater securitisation activity in residential mortgage and other retail loan portfolios because the increase in capital for loans held on balance sheet will exceed that of securitised assets. These findings suggest that the implementation of the SA Output Floors will disfavour one asset class substantially while benefiting another asset class with no clear rationale based on policy priorities.This is a consequence of adopting regulatory rules that are not soundly rooted in an understanding of the relative riskiness of different asset classes. Overall, the analysis of the study reveals the significant mis-calibration of the SEC-IRBA and SEC-SA for mezzanine tranches and a misalignment of senior tranche risk weights in comparison to pool risk weights. It, therefore, contributes to the case for reconsidering the level of capital charges for such tranches. AFME suggests an immediate recalibration of the SA Output Floor is particularly urgent to mitigate the severe negative impact outlined. The Association strongly supports proposals by MEPs for a transitional arrangement, until a wider review of the framework is undertaken. This transitional measure is critical for the economic viability of synthetic on balance-sheet transactions, the main instrument used to share risk and redeploy capital into lending to SMEs, corporates and project finance, as they are the most severely impacted by this rule change. - ENDS -
Key industry report tracks European capital markets’ performance in 2022
17 Nov 2022
Press release available inEnglish,French,German,Italian,Spanish. Individual country analysis available forFrance,Germany,Italy,Spain. The Association for Financial Markets in Europe (AFME) in collaboration with eleven other European and international organisations has today published the fifth edition of the “Capital Markets Union – Key Performance Indicators” report, tracking the progress of Europe’s capital markets against nine key performance indicators and analysing the progress over the past five years. Among the key findings of the 2022 report: Socio-economic and geopolitical developments have caused a major reversal of capital markets activity in 2022 compared to the record gains of market-based financing levels of the previous two years. Inflationary pressures, exacerbated by the Russian invasion of Ukraine, and combined with monetary tightening and fears of recession following the Covid-19 pandemic, have led to an increase in the cost of capital and created a climate of market uncertainty and volatility more generally. Market-based funding used by corporates dropped to pre-Covid levels - total new debt and equity issuances decreased by 32% year-over-year during the first half of 2022, with a particularly steep decline (86%) in EU Initial Public Offerings. Europe’s equity gap grew wider with the EU’s domestic market capitalisation of listed shares declining from 18% in 2000 to just 10% of the world’s total in 2022, causing Europe to further fall behind the US and UK in the global capital market competitiveness ranking. Pre-IPO equity investment in EU SMEs remained strong with €34.3bn in new equity investment flows in the first half of 2022, or 73% of the amount invested in 2021. However, a growing challenge for investors is the capacity to exit investments as the IPO market remains subdued and public markets see lower valuations. European households saw a decline in their savings in the form of capital markets instruments due to deterioration in asset values. EU securitisation transactions fell to lowest levels on record with the proportion of EU loans outstanding transferred via securitisation and loan portfolio sales falling to 1.6%, the lowest value on record and half the value in 2018 (3.2%). US securitisation issuance grew 74.5% during 2020-2021 vs 2017-2019, while EU issuance declined 10.9% over the same period. Remarkable ESG growth over last five years – with the amount of EU ESG debt issuance increasing from €61bn in 2017 to €360bn in 2021. EU green bond issuance continued to rise in 2022, albeit at a slower pace this year, with volumes up 8% year-on-year in the first half of 2022, compared to the 74% increase in 2021 which was largely due to sovereign issuance. An improved EU FinTech regulatory ecosystem While FinTech funding was down across the globe since the peak of last year, the number of EU Fintech unicorns increased from 13 to 18, suggesting an overall improvement in the environment for financial technology. Compared to 2021, three additional countries (Italy, Latvia, and Slovakia) deployed regulatory sandboxes. Now, 13 out of 28 countries (EU 27 + UK) provide this regulatory feature. The report was authored by AFME with the support of the Climate Bonds Initiative (CBI), as well as European trade associations representing: business angels (BAE, EBAN), fund and asset management (EFAMA), crowdfunding (EUROCROWD), retail and institutional investors (European Investors), publicly quoted companies (EuropeanIssuers), stock exchanges (FESE), venture capital and private equity (InvestEurope), private credit and direct lending (ACC) and pension funds (PensionsEurope). – Ends –
Joint industry letter warns absence of EU securitisation market is a strategic loss for Europe
7 Nov 2022
A group of nine organisations representing key participants in the European securitisation market have written a public letter to EU policymakers, calling on them to take urgent targeted measures to ensure that securitisation can support the European economy during a testing period marked by macroeconomic uncertainty. The group includes the Association for Financial Markets in Europe (AFME), the Dutch Securitisation Association, the European Banking Federation (EBF), the International Association of Credit Portfolio Managers (IACPM), Leaseurope, Eurofinas, Paris EUROPLACE, PCS and True Sale International (TSI). The letter calls for urgent action as it highlights how securitisation volumes in Europe have continued to decline in 2022,in sharp contrast to the growth seen in other markets in recent years. The United States, for example, recorded its highest ever issuance levels in 2020 and again in 2021. It is also a critical moment for the European securitisation market as key regulatory workstreams are underway which could contribute to the recovery of the market or exacerbate current regulatory imbalances. For example, targeted measures in the prudential requirements for banks under CRR3, and insurers under Solvency 2, together with a well-designed EU Green Bond Standard, would be important steps towards a better functioning market. The organisations are therefore calling on EU legislators to use these discussions to introduce immediate adjustments to securitisation-related calibrations and concrete mandates for more risk sensitive revisions to be undertaken as a subsequent step. There are also critical technical standards under preparation which could negatively impact the market if further disproportionate requirements are introduced. The joint Association leaders write in the letter: “The absence of a well-functioning securitisation market represents a strategic loss to the European financial system. It is undermining the competitiveness of European financial institutions and limiting their ability to recycle capital to support new financing. It has encouraged institutional investors to shift towards other products that do not offer the same advantages in terms of protection, transparency and liquidity.” “At the heart of the problem is a disconnect between the Commission’s vision for securitisation in Europe – a tool making a significant contribution to a well-functioning financial system that efficiently finances the real economy – and aspects of the regulatory framework which remain miscalibrated and, in practice, disincentivise issuance and investment in securitisations, thus holding back the tool’s potential to support the economy.” The full letter can be found here -ENDS -
New EU sovereign bond trading data underlines need for careful post-trade deferrals calibration
13 Oct 2022
The Association for Financial Markets in Europe (AFME) and FINBOURNE Technology have today published the second in a series of new reports, which analyses EU sovereign and public bond trading data consolidated from numerous sources for the period of March to December 2021. This report follows an earlier April 2022 report which focused on the corporate bond trading landscape. The new data from this report demonstrates the following principal findings: There is a high degree of trade transparency in EU sovereign bond markets, especially when compared to corporate bond markets, with a significant majority of EU government bond trades (76%) currently being made real-time transparent (compared to 8% of corporate bond trades). However, the quality of the sovereign data set is materially worse than the corporate bond data set due to a high level of distortion caused by the inconsistent use of some flags, among other issues. This needs to be addressed by ESMA. The majority (60%) of government bond-related trades on EU venues are non-EU bonds from the US, UK and other countries. Notably, Table 1 shows the trading volume of US Treasuries is nearly the same as for all EU issuers (circa 40% of total volumes). This means it is currently hard to have a clear view of the trading of EU-based issuers with the large amount of trading in the EU by non-EU issuers clouding the picture. AFME believes improvements could be made, for example, by narrowing the scope of MiFIR trade reporting to only cover EU-issuers, which would then be the basis on which deferrals should be calibrated. This would be similar in some respects to the US TRACE system, which focuses only on securities issued in the US. This re-focus would further support an EU fixed income consolidated tape focused on EU markets. Adam Farkas, Chief Executive of AFME, said: “This second data analysis from AFME and FINBOURNE Technology reiterates the importance of an accurately calibrated deferral regime for EU sovereign bonds. This would help grow the EU fixed income market by focusing on opportunities to further increase transparency where appropriate, while carefully calibrating deferrals to avoid causing undue risk for market makers, which could negatively impact the amount of liquidity that they are able to provide. “In order to further improve transparency, AFME believes MiFIR reporting of sovereign and public bond trading activity should be analysed by ESMA to confirm precisely through data analysis where increased transparency will not damage market liquidity.” Thomas McHugh, CEO and Co-Founder, at FINBOURNE Technology, said: “Once again, we’re delighted to work with the AFME team and its working group members to support their evidence-driven approach to policy formulation. The analysis for this paper required an extremely granular approach to transaction records, made possible by our Modern Financial Data Stack. We hope, that by constructing this data, we can jointly deliver the transparency needed, to clarify some of the key issues impacting the creation of a consolidated tape. As always, our core principle is to liberate, simplify and connect data and this paper goes some way to showing the benefits of a single consolidated view of transactions to inform market participants, regulators and EU authorities.” The report provides extensive data on sovereign bond risk position trade-out times (i.e. the time it takes to move the risk off the bank’s balance sheet). This data demonstrates a wide range of times depending on issuers, trade sizes and issue sizes, ranging from very short to very long. This shows that larger and illiquid transactions require carefully calibrated and, in some instances, relatively long, deferral periods to ensure optimal market liquidity (as otherwise liquidity providers can be unduly placed at risk). These larger and illiquid trades comprise a small percentage of the number of trades, but a much larger percentage of volume. Likewise, the data shows that trade-out times for other trades can be very short, justifying no or short deferrals in those instances. The AFME paper analyses approximately 1.8 million post-trade records on 8,200 distinct sovereign and public bonds. From the data set studied, AFME and FINBOURNE Technology find that different deferral periods need to be applied based on the trade size and issuance volume, among other key characteristics. Applying an incorrectly calibrated deferral regime to all trades, especially those larger in size or illiquid, risks exposing liquidity providers to potential undue risks, which could negatively impact the amount of liquidity/pricing that market makers are able to provide. Key findings: Tables 3 and 4 show that currently ‘real time’ reporting on EU sovereigns/public bonds is higher than that for corporates – respectively 76% versus 8% by number of trades, and 37% vs 16% by volume. As was the case in the April 2022 corporate bond study, this report confirms that trade out times for sovereigns/public bonds are significantly longer for small issuance sizes and larger trade sizes. Trade out times vary significantly for various issue and trade size categories, ranging from a few minutes to well over a year depending on the issue and trade size category. As a result, the data supports real-time and End of Day (EOD) reporting for some categories of trades, but also shows certain deferrals for larger trades should be significantly longer than four weeks. The vast majority of trades (92%) in the combined sovereign/public bond category relate to direct sovereign issuance from Debt Management Offices (DMOs) rather than non-sovereign public entities. Sovereign trading volume is over twice the size of corporate bond trading. the report also provides trading volume from each EU issuer country. This data analysis supports AFME’s consistent position that deferral times should be calibrated by ESMA, only after analysis of actual trade data collected from the fixed income consolidated tape. – Ends –
AFME comments on Commission report on functioning of the Securitisation Regulation
11 Oct 2022
In response to the European Commission’s report on the review of the Securitisation Regulation*, Shaun Baddeley, Managing Director of Securitisation at the Association for Financial Markets in Europe (AFME), said: “The Commission has published its much-awaited report on the functioning of the Securitisation Regulation. AFME agrees with the industry survey, conducted by the Commission, which finds that the Securitisation Regulation has not been successful in improving access to credit for the real economy. AFME accepts the Commission’s conclusion that more time is needed to truly assess the impact of the new framework but urges more action as soon as possible to help boost the securitisation market in Europe, which has been struggling for years due to regulatory imbalances. “In particular, AFME welcomesthe Commission’s invitation to ESMA to conduct a much-needed review of transaction reporting templates, noting the need to significantly simplify requirements for private transactions to make the framework relevant and proportionate. However, without change in the definition of a private securitisation, many private transactions will be treated as public for disclosure purposes, in part, defeating the purpose of the review. This will at best create real challenges for smaller borrowers reliant on bank relationships to finance themselves efficiently via private securitisation, and at worse, prevent them from accessing this funding at all. “AFME also finds the opportunity to foster EU investor growth has so far been missed. While the report acknowledges market participants' concerns that investor due diligence obligations are disproportionate, creating high barriers to entry for new investors, there is no action to address this issue. The industry awaits with interest the recommendations from the Joint ESAs report on their review of the prudential capital framework for banks and insurers, which will present another important opportunity to attract investors back to securitisation. It will also be a chance to recalibrate bank capital to address disproportionate capital treatment for both parties, when compared to other asset classes. “The report recognises the important contribution that securitisation can make in channelling capital towards the green economic transition and supports the EBA’s assessment that no separate sustainable securitisation framework is needed. AFME agrees with this assessment but would urge policy makers to recognise in the Green Bond Standard the important role that securitisation can play via green synthetic securitisation.” - ENDS -
AFME underlines the importance of level playing field for responsible data sharing. Association recommends four key principles for Open Finance Framework
27 Sep 2022
The Association for Financial Markets in Europe (AFME) has today published a new paper “Open Finance and Data Sharing – Building Blocks for a Competitive, Innovative and Secure Framework”. This paper precedes the European Commission’s framework for data access in financial services which is due to be published in the coming months as announced by the EU’s chief of financial policy, Mairead McGuinness. Elise Soucie, Associate Director of Technology and Operations at AFME, said: “Open Finance in the EU’s data economy will transform the way banks share data with each other, and also with third-party providers, such as fintech companies. For financial services this could mean that access to new, broader data sets could enhance the way banks operate and encourage innovation across sectors. “But with innovation comes potential for unintended consequences such as sharing data with participants in other sectors who may already have a dominant share of both individual and corporate data and which could lead to monopolies and the exploitation of data. Therefore AFME has identified four key principles to help address these risks and to support policy makers in the development of a robust Open Finance Framework.” The paper identifies four key principles to support the development of a robust Open Finance Framework, including: A level playing field is crucial In order for an Open Finance Framework to flourish not only in financial services but across multiple sectors, there must be consistent and appropriate regulatory oversight. This consistency is key in order to both support innovation, but also to discourage monopolies, encourage competition and efficiency, and to lower costs for both corporate and retail customers, creating a robust and effective data economy. For this to occur, regulation must address risks consistently and market players must have consistent regulation if data is to be shared across the sectors. Interoperability and an appropriate level of standardisation A robust data economy and its positive long-term impacts will be supported by both interoperability and an appropriate level of standardisation on a global scale. Interoperability should also support a level playing field so that, if data is being shared outside the financial services sector, it is still subject to appropriate requirements and remains high quality and fit for purpose. Furthermore, any harmonisation would also need to occur across EU Member States, while also being complementary to global frameworks. This interoperability could be supported through a market-led forum that could support the implementation of both principle-based standards and technical and security standards where appropriate. An appropriate framework for compensation Compensation is important in order to ensure fair allocation of costs across the data value chain and to safeguard fair competition. Compensation, for infrastructure and provision of data services is also important to incentivise data holders to maintain a high level of quality and high functioning data sharing mechanisms. Ensuring that each type of data is supported by an appropriate data sharing infrastructure enables data to be fit for purpose and reliable when used. Data reliability also supports a robust data economy and mitigates risks to data integrity, data security, regulatory compliance and the accuracy of end products for both corporate and retail consumers. Clear liability provisions Liability provisions are important in order to provide legal clarity with respect to the access, processing, sharing, and storage of data. These provisions should be consistent with the GDPR and should also include specifications on redress and dispute resolution as well as consent mechanisms for consent beyond the usage of the data controller. In addition to the Open Finance Framework setting out liability provisions, it should also support and enable contractual agreements as these are crucial to fill any gaps in new use cases, or specialised scenarios which may require additional clarity on the legal, technical and other conditions governing data sharing. - ENDS - Note to the editor: This summer AFME responded to the European Commission’s targeted consultation on ‘Open Finance and Data Sharing in the Financial Sector’. Commissioner McGuinness’ announcement of the European Commission’s Expert Group on Open Finance builds on the European Commission’s efforts to gain cross-industry insight into the impact of data sharing.
AFME calls for industry discussion on shortening settlement cycles in Europe
21 Sep 2022
The Association for Financial Markets in Europe (AFME) has today published a new paper discussing whether Europe should move to a one-day settlement cycle (known as T+1). In Europe, the current settlement cycle for most transactions in equities and fixed income markets is two business days (‘T+2’). The paper follows announcements by the US and other jurisdictions earlier this year of their intention to move to shorter settlement cycles. Pete Tomlinson, Director of Post Trade at AFME, said: “An industry move to T+1 would follow the historic trend towards shorter settlement cycles, and could result in reduced market risk and associated costs. However, a move to T+1 could be the most challenging migration yet because it would remove the only business day between trading and settlement, creating significant pressure on post-trade operations, particularly for global participants. The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T+1. A rushed or uncoordinated approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks. For this reason, AFME is calling for an industry task force to be set up to conduct a detailed assessment of the benefits, costs and challenges of T+1 adoption.” The paper, “T+1 Settlement in Europe: Potential Benefits and Challenges” highlights the key benefits of moving to a shorter settlement cycle, including: Reduction of risk: shortening the number of days between trade execution and settlement will reduce counterparty, market and credit risk, especially during periods of high market volatility. Significant reduction of associated costs: by limiting firms’ open exposures over the settlement period, there will also be a reduction in margin requirements, allowing market participants to better manage capital and liquidity risk. Maintaining global alignment: given that some major jurisdictions will be adopting T+1, the end users of capital markets may benefit from Europe following the same approach. The paper also outlines the various barriers to overcome before such a migration can take place, including: Post trade activities compressed into shorter time frame: there would be significantly fewer hours between trading and the beginning of the settlement cycle for post-trade operational processes to take place. While it might be assumed that moving from two days to one day would reduce the available post-trade processing time by 50%, AFME actually estimates market participants will be moving from having 12 hours to 2 hours of post-trade operations time, an 83% reduction. Possible increase in settlement fails: the migration could also lead to an increase in the number of settlement fails in the market, which will incur cash penalties under Central Securities Depositories Regulation (CSDR) rules, as well as having capital impacts under Basel III requirements. Greater operational complexities for global participants: time zone differences will impact the possibility of same-day matching processes for investors from outside Europe, vastly reducing the time available to communicate and resolve any breaks or exceptions. This impact would be particularly significant on cross-currency transactions which have an FX component. Securities Lending impact: moving to a T+1 settlement cycle compresses the timeline to identify and recall securities, which could lead to breaks in the process, resulting in an increase in settlement fails and cash penalties unless there is a modification to existing processes, technology and overall behavioral changes. Impact for Exchange Traded Funds (ETFs) and Securities-based derivatives more pronounced: Due to the global composition of many ETFs, which contain underlying securities from several jurisdictions, this can often lead to settlement delays in a T+2 environment, due to time zone differences, market holidays and cross-border settlement complexity. These challenges would be even more pronounced in a T+1 environment. Challenges will also exist for securities-based derivatives with further assessment required to identify impacts to the swap lifecycle, such as margining calculation and collection. AFME’s paper strongly recommends that further cross-industry discussion is required to identify and quantify the benefits and challenges of moving to T+1 settlement. AFME cautions that a successful migration will require coordinated industry effort, from an initial impact assessment through to the development of a detailed implementation plan. - ENDS -

Rebecca Hansford

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