We had our fifth plenary meeting of the Clearing & Settlement Working Group (CAS-WG) in March.
The meeting covered all the latest issues, news and views, and was kicked off by Greg Caldwell, Chair of the Regulations Subject Group, who outlined the complexity of European and Global Regulations through this slide outlining the Rubik’s Cube of Regulations.
Between EMIR (the European Markets Infrastructure Regulation), Dodd-Frank, MiFID II (the Markets in Financial Instruments Directive), CRD IV (Capital Requirements Directive), MAD (Markets Abuse Directive) and more, the regulatory landscape is changing and complex.
There is an awful lot of overlap and conflict between directives across regions.
For example, just look at Dodd-Frank versus EMIR where there are distinct differences and conflicts between confirmations, client documentation, portfolio reconciliation and compression requirements as demonstrated by this paper published in November 2012 by Clifford Chance:
Greg concluded by saying that the primary value-add of the Regulations Subject Group will be to identify opportunities for financial institutions to avoid unnecessary costs or, as he terms it, avoid ‘digging up the road more than once’.
This is the focus of a crowdsourcing initiative to get ideas as to where there are conflicts and overlaps in regulations. Anyone with a view should send these views to email@example.com or firstname.lastname@example.org , with one entry to be picked at random for a free membership to the Financial Services Club.
Greg was followed by a fascinating presentation by Ben Parker, Head of Clearing & Settlement for UBS, on the likely path of T2S (TARGET2 for Securities) and whether it’s a good or bad thing.
Ben began by talking about when he first saw the details of T2S, and how the ECB had developed the idea of it after the success of TARGET as a Real-Time Gross Settlement (RTGS) system for pan-European high value payments.
T2S was spawned back in the early 2000’s as an outcome of the Giovannini Committee, who found that the barriers to a harmonised European trading market was due, in large part, to the barriers to cross-border settlement due to member state laws.
In order to overcome this, the ECB created T2S.
Ten years later, it’s getting nearer to launch (it’s still not there yet).
A good idea in principle but, in practice, it has issues in terms of what this means for the unbundling of products and services in post-trade between custodians, clearing houses and securities depositories.
Ben then went to talk about the elephant in the room.
Is T2S worth it?
Are there going to be any benefits?
Is the end state achievable and, more importantly, worthwhile?
He put this in the context of UBS who process nine million trades a year (I assume he means in Europe).
The order size of those trades has
come down but the Custodians costs have gone up. T2S should
reduce those costs as they will be able to consolidate custodial services to a smaller number of providers.
In fact, today, UBS are unable to outsource much of their post-trade settlement services due to the complexity of each member states operations. Post-T2S the hope is that this will be simplified and so settlement outsourcing to a sleek and small number of custodial providers will become the norm. That means that T2S will provide increased efficiencies and capabilities. It will make settlement a commoditised process and reduce risk, with T+2 a major step forward.
Good quality collateral is another
key challenge and there is a barrier to optimising collateral when long
positions have to held with multiple custodians in multiple venues.
T2S overcomes some of those issues by allowing the consolidation of custodians. Ben fully expects that, over time, most of the major players will in fact move towards a self-settlement environment.
Another issue for Ben is open
trades. Open trades are a nightmare as they could mean that these are failed
trades and therefore open risks. Russia has the most failed trades for
closely followed by Portugal.
third of the open trades are caused by static data. Therefore,
harmonising and standardising
post-trade settlement towards greater real-time analytics will make markets more efficient.
Admittedly, there will be a short-term issue of settlement costs rising for many firms but that should be offset by the longer term reduced costs provided by the move to self-settlement and consolidated custodial services. Although this idea of unbundling securities from asset servicing is nothing new, the idea of getting the benefits of consolidation and self-service is key.
Then there is the issue of cost. Many have complained about the cost of T2S, which is estimated to be north of €1.5 billion by some. But the banks should not have to absorb that cost as most of this will be taken by the custodians. Sure, the custodians will pass on that cost to the customer but, as customers consolidate custodians, they will reduce costs over time so it is worth the cost.
The only other issue is the one of who’s in and who’s out. After all, 40% of the trading in the UBS operations are in the UK and the UK is not part of T2S. That is another key issue.
However, all in all, the cost and fragmentation is not as big an issue as the opportunity to move to self-servicing and consolidation. So there are challenges but also major benefits for UBS in the move to T2S.
Ben was followed by an update from our other two subject groups – the Market Infrastructure Subject Group, chaired by Kathleen Tyson-Quah, and the Technology Standards Subject Group co-chaired by Virginie O’Shea and Graeme Austin.
Kathleen made clear that their group
is facing a funding challenge. They believe they have hit
upon a fantastic idea to map the trade flows between execution venues, CCPs, CSDs and markets, but need funding to build the model into reality.
The straw model is already live at http://emiit.info/ and the group is now seeking
investment from interested parties to build this into a realistic system.
It was interesting to note that this would really help the regulators as well as the providers, as Kathleen was recently with one bank who produce 23,000 risk management reports globally every day. The bank recently found that, of those reports, 85% are never actually reviewed or read.
read the reports they receive? Probably not but, by having a tool that
show them trade flows across markets in real-time, they would have the tools to
concentrate the mind.
This is why Kathleen’s group are making their next step to present the trade flow tool to the Financial Stability Board and the Prudential Regulatory Authority, to see what appetite the regulator has for these tools.
The final presentation was from Virginie O’Shea on Technology Standards.
Virginie talked about various activities in the Technology Standards Group, with the aim of clarifying the connectivity and interconnectivity of CCPs, CSDs and ICSDs, as well as T2S.
Equally, with co-chair Graeme Austin, Virginie made it clear that the Group is co-ordinating key dialogues with SWIFT, FIX, ISISTC and AFME to identify areas of correlation and overlap, and to ensure clarity of focus upon trade and trade confirmation areas.
One of the biggest areas the Group feels it can contribute and develop knowledge around is the technology standards investment roadmap.
The Investment Roadmap affirms the commitment of the various standards organisations – FIX, FpML, SWIFT, XBRL, ISITC and FISD – to ISO20022.
It was notable from the work of the Technology Standards Group that some of the standards bodies are more committed than others, as there is still some work to be done to achieve ISO20022 conformance in a number of areas.
The plenary finished with a debate between Martin Watkins of Ernst & Young, Bob Fuller of Fixnetix and Andrew Simpson, Market Infrastructures Consultant, about the merits of the European landscape today, in the context of EMIR and other regulations.
It was a fascinating debate and one that I will write up separately as it merits its own space.
So, watch this space for a view on where European regulations are going right now (not including Cyprus of course).
In the meantime, here are the slides from the session for those who like this sort of stuff: