Euroclear UK & Ireland (EUI), in cooperation with London Stock Exchange, BATS Chi-X Europe, the Irish Stock Exchange and Turquoise, this week said it will shorten the standard securities settlement cycle for the Irish and UK capital markets to T+2 in October next year. This is in advance of the anticipated deadline of Jan. 1 2015 in the proposed EU Central Securities Depositories Regulation (CSDR), which aims to harmonize EU securities settlement cycles. Euroclear’s John Trundle talks to Global Custodian about why these markets migrated early and the significance of the migration for goal of improved settlement efficiency in Europe.
Why are the U.K. and Ireland moving to T+2 first?
JT: Each capital market is making its own mind up on when it moves. The immediate encouragement to move is the CSD Regulation (CSDR), which is going to mandate T+2 settlement across Europe. So most markets will try to achieve T+2 standard settlement cycles by 2015, before CSDR takes effect. In the early 1990s, the London Stock Exchange used to have an account period running for a fortnight and all the securities transactions conducted in that fortnight were accumulated and then settled at the end of the two week period. Then the market moved to T+10 settlement in 1994, when “rolling settlement” was implemented – here any on-exchange transaction would settle ten business days after the trade was struck. A year later it was possible to move to T+5. The Crest system, launched in 1996, (now operated by Euroclear UK & Ireland) provided electronic settlement and the possibility to further this trend of shortening settlement cycles.
In 2001, the U.K. equities markets shortened the standard settlement cycle to T+3. Germany is already operating under a T+2 cycle. So what the European Commission was pushing for in its CSDR initiative was to harmonize around the most demanding settlement practice in the equity market which was the German practice and that’s precisely what different markets are now trying to achieve.
The central question is do we acknowledge that T+2 is going to happen even though the CSD Regulation has not yet been implemented? Stakeholders in our capital markets all thought it was likely to happen and even if the CSDR wasn’t enacted in 2015, the pressure for this sort of change would remain. So the question became, if we agree to a standard settlement cycle of T+2, when is the best time to roll it out?
After constructive discussions with various participants in the market about an appropriate date, the collective choice was October 6 next year. This is the same date as some other European markets are planning their change. In the Euroclear Group we have sister CSDs, which operate in France, the Netherlands and Belgium, which we collectively call the ESES markets (Euroclear Settlement of Euronext-zone Securities) also deciding to go for T+2 on Oct. 6, 2015. Autumn was deemed the right time to move because it gave the affected parties a reasonable time to prepare, and the specific date did not clash with other launches, like the annual SWIFT release.
The discussion was fruitful because we had the relevant stakeholders in the room. We received endorsement from the Bank of England, the FCA and the stock exchanges. The stock exchanges are key because they need to adapt their rules to effect the change to the standard settlement cycle of equities transactions conducted on these major exchanges. The critical exchanges to agree were the London Stock Exchange which has the biggest equities trading market share in the U.K. but also BATS Chi-X Europe, which is number two. I think all the other smaller trading venues were happy to follow the lead of the big two because they would want to be operating consistently. Furthermore, we needed to make sure the relevant intermediaries, including the custodians, the broker dealers and other participants in the decision-making process were sufficiently represented partly through the various trade associations and partly through direct representations through some of the firms.
How does this lead to reduced risk post trade?
JT: It’s clearly a structural change to the UK and Irish equities markets. One of the main drivers in trying to get settlement cycles shorter is to reduce counterparty risk. When one has a Delivery-versus-Payment (DVP) settlement system, as with the Crest system run by EUI, it means that you have the reassurance that you will never be out of pocket as the stock and the money components change hands simultaneously. Nevertheless, if you have done a trade you either want the cash or you want the stock you bought.
Thus, if your counterparty fails and doesn’t deliver on his side of the bargain we can make sure you don’t lose you money or you don’t use your stock but we can’t ensure that you have the assets or cash for the intended purpose. Getting to successful settlement as soon as possible is a public policy objective but the extent to which you can do that varies from market to market. Equities are one of the more difficult asset classes to settle in part because of the range of active participants.
At EUI we can be very flexible and settle under a variety of schedules, for example if you look at the UK gilts market, these instruments currently settle on a T+1 basis. Many money market transactions and repo deals settle same day i.e. on T+0. At EUI we run a real-time settlement system which means if we get matched instructions from two counterparties we can settle very quickly in a few minutes on the same day of the trade if both counterparties agree is the central capacity to settle quickly is there but it requires all parties to be able to take advantage of the STP service.
Euroclear also recently migrated the funds of FNZ to its settlement platform. Comment on the significance of this deal in terms of automating fund settlement in the U.K.
JT: This is a very good partnership for us. We believe we provide a very valued service in the bond and equities market and we have been looking for some time to offer the benefits of those efficient processes to other asset classes. The funds market most needed that help. We offer order routing from the buy side to the fund manager, using STP to reducing error, speeding up the process and getting confirmation back from seller to buyer in an automated fashion.
But, until recently, we didn’t have an automated settlement process to enable the money and fund units to move according to the DVP process used for equity transactions. So we’ve been trying to work with our clients in the funds market to see whether they would be interested in a similar solution for the funds market – i.e. linking cash and unit settlement. In March this year, we had our first fund managers come onboard. This month we have 30% of all fund managers by orders on the system. By March next year we will have 55% and we expect by the end of 2014 to have most of fund management available for settlement.
GC Friday Interview: John Trundle, Chief Executive Officer, Euroclear UK and Ireland
Euroclear UK & Ireland (EUI), in cooperation with London Stock Exchange, BATS Chi-X Europe, the Irish Stock Exchange and Turquoise, this week said it will shorten the standard securities settlement cycle for the Irish and UK capital markets to T+2 in October next year. Euroclear’s John Trundle talks to Global Custodian about why these markets migrated early and the significance of the migration for goal of improved settlement efficiency in Europe.