SRD II and SDR in the shadow of COVID

sdr blog

Kattintson ide a magyar verzióért.

In all respects, the year 2020 forced an unpredictable, almost impossible scenario on the capital market. The epidemic has shattered not only our health and our economy, but also our society. Capital market players had business continuity plans and disaster response plans at hand in vain. IT security, data and investor protection, and all IT support on both the hardware and software levels had to be made available immediately from time to time and the entire business operation had to be made Home Office compatible to protect human life.

With the pandemic in the background, money and capital markets have been put in an awkward situation by more and more EU directives this year. One such new directive, already adopted by the EU in 2018, is SRD II (Shareholders Rights Directive), which also deals with investor protection (shareholder rights). It stated, that natural person investors should be informed of the corporate events of public limited companies in the same way as institutional clients. The regulation outlined the minimum data content to be passed on for general assemblies and other optional and mandatory events, but gave no direction regarding the channels of communication nor the depth of information to be provided.

Nevertheless, capital markets were significantly influenced by how Clearing Houses handled communication with issuing companies and how they could pass on this corporate information to market participants. In addition to an online platform, this “Golden source” information can only be passed on to accountmanaged market participants via ISO 20022 MX SWIFT messages and xml files complying with T2S standards, and this requires significant developments, as the previously well-functioning service providers integrating various SWIFT standards are also slowly becoming obsolete.

New MX messages have emerged that no longer have an MT equivalent and are linked to share book identification, posing a major challenge to even the largest Clearing Houses and sub-custodian banks.

Despite lobbying, the capital markets have not received a postponement from the Union, so on 3 September 2020, it entered into force and the failure to provide information can now be sanctioned.

In the case of the SDR, settlement discipline regulations, the request for deferral submitted to the European Commission was accepted with reference to the epidemic and preparedness problems and was postponed to 1 February 2022. However, capital markets remain in the shadow of being forced to make significant IT changes to comply with T2S standards.

The basic aim of the legal regulation was to establish settlement discipline so that we would not have to make forced purchases in a transaction that has already been concluded, but its consequences have not yet been seen, so we can only make assumptions about a future operation.

In any case, several groups of market participants have applied to ESMA (European Securities and Markets Authority) for a test period when the new regulation enters into force. They fear that the regulation will jeopardize the liquidity of the securities markets and will impose a significant burden on market players with fines.

The IT transformation of the background systems is indispensable due to the new master data management and the new “matching” criteria linked in settlement, but the regulations also affect the pricing, the reporting and registration of fines related to the settlement discipline.

The most important task now for the capital markets is the transition to the new SWIFT standard, which will be inevitable in the next 5 years. It is also important to prepare for new steps of legal harmonization, which will affect corporate events in the coming years.

The above directives and regulations suggest further legal harmonization and standardization in the coming decades, both in the field of corporate events and settlement. National depositories will become central repositories, which will then have to be informed of all corporate events by issuing companies. The Payer roles also appear to be standardised in the area of debt and equity returns. This will require, among other things, changes in tax legislation to give custodian banks and investment service providers these roles.

Yield payments can be standardised at EU level and paid as early as after the date of the entitlement (the cut-off date). The central securities depository will also play a significant role in the “eased” identification of those eligible for return. At the national level, the creation of accelerated tax refund claims and the necessary IT background and customer platforms will be essential.

The year 2020 also proved that one of the major events of corporate events, general assemblies, should be slowly brought under control, at least it should be considered that assemblies traditionally held in person should also be moved to online voting platforms and an IT background should be provided for this with the involvement of the Central Securities Depositories. Perhaps it would reduce the current documentation requirements aimed at identifying shareholders, so there would also be an improvement in cross-border proxy voting. Instead of the huge documentation supplementing paper-based mandates to be submitted (in which the existence of the company for investors and the authority to sign the proxy authorisation are confirmed), the existence of legal persons would be verified from internationally available data warehouses or from the database available at the Tax Authorities.

With the help of the online platform, it would be possible to avoid postponing the general assemblies that closes the previous financial year. This would allow both natural investors and legal entity representatives to vote securely, easily, after identification and shareholding verification.

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