Volume 16, 2023-2024

Each volume of Journal of Securities Operations & Custody consists of four quarterly 100-page issues. Articles scheduled for Volume 16 are available to view on the 'Forthcoming content' page.

The articles published in Volume 16 include:

Volume 16 Number 1

Editorial
Simon Beckett, Publisher
Papers
Breaking the mould with caution: Promises and risks of crypto-inspired clearing models in traditional central clearing
Aniket Bhanu, NSE Clearing

While numerous crypto exchanges have failed, their innovative clearing models may hold value for the traditional central clearing space. After describing the representative model of traditional clearing and with its strengths and challenges, this paper reviews the external pressures that often dissuade central counterparties (CCPs) from deviating from this archetype. The paper reviews the design innovations in post-trade services in crypto markets and critically examines the potential for implementing certain facets of such alternate models in traditional clearing contexts, taking a view of their promises as well as risks. The paper strongly advocates for a contingency-based approach to CCP design and discusses specific contexts where alternate clearing models could prove valuable for the markets. This journey must preserve the balance of efficiency and safety, anticipation and prudence, in order to maintain the resilience of CCPs while redesigning crucial procedures for improved market services.
Keywords: central counterparty; clearing; alternative clearing models; market infrastructure design
Asset managers and withholding tax: Problems, options and best practices for asset managers on withholding tax processing
Thomas König, Daniel Schneider and Manfred Artmeier, RAQUEST GmbH

This paper presents a detailed analysis of the critical role and complications surrounding withholding tax processing in the asset management industry. The paper first explores the substantial losses incurred by the industry due to a lack of proper attention and expertise in withholding tax matters, demonstrating the urgency of this issue. It then examines the current approach of relying predominantly on custodian banks for managing these issues, highlighting the shortcomings and risks inherent in this practice. The paper further investigates the current state of asset management companies, revealing their limited capabilities in managing withholding tax efficiently due to various factors including cost pressures, technological gaps and lack of awareness. To address these challenges, the paper proposes two primary options for asset managers: increased collaboration with tax advisers, and automation through software solutions. A detailed comparison is made on the pros and cons of these options. Collaborating with tax consultants, while beneficial in many ways, might fall short due to the complexity and volume of the withholding tax challenges. On the other hand, automation can provide significant benefits in terms of efficiency, accuracy, scalability, compliance and cost-effectiveness, although challenges related to implementation and integration exist. The paper concludes with a checklist of critical success factors for selecting, implementing and operating withholding tax processing software, providing practical guidance for asset management companies seeking to improve their handling of withholding tax matters. These findings underline the importance of a proactive approach and the necessity for asset managers to explore the potential of technology-based solutions in this crucial area.
Keywords: withholding tax processing; tax consultants; tax automation; asset managers; tax reclaim; tax relief at source
The transition to T+1: Accelerated settlement cycles and progress so far
Pardeep Cassells, AccessFintech

This paper examines the current momentum driving faster settlements in financial markets, specifically focusing on the shift from trade date + 2 (T+2) to trade date + 1 (T+1) settlement cycles. The U.S. Securities and Exchange Commission (SEC) and the Canadian Capital Markets Association plan to implement it in May 2024. His Majesty’s Treasury in the UK and the Association for Financial Markets in Europe (AFME) have both established taskforces to assess the feasibility of transitioning to T+1 settlement. This paper aims to provide readers with a comprehensive understanding of the accelerated settlement movement and its potential implications for global market participants. It will delve into the reasons behind the simultaneous adoption of this change across various markets, highlight the key changes being introduced in the US market, and explore its impact on market participants within the US. It will also address the consequences of accelerated settlement for international markets, raising critical factors that all market participants need to consider when facing settlement cycle changes. Practical recommendations to prepare for T+1 readiness will be offered. Readers can expect insights into the motivations driving the accelerated settlement movement, the key changes unfolding in major markets and the potential effects on international markets, ensuring preparedness for the forthcoming T+1 settlement era.
Keywords: accelerated settlement; settlement cycle; trade date + 2 (T+2); trade date + 1 (T+1); regulation
Operational challenges with complex assets : Navigating technology solutions for diversified institutional Investment portfolios
Scott Kurland, SS&C Technologies

In recent years, institutional investors have begun diversifying into asset classes previously deemed too complex or high-risk to suit their objectives. While these investments may hold the potential for exceptional returns, they also pose significant challenges from an operations and accounting perspective due to their bespoke nature. This paper explores the diversification trend and investment categories that are attracting attention (and capital) from institutions. It outlines the key operational issues these investments raise, as well as some strategies that can help investors overcome those issues and optimise the benefits of diversification.
Keywords: insurance investment accounting; insurance investment outsourcing; insurance investment operations; institutional investing; private markets; private credit; private debt; commercial real estate debt funds; Schedule BA investments; enterprise risk management
ESG as a key pillar of investment strategy
Eigil Ingebretsen, Storebrand Asset Management AS

In this paper we delve into the importance of environmental, social and governance (ESG) considerations as a cornerstone in investment strategies. The discourse takes the reader through a transformative journey, from understanding key pillars that needs to be addressed to truly succeed in ESG integration from setting the level of strategic ambition to it effectively into investment processes, focusing particularly on process integration and management. We explore key process steps in an investment process, such as strategic allocation, security selection, portfolio construction with a particular emphasis on risk assessment, stress testing and investment compliance. Specific examples are provided to elucidate how ESG considerations can be seamlessly incorporated into these critical steps to achieve fully aligned portfolios. Upon completion of the paper, readers can expect to gain a robust understanding of the ESG landscape, insights on how to integrate ESG considerations into their investment decisions and tools to future-proof their portfolios. The knowledge and skills acquired will be invaluable for asset managers, investors and other finance professionals looking to align their strategies with the emerging realities of the current investment landscape.
Keywords: ESG; data; data models; process integration; investment strategy
Trading operations: Intelligent automation and the T+1 mandate
Laura Ryan, John Almeida and Alan Paris, ServiceNow

As the financial services industry is finalising the adoption and implementation of the shortened settlement cycle on 28th May, 2024, and its implications to procedures, technology and behaviour, this paper lays out the benefits, challenges and best practices to ensure a smooth transition and implementation to all participants. The implications of these changes are enormous and open companies up to a variety of risks. This paper informs best practices to ensure a seamless integration, including operational, risk and communications. In addition, the paper focuses on practical steps to automating processes, centralising data and utilising technology to create a more efficient future. It points out that by utilising technology as a mechanism for continuous improvement, not only will companies be able to meet implementation requirements of this T+1 mandate but also create a mechanism to continue to meet regulatory changes. By utilising technology to create an environment of continuous improvement, powered by work orchestration, a fundamental shift in workforce behaviour can begin. In doing so, companies can ensure that they meet the operational requirements of this mandate, leading to efficiencies throughout their organisation and an improved employee and client experience.
Keywords: work orchestration; post-trade processing; streamlining; technology and automation; continuous improvement; trading operations; T+1; capital markets; asset management; banking; wealth management; trade settlement
Withholding tax relief and recovery: The key to enhancing operational alpha?
Jason Yule and Julia Bricker, WTax Canada

The evolving international tax landscape continues to provide complexities for investors, creating operational challenges, often eroding investment returns. This paper unpacks the withholding tax process along with the key hurdles that investors have to overcome when recovering taxes. While these hurdles have been expanded upon, an effort to quantify the effect on investment performance has been made to help investors understand the true cost of tax inefficiencies. The paper thereafter dives into emerging international tax trends, risk management considerations, and concludes with an analysis of solutions that investors can utilise to enhance their international tax relief and recovery process.
Keywords: withholding tax; international tax; tax recovery; tax reclaims; dividends; foreign tax recovery
Book review
Clearing OTC derivatives in Europe by Bas Zebregs, Victor de Seriere, Rezah Stegeman, and Patrick Pearson
Godfried De Vidts, ICMA ERCC