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Making MiFID II Work

The Total Cost

of Trading

Future Collaboration Across Front- and Back-Office

April 2018

This document is confidential between you and Liquidnet and should not be disclosed to anyone
else without Liquidnet's prior permission. It is published only for Liquidnet members, customers, and
anyone who has been sent this document directly from Liquidnet.

This document is not investment advice or intended as a recommendation to buy or sell any
instrument covered with it. Although the statements within this document are believed to be correct,
they have not been verified by the author and should not be relied upon when considering the merits
of any particular investment. A recipient should consider their own financial situation, investment
objectives and seek independent advice, where appropriate, before making any investment.

All presented data may be subject to slight variations.

All data and figures are Liquidnet internal data unless stated otherwise.
This paper is part of Making MiFID II Work—our comprehensive
content, learning, and resource programme about MiFID II and its
impacts on the buy-side, both in Europe and around the world.

For more information about MiFID II, how Liquidnet can help you
prepare, or to access more of Rebecca Healey’s MiFID II research
papers, insight, and workshops, please reach out to your Liquidnet
coverage, email mifid2@liquidnet.com, or access the Making MiFID II
Work app on My Liquidnet by logging into my.liquidnet.com or
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The Total Cost of Trading
Future collaboration across front- and back-office

Investor protection is a central pillar of MiFID II. ESMA believes that ten trillion euros are sitting in EU savings accounts with
low interest rates rather than being invested in the European economy1, due to poor performance, lack of transparency,
unrealistic expected returns, and hidden costs. It is the regulator‘s view that only when retail investors feel sufficiently
protected will they return to European capital markets.

In order to improve investor confidence in financial markets, European regulators are increasingly focusing on transparency
and accountability throughout the investment process; in particular, looking at the cost of trading and its impact on assets
managed on behalf of end investors. As well as Markets in Financial Instruments Directive (MiFID II), a number of firms now
need to turn their attention to the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) dedicated
to ensuring retail investors have full transparency over charges to understand the cost of their investment.

Few firms currently yet have the full capacity to understand the total cost of trading given the continued bundled nature of
trading. While the cost of research is becoming unbundled from the cost of execution for asset managers, exchanges and
CCPs still operate bundled models with fees calculated on volume and complex rebate models. The more complex the firm’s
product offering is, the harder it can be to understand all fees at the granular level now required. However, those firms that
have invested in technology and are able to accurately establish the total cost of trading have a significant advantage in their
ability to adjust operational costs to remain competitive.

Focusing on the total cost of trading matters for asset managers as the level of scrutiny over transparency of costs merely
looks set to continue. The FCA have just released their latest policy statement on their review of the UK Asset management
industry (https://www.fca.org.uk/publications/policy-statements/ps18-8-implementing-asset-management-market-study-
remedies), which introduces further measures to improve the fairness of how investors in funds are treated particularly in
relation to disclosure of costs. Further regulatory reviews are due to be published by ESMA, reinforcing the need to
understand the complete cost of trading, particularly given the focus on enforcing the efficient settlement of trades with the
Central Securities Depositories Regulation (CSDR). Yet it is not only regulators who are putting firms under scrutiny; pension
trustees and boards are increasingly making asset managers, and the sell-side firms who serve them, more accountable.
Whether it is providing evidence of best execution or full disclosure of all costs and charges, a new era of transparency and
accountability in asset management is now well underway.

Executive summary
In 2017 and Q1 of 2018, Liquidnet interviewed managers of back-office operations and heads of dealing at a total of 27
global asset management firms accounting for $16.9T AUM globally. The purpose of the research was to understand how
the introduction of new European regulations—MiFID II, CSDR and PRIPPs—will impact their workflows, improve operational
efficiencies, and encourage firms to provide greater transparency into the total cost of trading.

Some key highlights from the research:

1. The cost of trading is still viewed as a front-office issue with 61% of all respondents looking at implicit and explicit
costs of trading; only one third include all costs and charges through to settlement.
2. Firms often still remain segregated front to back. Over half of back-office respondents were not aware of what
the cost of trading would be for their organisation, considering it solely a front-office issue.
3. Limited access to accurate data creates challenges for the buy-side to split out individual costs and charges; just
over a third currently track all costs on an individual firm and broker level. Tracking costs still remains a
function of the assets traded and the method of execution, with OTC activity seen as the most opaque.
4. Under 50% of respondents systematically include settlements as part of their best execution policy. Thirty-six
percent consider settlements as part of their policy on an ad-hoc basis and 18% of firms do not include settlements
as a formal part of their best execution considerations.
5. New regulatory requirements over the disclosure of all costs and charges is delivering change, but progress is slow
and impacted by the asset class traded and the availability of data and technology to assist the process. Seventy-
seven percent of buy-side firms are prioritising investment in technology upgrades across both front and back
office to ensure compliance.
6. CSDR will impose a penalty regime, including fines and a mandatory buy-in regime, for those who fail to settle on
time. Yet, just 12% of respondents currently obtain real-time information on settlement fails, limiting their
ability to prevent them.
7. Sixty-seven percent of respondents recognised there was more they could do to meet the 99.5% settlement
efficiency rate set by ESMA. However, the lack of automated workflow processes in fixed income makes settling
on time more challenging, with a current settlement rate averaging only 81%.
8. A further 50% of firms indicated that an improvement would only be achievable if brokers’ shorts were
resolved rather than seeing any requirement for change on the part of the buy-side.

Trading costs in the spotlight
Competition, regulation, and the rise in passive funds continue to create upheaval “People are going to look at the
across active asset management. The industry is already under pressure, requiring operational cost more and more. When I
wholesale change across the board in how firms manage their trading operations. am trading with a broker, am I trading
As regulators focus on ensuring transparency of costs for investors and improving at the same rate between 1 and 10
execution and settlement performance, buy-side firms must now identify and tickets? Is it a different cost? Do I need
disclose every cost, from order receipt to settlement. To achieve this, firms will need to extend or shorten settlements?
to focus on improving front-to-back communication, as well as increasing their Funding rates have been really low, so
operational efficiency. we would just get an off-charge to
trade across the globe.”
This new age of transparency over charges will leave no stone unturned; full
disclosure of all costs is clearly set to become best practice in the new era of “We are 99% explicit and implicit.
accountability, as the historic focus on net performance is replaced by industry Regulators have a macro problem—they
standards on delivering value for money. However, how and what to calculate as need individuals to save more and
a cost varies greatly from firm to firm, as well as between heads of dealing and remove the frictional costs of trading
settlements. Sixty-one percent of respondents indicated that both explicit and but it’s difficult for all firms to achieve
implicit costs were taken into consideration when calculating the cost of trading. this. We have looked at reducing our
(see Exhibit 1) explicit costs and have a good handle on
most implicit costs but it’s not always
Exhibit 1:
What factors does your firm consider when looking at the cost of trading? possible—TCA, for example, doesn't
cover all asset classes—fixed income is
developing but it‘s still an art rather
Explicit 59% of back- than a science.”
office managers
cost only
consider the cost
6% of trading a front-
office issue only
All charges inc.

Explicit and
implicit costs

Source: Liquidnet Research

While the factors that make up the total cost of trading reach across multiple parts
of some organisations, 59% of respondents working as Heads of Settlements still
consider the cost of trading solely a front-office issue. Just a third of respondents
currently include settlements in their total cost considerations, confirming that for
most of the firms, execution services remain firmly separate from the operations of
settling a trade.

The explicit cost—spread paid or commission—is one cost, the implicit costs around “Additional costs above trading such as
execution, another, but understanding the true cost of implementing the investment clearing are considered as part of the
decision can be impacted significantly by the cost of settling a trade. Some firms are overall cost of our strategy. Not
able to measure the cost to trade across every asset class and every market; necessarily on a case by case basis but
however, whereas calculating an accurate post-trade charge for listed equities can more holistically. For example, that we
be relatively straightforward, calculating a charge for a bilateral OTC swap can be far are going to clear all interest swaps
more complex. Physical cash bonds may have minimal charges external to the bid or where applicable, but we are not going
offer spread, but for non-cleared swaps the cost of high clearing fees may make the to clear CDS because it is too big of a
overall cost of implementing the investment decision prohibitive. drag on the balance sheet and the cost
of clearing.”
Data, technology and resourcing still can stand in the way for many firms to pull
together comprehensive information on costs and charges. While implicit costs are “Looking at the exchange rate
becoming increasingly easier to measure given the rise in electronic trading and derivatives or futures, we are
increased use of pre- and post-trade analysis such as TCA, the ability to include constantly reviewing our clearers‘ and
implicit costs as part of the total-cost-of-trading calculation remains asset class our execution rights with our non-
dependent, as does how the manner in which the trade is executed. clearing house. Someone might come in
Settlement considerations are also asset class specific. Clearing and settlement with an incredibly low execution rate
costs for OTC derivatives trading is one area where fees are likely to come under but just because they are cheap does it
pressure as more activity moves on-venue. However, on the equity side, operational mean they are good to do your
costs represent a fraction of what they used to be; they are more dependent on the execution? Considering just the
custodian rather than the broker, and can be dictated by the client, outside of the cheapest execution commission is an
control of the asset manager. overly simplistic approach.”

As such, some firms are choosing to take a different approach to understanding all “We break out the cost of trading by
costs and charges; pulling together a broad range of trading costs and settlement businesses and brokers. I can divide
data including fails, custody charge, and time allocation for settlement issue, in the number of people in my equity
order to assess the full cost of implementing an investment strategy. confirmation team by the trade volume
for the costs to support that activity.
Incorporating all the necessary data into a full electronic audit trail enables firms to
Our swap biz has the highest cost per
track, measure, and quantify the cost through out the execution process; full trade, especially when we are trading
automation of this process facilitates efficiency to enhance and improve the
bilaterally. Even where there's an
workflow process. Then, areas such as trading and running costs; staffing resources,
opportunity to clear a trade, sometimes
systems, property cost, technology, CTM, Swift, etc; even any cross charges such as
we still do bilateral trades—why? It
anti-dilution levies, can be reviewed and improved where required. However,
looks like price/execution is better, but
knowing when and where to draw the line on costs and charges is not yet an exact
if you factor in delta'ed costs it might
science, and firms vary broadly with regard to which costs are considered and how
not be the case. We are trying to build
they are calculated.
the links for the cost post-trade into the
Given that firms will need to provide a full illustration showing the overall effect of price of the trade.”
costs on an investment return going forward, clearly a change in approach will be
required by many. MiFID II laid the groundwork by considering best execution as “The issue is when you are looking at
more than just getting the best price for clients. Firms now need to implement a spread prices and making sure you
thorough policy with relevant data on execution quality, as well as providing clients have the correct benchmark to compare
with the total cost of implementing the trade. to. There are limitations in vendor TCA—
we keep asking them for TCA for swaps
but they either can’t provide it or it will
cost an arm and a leg. The market
hasn't caught up with TCA for non-
equity classes.”

Moving from explicit to implicit
MiFID II’s requirement to unbundle the research process should facilitate better disclosure of costs. Asset managers can no
longer be charged one bundled and opaque fee covering both execution and research services by their brokers. Instead,
firms are expected to direct orders to the execution venue or entity which provides the best possible results in terms of total
consideration, rather than where they have historically had a counterparty relationship.

In addition, MiFID II highlights the requirement for firms to understand the cost of trading beyond the sole consideration of
commission rates or explicit costs. By asking asset managers to disclose the total cost of trading ahead of execution,
European regulators aim to instigate behavioural change. Portfolio managers may also have to examine and adjust their
investment strategies as the cost of entering or exiting a strategy must now be considered2 (see Appendix 2).

One example of the growing need to consider explicit as well as implicit costs of trading can be illustrated below. High-
touch, electronic/algo and portfolio trading execution-only rates averaged 5.16 basis points for equities in developed
markets by the end of 20163. However, looking at explicit commission alone as the only cost is misleading. The average
order size for Rolls-Royce in the lit market was 1,405 shares, with an average daily volume of 6.15 million shares. As such,
trading 9 million shares risks incurring negative market impact, and the implicit cost of trading is considerable (see Exhibit 2).

While the back-office has long been excluded from trading costs considerations, it too now has a role to play in
understanding the true cost of trading and delivering best execution. Settlement charges including, but not limited to,
amendments, interest rates, borrow costs, interest claim exposure, and touch points must now be included in the total
consideration. Settlement fails will come at an additional cost, with fine rates hovering between 0.15 and 1 basis point
(see Appendix 3) and a buy-in charge which is, in the main, both unpredictable and unquantifiable.

Exhibit 2:
Rolls-Royce Holdings—Impact Cost vs Risk Cost and Total Cost vs Duration

First scenario: executing the order on the lit market via a high touch broker
Total front-end cost (explicit cost + implicit cost) = ~ 5 basis points (Commission rate) + 280 to 286 basis points (market impact cost) = ~ 285 to 291 basis points
Second Scenario: Crossing the block on the Liquidnet platform
Total front-end cost (explicit cost + implicit cost) = 6 basis points (average front end commission) + 0 market impact cost as anonymity guaranteed

Source: OTAS Technologies

ESMA Q&A Investor Protection, 18 December 2017 – https://www.esma.europa.eu/sites/default/files/library/esma35-43-
Have Emerging Markets Emerged?, Greenwich Associates, February 2017

What’s next for best ex?
April will be another major stepping stone for the industry with asset managers due “It is going to be a bit of an experience
to release their first report under best execution obligations. Firms trading directly in April with the publication of RTS 28
on a venue will be required to publish their top five execution venues under RTS 28, and Article 65.6 to pull together our
while firms that receive and transmit orders are required to disclose the identity of OMS data from Charles River up to
their top five brokers in terms of trading volumes where they transmitted or placed November and add in the Aladdin data.
orders that resulted in execution under Article 65. We need to merge two sets of data
together, which has been a bit tricky
The challenge for firms is the quantity of data to sift through and evaluate, and then as well as pulling in the feeds from
how to display this to underlying clients so the data can provide something of value. the APA.”
While TCA data is becoming the de-facto request from clients, it is questionable
whether TCA as a methodology is widely understood outside of equity electronic “We do have clients asking for TCA
trading. Vendor product offerings often do not extend to fixed income or swaps, nor more now than they ever used to, but
voice trading across asset classes. TCA also currently does not include commission the majority asking for it still do not
rates, which need to be calculated as an additional charge on top of the TCA. understand it when they get it so there
is still an educational process involved.”
Data quality and accuracy is still a particular challenge for fixed income, making the
identification of explicit and implicit costs of trade within a spread difficult to “We look at settlement costs if we sell
identify. As TCA in fixed income is adopted further and APAs produce data in a or buy an OTC programme,. e.g. if it was
readable format, TCA providers can begin consuming the information and building 20 transactions, what would it cost
it into their models which will provide greater accuracy and consistency in me? The ticket cost would be x, the cost
understanding the true cost of the trade. However, in the interim, the quantitative of the clearer y, cost of holding z. But
information required for best execution may be inaccurate and misleading. we don’t look at the individual broker.”

Exhibit 3: “For Fixed Income, we are looking at

Do you track all costs at an individual broker level or as an aggregated total
at the firm level?
where the costs are starting to hit.
When we are trading a bond of this
duration and this liquidity in this size;
Don't look at where do I get the best result and on
these costs
Per broker which venue? We are nowhere near
26% where we would like to be yet.”

“We are starting to look more and more

Per trade
at FX and we are looking at some TCA
providers in the FX world and how we
can improve on that front. But
Internally, at
firm's level
derivatives is still about commission
11% only purely because it is the style of
trading, you are tied to a contract. You
Broker and really have to go exponential before you
firm's level can start to gauge things against a
specific benchmark.”

Source: Liquidnet Research

Settlements is also one of the seven factors for consideration, but again firms are
taking a very inconsistent approach with Heads of Settlements focusing on the cost
of settlements to the individual firm themselves rather than looking at their
counterparty relationships. Just over a third of respondents look at all costs at both
an individual broker level and as an aggregated total across their firm (see Exhibit 3).

While Heads of Trading will review execution costs at an individual broker level, this
is based on management of implicit trading costs for best execution purposes.
Similarly, to trading FX, the cost in execution when you execute with your clearer
versus with a non-clearer may be substantial. While not all firms are monitoring this
on a trade-by-trade basis, a growing number are choosing to review this as part of
their best execution policy systematically (see Exhibit 4).

Exhibits 4 and 5:
Are settlement fails part of your firm’s best execution policy/When reviewing broker vote process, do you consider STP?

18% Never
Yes, 39%

On an adhoc
36% On an adhoc

Source: Liquidnet Research

The ability to track the process via Straight-Through Processing (STP) is still “As there is no explicit commission
heavily dependent on the manner in which trades are executed. For equities, charge, we make an estimate of what
electronic trading is prevalent and therefore STP is standard practice. In contrast, we think the spread is and how far
fixed income traders are reluctant to loose access to voice, whereas the operations away from where we think the mid is,
departments who support the business are clamouring for automated booking so although we can’t prove it at the
models and STP. time, it is a set of data we can use.”
Moving trading from voice to venue by processing trades on a platform provides a “What is misleading about TCA on
neat solution—in theory. In practice, missing LEI codes, the lack of standardisation the equity side is it does not include
in the flagging of FIX fields, confusion over which timestamp to use and when, commission rate that come on top. It is
creates challenges at best; and at worst, the provision of incorrect information called Transaction Cost analysis but it
leading to inaccurate reporting. The administrative benefits of electronic trading is exclusive of commission rates. So if it
are clear. As well as providing efficient data capture and timely trade and was inclusive of commission rates then
transaction reporting, now settlement issues can be quickly identified and rectified it will be slightly more genuine.”
as part of a systematic review process to monitor and track all unnecessary costs
and charges in a fully transparent manner, which ensures effective risk
management as well as greater control of operational costs.

The regulators’ view on costs
ESMA’s study “The impact of charges on mutual fund returns” 4 illustrates that between 2013 and 2015, ongoing fees, one-off
charges, and inflation reduced the returns available to investors by an average of 29%. More recently, the FCA’s study on
asset management includes proposals on new data requirements to ensure greater disclosure of costs and fees, not only to
drive down perceived unnecessary costs but also to help rebuild public trust in financial markets. As such, all managers,
passive as well as active, are in the spotlight to provide full transparency over costs and charges.

• Article 24(4) of MiFID II requires information about the investment firm, the services, financial instruments and
investment strategies it proposes, the trading venues it uses, as well as all costs and associated charges, to be
disclosed to clients—or potential clients—in a timely manner.

• Article 50(2) of MiFID II Delegated Regulation requires that all costs and charges related to investment and ancillary
services, and costs associated with the manufacturing and managing of the financial instruments (see Appendix 1),
to be aggregated and disclosed in both ex-ante and ex-post reports.

The FCA have also just released their latest policy statement on their review of the UK Asset management industry, which
introduces further measures to ensure asset management firms act in the best interest of investors. From September
2019, firms now need to carry out an annual “value” assessment, taking into account the quality of service investors
receive, overall fund performance and how the fund compares to others in the market, as well as provide more detailed
information on costs. The FCA support the disclosure of a single all-in fee to investors, as well as consistent and
standardised disclosure of costs and charges. The Institutional Disclosure Working Group of industry and investor
representatives was launched in September with a view to agreeing a template for the disclosure of costs and charges, and
the Group is expected to make recommendations on this to the FCA by the Summer of 2018.

While fund managers have always been focused on delivering performance to end investors, firms will now need to factor in
additional aspects of the investment process that may have been previously overlooked. There is a stronger focus on
providing end investors with greater protection through improved governance. The FCA is of the opinion that investors are
not always clear what the objectives of funds are, and fund performance is not always adequately or appropriately reported.
As such, firms will be required to have at least two independent directors or 25% of the board to ensure better scrutiny, as
well as act as customers’ representatives and guardians of value for money.

Firms will also be required to switch investors between share classes and ending the practice of taking so-called box profits
for funds, where asset managers supposedly made risk-free profits by managing the process of investors buying into and
selling out of funds. Managers now need to return these profits to the fund or the individual investors from April 2019. All of
the above measures are designed to address the perceived lack of price competition and ensure those investors who are less
able to find better value for money get improved outcomes.5

While firms are endeavouring to meet regulatory requirements, over three-quarters are still providing information on request
only, and much of this is related to the challenges around collating reports based on accurate data (see Exhibits 6 and 7).


Exhibits 6 and 7
Have there been any changes at firm’s level to provide investors with greater transparency
over front to back trading costs?/ What challenges have you uncovered when implementing
MiFID II and the requirements to provide ex-ante and ex-post reports of all costs and charges?

greater transparency over front to back trading costs?

Provide clients with


Provide details over costs

and charges on request only

Accuracy of data 89%

Producing readable and

understable reports

Educate internally about costs 11%

Vendor technology keeping


Source: Liquidnet Research

PRIIPs and the renewed focus on transparency to end investors
The Packaged Retail and Insurance-based Investment Products (PRIIPs) is yet Regulation (EU) No 1286/2014
another piece of European regulation that focuses on individual insurance Article 5
accumulation or saving products that offer investment opportunities to consumers,
1. Before a PRIIP is made available
obliges all firms, hedge funds, and private equity firms, as well as traditional asset to retail investors, the PRIIP
managers that produce or sell investment products to retail investors. Under PRIIPs, manufacturer shall draw up for that
retail investors must be provided with with Key Information Documents (KIDs), product a key information document
detailing all costs and charges—as well as information on any associated risks—to in accordance with the requirements
ensure retail investors are able to make informed investment choices. Fund managers of this Regulation and shall publish
of UCITS and NURS are exempt from these requirements until the end of 20196. the document on its website.

2. Any Member State may require

The regulatory logic behind PRIIPs is sound—to ensure that end investors are the ex-ante notification of the key
fully informed of every cost, explict or implict that can have a material impact on information document by the PRIIP
the performance of their funds. However, the method to calculate these costs manufacturer or the person selling a
has hit controversy. Establishing estimates of anticipated charges to buy or sell in PRIIP to the competent authority for
advance risks creating zero or even negative estimates for anticipated PRIIPs marketed in that Member
transaction costs. Favourable movements in a securities price while trading State.
orders are processed has led to calls that PRIIPs and KIDs are unrealistic and
potentially misleading for end investors.
As per Article 5 of the PRIIPs KID Regulation (Regulation (EU) No 1286/2014),
PRIIPs manufacturers have to
PRIIP manufacturers must draft the KID before a PRIIP is even made available to
calculate the total amount of costs
end investors. This will require asset managers to understand all the costs and
on an annualised basis, for
risks involved with the product even before they market it to retail investors. In standardised investments (usually
addition, member states may also request an ex-ante notification of the KID either €10,000 lump sums or €1,000
before the PRIIP is made available in their jurisdiction. Thus far, only four EU p.a. for recommended holding
countries have decided to implement this requirement: Belgium, Croatia, Finland, periods). This means that PRIIPs
and Italy. However, this number could rapidly increase as some member states manufacturers have insight in (i) one-
have yet to translate the PRIIPs KID regulation into local law. While the PRIIPs off costs; (ii) ongoing costs, which
framework represents another important milestone towards improved cost include transaction related costs and
charges and (iii) incidental costs. In
disclosure, making sure PRIIPs is of value remains an arduous challenge for many
order to calculate the reduction in
asset managers. yield this total amount of costs is
Some National Compentent Authorities (NCAs) were considering an alternative turned into values that reflect the
annualised impact on return per year
method which allocates half of the spread between the bid and offer at the point
at the recommended holding period.
of execution to the buyer and seller, thereby eliminating the issue of negative
transaction costs. However, ESMA have now released further Q&As of citing the
need for a PRIIPs KID to contain all cost components, including any inducements,
so that an investment firm can fulfil its obligation under the MiFID II regime with
regard to the ex-ante costs and charges of a financial instrument7.

The Investment Assocation Member Guide–Methodologies for calculating costs and charges (December 2017)

Another challenge is that valid KID documents were only made available late in “We started to pull PRIIPs stuff
the year and URLs provided by manufacturers are still prone to error which together, and we think it is not wise as
creates knock-on issues in archiving data for future comparison. Added to which, it is“With
in more
detail than
we the
there is an industry capacity issue in collecting the full set of data; IT bandwidth, are trying
clients to want
will ever work or
best with
way to
processing power, and incorporating multiple data streams from different calculate
limited the cost
accuracy whichofrisks
funding rates
providers are creating challenges in providing standardised reports; along with a and look at some
mis-information of the
rather thanoutliers
lack of credible data for fixed income-related PRIIPs products. of value.”
check the data. The first round that
was done Pre-MiFID II did not really
CSDR and the rising post-trade challenge mean anything, so we are having to
review this currently”
The post-trade environment also looks set for a dramatic shake-up. Less
well known than its sister regulation MiFID II, the CSDR came into force on
17 September 2014, but its full impact has yet to be felt, given that the industry
is still waiting on the exact detail surrounding how the penalty regime will be
implemented. This matters, as it is the severity of the penalty mechanism which
is concerning for 75% of back-office respondents; 50% believe that automated
buy-ins will impact them the most, while a quarter have concerns regarding cash
penalties (see Exhibit 8).
Exhibit 9: Which Areas of CSDR Will Impact You the Most? “The buy-in will be the biggest impact
Exhibit 8:
Which areas of CSDR will impact your firm the most?
from a risk and cost perspective.”

“If we can get our trade to the

Penalty mechanism
custodian within their deadline, all
issues are dead. CSDR will be more
about the custodians and the brokers
None 25% getting themselves in order. We can
never be responsible for stock lending
as we don't do it, so we'll never be
Name-and-shame 19% short."

“I’m not too concerned about buy-ins,

Not sure yet 19%
but it'll keep me most awake—how we
buy someone in is a mystery.”

Source: Liquidnet Research

The European Commission is still due to approve the exact settlement discipline
proposal released by ESMA in the form of RTS in February 2016. This is still
outstanding. Once it has been approved and published in the Official Journal, ESMA
has suggested a two-year period before the adoption of the penalty regime (see
Exhibit 9). The regulators aim to improve settlement across Europe by harmonising
the timing and discipline of securities settlement and the rules governing CSDs
across 28 member states.

Exhibit 9:
CSD regulation timeline

Timeline Actions
September 2014 CSDR came into effect (Level 1).

February 2016 ESMA delivered its final report on settlement discipline measures (RTS level 2) asking for 2 years’
delay in the implementation to the European Commission.
November 2016 The European Commission published the draft implementing measures (RTS/ITS and delegating
acts) excluding settlement discipline.
10 March 2017 The incoming CSDR standards (except for settlement discipline) were published in the European
Union’s Journal, entering into force after a period of 20 days.
8 November 2017 CSDR was published in the UK on 7 November and came into force on 28 November 2017.

14 December 2017 ESMA published a Q&A update regarding the implementation of CSDR8. The CSDR framework is
expected to be complemented by the delegated acts on settlement discipline, to be adopted by the
European Commission based on ESMA draft RTS from 2 February 2016.
Pending actions The European Commission is due to approve the settlement discipline proposed by ESMA.

2 years after the approval of The settlement discipline comes into effect.
the settlement discipline

When the regulation is approved, ESMA has proposed that cash penalties will be calculated on a daily basis for each
business day that a transaction fails. A settlement fail is defined by Article 2(1) (15) of the CSDR9 as “the non-occurrence of
settlement, or partial settlement of a securities transaction on the intended settlement date due to lack of securities or cash,
regardless of the underlying cause”.

CSDR will also implement a mandatory buy-in process on any financial instrument which has not been delivered within a set
period of the intended settlement date. The period is dependent on the asset type and liquidity of the relevant instruments,
i.e. up to four days for liquid securities, seven days for illiquid securities, and up to 15 days for transactions on SME growth
markets. Following a consultation with industry players10, ESMA decided that buy-ins should be processed at a trading level,
and Central Securities Depositaries (CSDs) will not have an active role in the process in order to protect their risk profile.
However, CSDs will be involved in the reporting of the buy-in to the competent authorities.

Although settlements are, in the main, considered safe and efficient within national borders, the European regulator
perceives the current model of cross-border settlements, and the lack of regulatory convergence among the 28 EU states,
as presenting higher risks for investors. Clearing and settlement systems in the European Union have developed nationally.
The EU currently has 30 CSDs—one in each member state and two international CSDs (ICSDs)—while the United States has
just two (Exhibit 10). Differences among national systems are seen as detrimental to the development of the European
financial market as they result in greater complexity. They also increase the risk of failed settlement, and overall keep
clearing and settlement costs high, relative to the United States.


Exhibit 10:
CSD market U.S. vs Europe—simplicity vs complexity

EU has 30 CSDs
1 in each Member State plus
2 ‘international' ICSDs
Clearstream Banking Luxembourg &
US – 2 CSDs Euroclear (bonds)
& ICSDs represent 37% of total settlement
Fedwire Securities volumes in EU but with national CSDs
represent 80% of total settlement volumes
in EU
• Euroclear Group includes
Euroclear Bank plus six national
CSDs in France, Belgium,
Netherlands, the UK, Ireland,
Finland, and Sweden
• Clearstream Group includes
Clearstream Banking Luxembourg
(the ICSD) and two national CSDs
in Germany and Luxembourg

Source: Liquidnet Research

CSDs will be responsible for providing regular reports to competent authorities regarding the number and details of
settlement fails, as well as the measures considered to prevent them. Similarly, settlement internalisers will have to report
the aggregated volume and value of all securities transactions to the competent authorities on a quarterly basis that they
settle outside securities settlement systems. National Competent Authorities will then be responsible to disclose this
information to ESMA and inform of any risks linked to the settlement activity.

From passive to active monitoring
If the objective is to prevent settlement fails, the challenge is that firms are still, in the main, relying on their custodians
to inform them of the fact (see Exhibit 11), rather than pro-actively monitoring the process themselves. Although firms are
now auto-matching whenever and wherever they can, with 59% of back-office respondents now auto-matching 100% of
their business (see Exhibit 12), this still depends on the asset class. While 41% auto-match all equities, they are not able
to extend this to convertible and government bonds, commercial paper, or certificates of deposit.

Exhibit 11 & 12:

How do you currently monitor fails? How much of your business do you currently auto-match?

Custodian reports 59%

FailStation 29%

Intraday monitoring 24%

59% As much as
Broker reports/liaison 24% we can
Proprietary fails mgmt. system 18%

Trade date confirmation 12%

Real time information 12%

None - manual process 6%

Source: Liquidnet Research

Twenty-four percent of back-office respondents highlighted the importance of liaising with brokers early enough to prevent
fails and ensure a timely settlement. The ability to monitor and communicate ahead of settlement will become even more
critical should a broker be short in order to find a solution before settlement is required. Yet, only 12% percent currently
obtain real-time information on settlement fails, which limits their ability to prevent them.

If cash penalties are to be calculated on a daily basis—each business day a transaction fails, and the mandatory buy-in is
triggered up to four business days after the intended settlement date for liquid securities—asset managers will need to
proactively monitor the trade lifecycle, rather than expect the information to be fed back to them via custodian reports.
Forty-seven percent of back-office respondents already have in place a fails management system that aggregates pre- and
post-settlement exceptions in real time—a mix of FailStation and proprietary systems.

In many cases, the reason for settlement failure is often due to a broker shorting the instrument. Consequently, many firms
rely on the sell-side to adjust its behaviour to improve the settlement rate. Nearly three quarters of back-office respondents
track failure rates at a broker level while also tracking rejection, fail, amendment, and cancellation rates when reviewing STP
(Exhibits 13 & 14). However, from a regulatory perspective all parties are accountable—buy-side, sell-side and the
custodian. The buy-side is responsible for providing the custodian with accurate trade data on time.

Exhibits 13 & 14:
At what level do you track failure? What do you track when reviewing STP?

By broker 76% Rejection rate 18%

Fail rate 18%

At our firm level 41%

Amendment rate 12%

Adhoc sampling 12%

Cancellation rate 12%

We don't track 6% All of the above 76%


Source: Liquidnet Research

For 59% of back-office participants, the collection of fails data is now done systematically. However, as many as 12%
indicated this data was not automatically collected, as firms choose to rely on ad-hoc sampling instead. (Exhibit 15).

For those collecting this information, 41% of all respondents now incorporate it both quantitatively and qualitatively into
their broker vote process and best execution considerations. Yet, 29% of all respondents do not use fails data collected as
part of the firm’s best execution process (Exhibit 16). Respondents acknowledged that while settlement fails may influence
broker and best execution reviews, it is not formally part of the vote yet. The introduction of cash penalties and mandatory
buy-ins under the CSD Regulation will further compound the cost of executing an order, hence the need by asset managers
to incorporate this information into their broker selection process.

Exhibits 15 & 16: Exhibit 17: Is this information used in your broker vote process?
How do firms collect fails data as part of best ex considerations? / How is this information now used in the broker vote process?

Not Collected
We Don't Use
12% Quantitatively
17% Systematically
59% Qualitatively
Quantitatively only

Source: Liquidnet Research

“Our third-party administrators now send regular daily fail “It is used qualitatively and quantitatively. Real time activity
info and monthly fail MI. This is now part of our broker review will identify the exception and clear it. We then look at trends
process which is quite extensive.” and deficiencies at broker and firm level and act to prevent it
from happening again.”

98% is not enough
ESMA is setting a target rate of 99.5% settlement efficiency. Under article 6 (2), “Yes, 0.5% rate is achievable. My
market makers must now take measures to limit the number of fails, including settlement rate is 98.5-99% daily
arrangements with professional clients to ensure prompt communication, with differences by region/product.
allocations of securities or cash to the transaction, and acceptance or rejection I want the fail rate to go down to
of settlement terms pre-settlement date. 0.5% this year.”

The current settlement rate for equities averages 98%. However, making “Yes, this would be achievable if we
improvements to reach the 0.5% settlement fails threshold is not a given. Only had a market-wide crackdown on
36% of respondents consider ESMA’s target feasible, while 50% of firms indicated shorts for both equities and FI.”
that would only be achievable if brokers’ shorts were resolved by the sell-side,
rather than it being a buy-side responsibility. (Exhibit 17 and 18). There is a general
understanding among asset managers that a settlement fail is a sell-side issue
only; however, the buy-side retains the obligation of best execution and selection
of counterparties under MiFID II, making recurrent fails a buy-side concern as well.
Consequently, sub-optimal settlement outcomes would need to be addressed and
the broker selection process adjusted to include settlement as part of firms’ best
execution responsibilities.

Although the regulatory technical standards on settlement discipline have yet

to be endorsed by the European Commission later this year, ESMA has focused on
incentivising firms to reduce their fails rate. Under Article 7 (9) of the CSD
regulation, CSDs, Central Clearing Counterparties (CCPs) and trading venues
will be responsible to establish procedures in consultation with their respective
competent authorities, to suspend, and disclose to the public any participant
who consistently and systematically fails to deliver the financial instrument
on the intended settlement date. In addition, cash penalties collected from
failing participants will be redistributed to participants who suffered from a
settlement fail.

the 0.5% Settlement fails rate proposed by ESMA feasible for your firm? For
Exhibit 17 & 18:
Is the 0.5% fails rate proposed by ESMA feasible? If so, for which assets?

Not unless
Yes, but for
29% Equities only
Yes, for
Equities &
...Broker Income
shorts are 67%
Yes resolved
36% Yes

Source: Liquidnet Research

A long road ahead for fixed income
While more than two-thirds of respondents are convinced that ESMA’s settlement rate is feasible for both equities and fixed
income, one third of the respondents acknowledged the additional difficulty when trading fixed-income instruments.
(Exhibit 19). Most of the processes remain manual, with clear issues regarding the lack of automated workflows. ESMA
acknowledges the technology requirements to address settlement fails and has consequently proposed to delay the
implementation of the settlement discipline to two years after its endorsement by the European Commission. However,
change is already underway with 77% of buy-side firms acknowledging the need for technology upgrades to ensure
compliance with both MiFID II and the CSD regulation (Exhibit 20).

Exhibit 19 & 20:

Settlement success rates equites vs. fixed income / What areas remain a priority in terms of investment to ensure
compliance with upcoming regulation?

Building out tech/upgrade 77%

Data aggregation & accuracy 38%

Equities Fixed income
Continued compliance/legal
96% 100% 70% 92%
Info integration 15%
Low High Low High
Improving best ex process 15%
Factors include: Factors include:
q Broker shorts q Broker shorts Electronification of trading desk 12%
q Liquidity of stock q Variety of instruments
q Developed/emerging market q More manual process
q New account issues q Multi-week fails not uncommon Upskilling of workforce 8%

Reporting (trade & transaction) 4%

Nothing on the radar 4%

Source: Liquidnet Research

Implementing technology to ensure data accuracy remains a high priority for “We are always lobbying for electronic
firms. This also requires integration of workflows. Respondents recognised that execution as you can source liquidity
investing in one centralised and integrated process has enabled them to collect better and do it cheaper. Because we
improved data from one ‘golden’ source and better manage their reporting have a platform that connects through
obligations at the firm level. This has led to an increased demand for the use of the workflow we can measure it &
Execution Management Systems (EMS) as well as traditional Order Management have transparency of costs applied
Systems (OMS). through your process. Automation
builds efficiency you wouldn't normally
The size of the firm, as well as the range of assets traded, will dictate whether
have & from that you can measure and
firms opt for an OMS, OEMS or EMS in the near term. Originally, the OMS acted as
design your workflow. 99.5% of our
a conduit between the portfolio manager sending an order and delivery of cleared
trades confirm on trade date.”
trades from the custodian T+1, or end-of-day drop copies of execution fills from
brokers. The main requirement for an OMS was to capture key data and trade
lifecycle decision points needed for reporting obligations and commission
management requirements rather than enhance execution capabilities. Given the
historic predominance of voice trading maintaining investment in OMS technology
rather than trading functionality was deemed sufficient.

However, with the requirements on managing costs and charges, the theory of
arranging a trade over the phone, relies on integrating multiple data sources within
an OMS. In practice, there may be more than one OMS used within a single firm, as
well as multiple versions of an individual OMS. As organisations have consolidated,
the spaghetti of legacy OMS technology can threaten the flow of accurate data. This
was less of an issue when PMs concentrated on relying on sell-side capital to
execute orders; now it is an amalgamation of sourcing liquidity from multiple
locations. The declining use of the balance sheet means the ability to understand
the optimal point of entry or exit, or to utilise an alternative risk/reward bridge
investment while waiting for improved liquidity sources to emerge, will become
increasingly important as the role of technology within financial markets
accelerates. The benefit is clear as firms benefit from collating accurate data with
which to lower implicit costs of trading as well as enhance operational procedures
and meet settlement requirements (see Exhibit 21).

Exhibit 21: “We've merged our reporting

What efficiency gains have you made in the last year? obligations into one process. We now
have one golden source of information.
Data collection & accuracy 47% If we need additional information, we
can link in with any generic industry
Electronification of trading desk 40% solutions.”

Integrated workflow
“The main change will be the
centralisation of our reporting
obligations into one process—mostly
Enhancement of best ex process 13%
for transaction reporting.”
Reporting 13% “We have just had to install an upgrade
of one OMS and roll it out globally to
Segregated dealing desk 7% bond traders in APAC & the US. If a PM
in the EU puts on a trade, the traders
Insourcing 7% need to be able to pick it up globally.”

Source: Liquidnet Research

Investment by the buy-side in OMS technology in fixed income has often been
limited due to the cost and the difficulty in upgrading or replacing legacy systems;
however many firms are recognising the importance in making the necessary
investment in OMS/EMS technology (see Exhibits 22 and 23).

Making the right investment is considered more challenging of late due to the shift
in ownership of execution moving from sell-side to the buy-side. Trading
functionality is becoming an increasingly important consideration and some OMS
providers are struggling to keep up. Current functionality may not support the
volume of data now required, nor the speed at which change needs to occur. Even
if all the data is captured within systems, accessing it and extracting value is
challenging: OMS connectivity is database-driven, often measured in seconds,
whereas Execution Management System (EMS) latency is now in microseconds,
creating mismatches in information flows and increasing the risk of error.

The creation of a fully automated, efficient, cost-effective front-to-back technology process will allow firms to better
evaluate the true cost of execution, helping portfolio managers build more resilient. The use of pre-trade analytics with
larger and more diverse product sets across multiple sources will redefine how investment products can be selected,
personalising the process at an individual firm or even fund level. As liquidity discovery changes from a linear to exponential
process, alternative investment options with similar risk/reward characteristics at a more beneficial execution cost can be
suggested, making implementation of the investment stategy a truly cost-efficient and straight-through process, and
ensuring successful settlement of the trade.

The creation of a fully automated, efficient, cost-effective front-to-back technology process will allow firms to better
evaluate the true cost of execution, helping portfolio managers build more resilience. The use of pre-trade analytics with
larger and more diverse product sets across multiple sources redefines how investment products can be selected,
personalising the process at an individual firm or even fund level. As liquidity discovery changes from a linear to exponential
process, alternative investment options with similar risk/reward characteristics at a more beneficial execution cost can be
suggested making implementation of the investment stategy a truly efficient process.

Exhibits 22 & 23:

Are you investing in an OMS/EMS as a result ? If yes, which one?

OMS 64%
Under review

No Ops/Settlement systems 41%


EMS 23%

Upgrading data 18%



Source: Liquidnet Research

The regulatory outcome
In order to increase investors’ confidence in financial markets, ESMA is of the view that there needs to be a greater trust in
the entities producing and distributing investment products. An important step towards achieving that goal lies in greater
transparency about the products themselves, the service provided, as well as the true cost involved.

The need for greater transparency regarding all costs and charges will dramatically reshape how investments are made and
how firms choose to trade. MiFID II requires a clear separation between pricing research and execution services; and in
addition to the requirement to demonstrate best execution, PRIIPs requires funds to produce Key Information Documents
listing costs, risks, and potential rewards, designed to help consumers better understand the risks of their investments.
CSDR takes this one step further by compelling firms to include settlement fails and their underlying costs in execution
considerations. Firms must now take full ownership of the type of instruments they invest in, how these are traded, and
with whom, in order to ensure full transparency and accountability to end investors.

Only fully automated front- to back-office processes, together with better acknowledgement and use of available
technology and data, will deliver against these regulatory requirements. Buy-side firms now need to invest not only in front-
office technology but also in the back-office systems which support trading; a process not always seen as business critical
by all firms. The introduction of costly fines in the settlement process will radically transform how investments are made
and how execution providers are selected—based on settlement capabilities as well as execution provision.

Best execution can no longer be considered as just best price. The days when investment managers could solely consider
front-office charges or explicit commission rates versus the cost of executing an order have come to an end. Similarly,
transparency towards investors over the total cost of trading will further evolve due to regulatory and commercial pressure.

Enhanced efficiency and collaboration along the whole trading chain will reduce operational costs and limit unnecessary
risks. However, there are concerns that the mandatory buy-in process proposed by CSDR may also impact market makers’
ability to offer capital, given many now tend to run low levels of inventory and offer securities they may not currently hold.
The impact of regulation on future liquidity formation remains an open question. De-registration of market-makers may well
increase. Equally probable, however, is the emergence of new liquidity providers offering alternative solutions. Technological
improvements will enable market-makers and buy-side firms to find newer and cheaper ways to source liquidity.

The ultimate aim of the European regulator with MiFID II, PRIIPs and now the CSD regulation is to restore confidence in
European capital markets. By providing greater transparency and making markets more efficient, the aim is to foster greater
confidence in investing in Europe, which will in turn repatriate trading flows that were redirected in the aftermath of the
financial crisis.

It is not only regulatory pressure but commerical pressure which will lead to behavioural change. The underlying focus on
fees and costs is a consistant and pervasive theme. Ultimately, only a firm’s full disclosure of the true cost of trading to
investors, from both a regulatory and commercial aspect, will suffice. Understanding the true and total cost of trading will as
a result become best practice in the industry, creating a competitive advantage for those asset managers who choose to
differentiate their services. Those firms who ignore this change risk being left behind as the industry undergoes one of the
deepest shifts in business practices since the financial crisis.

Appendix 1
Cost and charges required under MiFID II delegated regulation

Table 1 — All costs and associated charges charged for the investment service(s) and/or ancillary services provided
to the client that should form part of the amount to be disclosed

Cost items to be disclosed Examples:

One-off charges related to the All costs and charges paid to Deposit fees, termination fees, and
provision of an investment service investment firm at the beginning or at switching costs
the end of the provided investment
Ongoing charges related to the All ongoing costs and charges paid to Management fees, advisory fees, custodian fees
provision of an investment service investment firms for their services
provided to the client
All costs related to the transactions All costs and charges that are related Broker commissions, entry- and exit-charges
initiated in the course of the provision to transactions performed by the paid by the fund, mark-ups (embedded in the
of an investment service investment firm or other parties transaction price), stamp duty, transactions tax,
and foreign exchange costs
Any charges that are related to Any costs and charges that are related Research costs
ancillary services to ancillary services that are not Custody costs
included in the costs mentioned above
Incidental costs Performance fees

Table 2 — All costs and associated charges related to the financial instrument that should form part of the amount
to be disclosed

Cost items to be disclosed Examples:

One-off charges All costs and charges (included in the Front-loaded management fee, structuring fee,
price or in addition to the price of the distribution fee
financial instrument) paid to product
suppliers at the beginning or at the
end of the investment in the financial
Ongoing charges All ongoing costs and charges related Management fees, service costs, swap fees,
to the management of the financial securities lending costs and taxes, financing
product that are deducted from the costs
value of the financial instrument
during the investment in the financial
All costs related to the transactions All costs and charges that are incurred Broker commissions, entry- and exit-charges
as a result of the acquisition and paid by the fund, mark ups embedded in the
disposal of investments transaction price, stamp duty, transactions tax
and foreign exchange costs
Incidental costs Performance fees

Source: Annex II, Delegated Regulation of 25.4.2016: http://ec.europa.eu/finance/docs/level-2-measures/mifid-delegated-regulation-annex-2016-2398.pdf

Appendix 2
Reporting obligations in respect of portfolio management

1. Investments firms which provide the service of portfolio management to clients shall provide each such client with a
periodic statement in a durable medium of the portfolio management activities carried out on behalf of that client unless
such a statement is provided by another person.

2. The periodic statement required under paragraph 1 shall provide a fair and balanced review of the activities undertaken and
of the performance of the portfolio during the reporting period and shall include, where relevant, the following information:
a. the name of the investment firm;
b. the name or other designation of the client's account;
c. a statement of the contents and the valuation of the portfolio, including details of each financial instrument held, its
market value, or fair value if market value is unavailable and the cash balance at the beginning and at the end of the
reporting period, and the performance of the portfolio during the reporting period;
d. the total amount of fees and charges incurred during the reporting period, itemising at least total management fees
and total costs associated with execution, and including, where relevant, a statement that a more detailed
breakdown will be provided on request;
e. a comparison of performance during the period covered by the statement with the investment performance
benchmark (if any) agreed between the investment firm and the client;
f. the total amount of dividends, interest and other payments received during the reporting period in relation to the
client's portfolio;
g. information about other corporate actions giving rights in relation to financial instruments held in the portfolio;
h. for each transaction executed during the period, the information referred to in Article 59(4)(c) to (l) where relevant,
unless the client elects to receive information about executed transactions on a transaction-by-transaction basis, in
which case paragraph 4 of this Article shall apply.

3. The periodic statement referred to in paragraph 1 shall be provided once every three months, except in the following cases:
a. where the investment firm provides its clients with access to an online system, which qualifies as a durable medium,
where up-to-date valuations of the client’s portfolio can be accessed and where the client can easily access the
information required by Article 63(2) and the firm has evidence that the client has accessed a valuation of their
portfolio at least once during the relevant quarter;
b. in cases where paragraph 4 applies, the periodic statement must be provided at least once every 12 months;
c. where the agreement between an investment firm and a client for a portfolio management service authorises a
leveraged portfolio, the periodic statement must be provided at least once a month. The exception provided for in
point (b) shall not apply in the case of transactions in financial instruments covered by Article 4(1)(44)(c) of, or any of
points 4 to 11 of Section C in Annex I to Directive 2014/65/EU.

4. Investment firms, in cases where the client elects to receive information about executed transactions on a transaction-by-
transaction basis, shall provide promptly to the client, on the execution of a transaction by the portfolio manager, the
essential information concerning that transaction in a durable medium. The investment firm shall send the client a notice
confirming the transaction and containing the information referred to in Article 59(4) no later than the first business day
following that execution or, where the confirmation is received by the investment firm from a third party, no later than the
first business day following receipt of the confirmation from the third party. The second subparagraph shall not apply where
the confirmation would contain the same information as a confirmation that is to be promptly dispatched to the client by
another person.

Source: Article 60 Delegated Regulation of 25.4.2016 – https://ec.europa.eu/transparency/regdoc/rep/3/2016/EN/3-2016-2398-EN-F1-1.PDF

Appendix 3
Penalty rates applicable to settlement fails

Type of fail Rate

1. Settlement fail due to a lack of shares that have a liquid market within the 1.0 basis point
meaning of point (b) of Article 2(1)(17) of Regulation (EU) No 600/2014,
excluding shares referred to in point 3

2. Settlement fail due to a lack of shares that do not have a liquid market 0.5 basis point
within the meaning of point (b) of Article 2(1)(17) of Regulation (EU) No
600/2014, excluding shares referred to in point 3

3. Settlement fail due to a lack of financial instruments traded on SME 0.25 basis point
growth markets, excluding debt instruments referred to in point 6

4. Settlement fail due to a lack of debt instruments issued or guaranteed by: 0.10 basis point
(a) a sovereign issuer as defined in Article 4(1)(60) of Directive 2014/65/EU;
(b) a third country sovereign issuer;
(c) a local government authority;
(d) a central bank;
(e) any multilateral development bank referred to in the second
subparagraph of Article 117(1) and in Article 117(2) of Regulation (EU) No
575/2013 of the European Parliament and of the Council ( 1);
(f) the European Financial Stability Facility or the European Stability

5. Settlement fail due to a lack of debt instruments other than those referred 0.20 basis point
to in points 4 and 6

6. Settlement fail due to a lack of debt instruments traded on SME growth 0.15 basis point

7. Settlement fail due to a lack of all other financial instruments not covered 0.5 basis point
in points 1 to 6

8. Settlement fail due to a lack of cash Official interest rate for overnight credit
charged by the central bank issuing the
settlement currency with a floor of 0

Source: Delegated Regulation (EU 2017/389 – http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2017:065:FULL&from=EN

About the authors

Head of EMEA Market Structure and Strategy
+44 20 7614 1607

Rebecca is considered to be one of Europe's leading industry voices on market structure, regulatory reform, and financial
services technology. She has authored a plethora of qualitative research reports and commentary covering the impact of
market regulation on all asset classes, changing market structure and developments in dark pools, HFT, and surveillance.
She joined Liquidnet in July 2016 to use her 20 years' experience to collaborate and deliver research and insights for both
the European equities and fixed income markets. Rebecca is also Co-Chair of the FIX Trading Community’s EMEA Regulatory
Subcommittee, dedicated to addressing real business and regulatory issues impacting multi-asset trading in global
markets. She has held prior roles at TABB Group, Incisus Partners, the British Embassy in Bahrain, Credit Suisse, Goldman
Sachs International, and Bankers Trust International.

EMEA Market Structure and Strategy
+44 20 7614 1701

Charlotte joined Liquidnet in May 2017 from Reed Exhibitions where she was a mergers and acquisitions analyst. Prior to
Reed Exhibitions, Charlotte held a role at The Boston Company Asset Management in Boston.

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