While changes in the European post-trade landscape appear to be gaining in momentum, with regulations such as EMIR, TARGET-2 Securities (T2S) and CSDR due to reach important milestones this year, a panel of distinguished securities industry representatives at the SWIFT London Business Forum last week commented on changes they have observed in the landscape thus far.
Setting the scene, Godfried de Vidts, director of European Affairs at ICAP and moderator of the panel, noted minimal movement on harmonization of the settlement landscape since the 16 barriers to safe and efficient cross border settlement were identified in the Giovannini report owing to protectionism in domestic markets. While T2S, the Eurosystem project to create a common technical platform for securities settlement in Europe, is intended to fix those linkages in the system, issues such as cross currency settlement issues need to be addressed, he said. With these CCP solutions we also have to ensure that bilateral transactions are going to be taken care of. Now that 85% of those transactions can be netted through CCPs you disrupt netting and you increase risks in the bilateral space and CCP space. So we have multiple CCPs in a bilateral world and we need to put these together in order to find solutions.
Tina Hasenpusch, head of clearing & business development, CME Clearing Europe, commented on what changes she had noticed in the clearing space in light of EMIR and Dodd Frank. She acknowledged the skepticism around changes to the market infrastructure, particularly in light of regulatory moves to centrally clear OTC derivatives. There is a slight increase in ripping apart netting benefits that you would potentially get in a bilateral space by putting trades that were not centrally cleared into a centrally cleared infrastructure. We should start by looking at the benefits of central clearing in the broader market space there are benefits in the role the CCP takes in becoming the buyer and seller and the centralization of risk on one hand but there is also transparency and flexibility involved.
Commenting on the outlook for CSDs, Paul Symmons, head of Public Affairs at Euroclear noted a potential sticking point in the recent draft CSD regulation that turns it into an ICSD regulation. Article 52 says a CSD shall never ever hold a banking license and the banks need to be separate entities, he says. Therefore the two big ICSDs would have to restructure. The text, which is currently being discussed, applies to CSDs holding securities accounts for the CSD and a bank, which holds cash accounts. It will look like a rather unusual bank if all its got is cash accounts and grants credit but is unable to hold any securities within the business particularly when it is commercial bank money, says Symmons. At the same time we are supposed to have connections up and running to T2S, which goes live in 2015 as well as clients demanding greater flexibility in the way we deliver collateral management services to our clients. A report from one of the consultants said that because of EMIR and Dodd Frank there will be a demand for an extra 2 trillion of collateral. That is sat mostly in CSDs or ICSDs so were under pressure to made ICSDs more interoperable, to provide a global pool of collateral, to develop the central clearing function of EMIR and at the same time we are being asked to completely restructure our business.
Commenting on post trade infrastructure harmonization from the point of view of the regulator, Iain Saville, senior adviser to the ECB, noted that while interoperability is working well for equities and central counterparties in Europe, the concept will be stifled by a lack of harmonization and commercial motives. What T2S does is force everything to open up to T2S at the same time, he says. When all the CSDs are members of T2S all their securities balances will be held on the same computer. The rules say that CSDs in T2S must provide non-discriminatory access to securities, corporate actions and so on. But thats not all that needs to be done: harmonization needs to be completed, there is specific work happening around cross boarder settlements and I understand that is going rather well. In terms of progress, 65% of the project is now built and I think thats good progress. The Danish kroner is likely to join shortly after the completion of migration and I very much hope that when the brand image of the euro improves and T2S is seen to work that other European currencies will revaluate their mild reluctance of some thing that may not work. Its not easy to sell to domestic constituencies.
The panel then turned towards the users of the post trade infrastructure. Robert Barnes CEO of multilateral trading facility UBS MTF says users of post trade infrastructure want authorities to instill best practice to encourage growth of safe trading and liquidity on a global scale. Barnes shared his takeaways from a recent World Federation of Stock Exchanges event, which discussed how financial institutions could work together in partnership to promote liquidity and new business: Adopting an optimized post-trading model is a priority for achieving an efficient trading landscape, he said.
For derivatives facing mandatory clearing and new modes of trading, practical principles to compliment the regulatory call for financial stability, and fair and efficient markets are needed. There are three components to this: high quality membership criteria, appropriate levels of initial margin and for the central counterparties: skin in the game. The latter means putting in own resources in the default waterfall. Secondly, a rigorous rating of central counterparties using objective criteria to inform investor choice of these new clearing offerings. For this we use Thomas Murrays rating of CCPs. We encourage all CCPs to cooperate and enhance their understanding of this framework. Finally a harmonized, internationalized implementation of Basel III is also needed, or else there will be an un-level playing field and here is a case where regional differences can negatively or positively impact the evolution of the market.
Barnes used the case of UBS MTF to support the case for interoperability. The multilateral trading facility enables all members to connect on an equal footing, including UBS the broker, which is segregated from members of UBS MTF. What is relevant is that we have launched full interoperability for two central counterparties Euro CCP and SIX x-clear. Also interesting is that as more markets connect to the same CCP you start to get a horizontal line that offers scale, economies and efficiencies. Also it introduces safety to mitigate systemic risk. Because cash equities are different from derivatives in that they settle just two days after trading, if members are able to access an alternative CCP, in the unlikely event that one of the CCPs has an outage other members can continue trading. Therefore interoperability is not just about adding significant economies of scale like volume discounts but it also adds safety to the system from a business continuity perspective.
Barnes also highlighted the quantitative benefits of interoperability: Ranking 16 different dark pools in Europe by volume traded, we were at number nine prior to us adopting interoperability. Afterwards we have rocketed up to the top and thats thanks to the regulators using this model and the users endorsing it. We have not had to wait for EMIR to go live for us as an industry to work together and be proactive.
(JDC)