The Depository Trust & Clearing Corporation (DTCC) has abandoned its proposed merger with LCH.Clearnet saying it saw no choice but to pursue other strategic alternatives.
The DTCC, which owns EuroCCP, first mooted a merger with LCH.Clearnet back in October 2008. However, a bank-led consortium including participants such as interdealer broker, Icap, threw its hat into the ring.
A statement released by the DTCC appeared to lay the blame for the failed merger at the feet of LCH.Clearnet saying it had not agreed on a basis for "consummating" the proposed merger, which left the DTCC with no choice but to pursue an alternative strategy in its quest to develop transatlantic clearing services.
As to what those alternative strategies are is anyone's guess, but the general thinking, at least among market participants, is that there are too many CCPs (central clearing counterparts) in Europe. In addition to LCH.Clearnet and the DTCC's European subsidiary, EuroCCP, there is Eurex Clearing, the London Stock Exchange's Italian clearer CC&G, SIS x-clear and EMCF, which is owned by Fortis and exchange group Nasdaq OMX.
The Code of Conduct for Clearing and Settlement was meant to encourage interoperability between clearing providers, but that has not happened and most believe the only way to reduce the numbers is through consolidation, not interoperability, which can lead to greater risks.
But with some exchanges keen to own CCPs and other countries that lacked a CCP setting up ones in the wake of the Lehman collapse, consolidation does not appear to be on the cards right now.
Wednesday, April 29, 2009
Tuesday, April 21, 2009
Wake-up call for banks about cost of new liquidity regime
The New World regulatory order that is likely to be ushered in as a result of the recent financial crisis, not only means more regulation for banks, but also more cost.
Experts are already warning banks that the UK Financial Service Authority's (FSA) new requirements around strengthening liquidity standards will overload banks with reporting requirements, and as think tank JWG-IT points out, the level of reporting is on such a scale that even the regulators may not be able to understand it or use all of it. Therein lie the dangers of over-regulation.
What got us into this mess is that the regulators did not understand what they were regulating. Are they in danger of treading the same path when it comes to the new liquidity standards that will be imposed on banks and building societies as of next year?
According to JWG-IT, the FSA's survey of more than 30 firms has put the potential incremental costs of implementing the new "liquidity reporting regime" at more than £2.4 billion (JWG-IT arrived at this figure, which the FSA confirmed, based on its own analysis of the FSA survey), orders of magnitude higher than the FSA's original overall estimate of £150-£250 million.
The comparison with MiFID is illuminating given that the cost estimates for that regulation were based on a regulatory framework that was more clearly defined. The new liquidity risk regime is less finalised than MiFID and has a much shorter implementation time frame (March 2010).
The FSA says that the more than 600 firms that will be impacted by its new liquidity reporting regime will need to devote resources to change their systems and hire more staff, which is ironic given that in the current climate banks have been shedding staff, particularly in IT departments, which will have their work cut out trying to implement the new liquidity requirements, which require "granular quantitative liquidity data" on a daily basis.
In its second consultative paper on Strengthening Liquidity Standards, the FSA estimates that the resource and staffing changes required could result in average one-off costs for UK banks of approximately £3.3 million and up to £7.4 million for "full-scope" investment firms. The UK branches of foreign banks will not escape unscathed either and could be looking at a bill of more than £500,000 each. On an ongoing basis, estimates suggest that banks will need to spend anywhere from £517,000 and £775 million, dependent on the level of "crisis reporting" required.
While the FSA's analysis of the impact the new liquidity reporting regime is likely to have on firms, "should be taken with a grain of salt" as it was prepared quickly, PJ DiGiammarino, CEO of JWG-IT, says that the cost estimates should serve as a wake-up call to banks.
He argues that global liquidity standards are needed for firms to more quickly and cost effectively implement the new regime. The Financial Stability Board, which extends the mandate of the Financial Stability Forum, is looking at the development of global standards for liquidity reporting, in addition to the reviews being undertaken by the US and the EU.
Experts are already warning banks that the UK Financial Service Authority's (FSA) new requirements around strengthening liquidity standards will overload banks with reporting requirements, and as think tank JWG-IT points out, the level of reporting is on such a scale that even the regulators may not be able to understand it or use all of it. Therein lie the dangers of over-regulation.
What got us into this mess is that the regulators did not understand what they were regulating. Are they in danger of treading the same path when it comes to the new liquidity standards that will be imposed on banks and building societies as of next year?
According to JWG-IT, the FSA's survey of more than 30 firms has put the potential incremental costs of implementing the new "liquidity reporting regime" at more than £2.4 billion (JWG-IT arrived at this figure, which the FSA confirmed, based on its own analysis of the FSA survey), orders of magnitude higher than the FSA's original overall estimate of £150-£250 million.
JWG-IT says that the implementation challenges around the new liquidity standards and reporting requirements are unprecedented and that the FSA's estimates "overwhelm" the estimated costs (between £870 million and £1 billion) from one year ahead of the Markets in Financial Instruments Directive (MiFID) implementation.It is symbolic of the afterthought regulators often pay to cost; let's implement the regulation so we are seen to be doing something and worry about the cost later. But how are firms going to fund this level of investment? And is it so onerous that banks are likely to implement piecemeal solutions or even delay liquidity risk projects further?
The comparison with MiFID is illuminating given that the cost estimates for that regulation were based on a regulatory framework that was more clearly defined. The new liquidity risk regime is less finalised than MiFID and has a much shorter implementation time frame (March 2010).
The FSA says that the more than 600 firms that will be impacted by its new liquidity reporting regime will need to devote resources to change their systems and hire more staff, which is ironic given that in the current climate banks have been shedding staff, particularly in IT departments, which will have their work cut out trying to implement the new liquidity requirements, which require "granular quantitative liquidity data" on a daily basis.
In its second consultative paper on Strengthening Liquidity Standards, the FSA estimates that the resource and staffing changes required could result in average one-off costs for UK banks of approximately £3.3 million and up to £7.4 million for "full-scope" investment firms. The UK branches of foreign banks will not escape unscathed either and could be looking at a bill of more than £500,000 each. On an ongoing basis, estimates suggest that banks will need to spend anywhere from £517,000 and £775 million, dependent on the level of "crisis reporting" required.
While the FSA's analysis of the impact the new liquidity reporting regime is likely to have on firms, "should be taken with a grain of salt" as it was prepared quickly, PJ DiGiammarino, CEO of JWG-IT, says that the cost estimates should serve as a wake-up call to banks.
He argues that global liquidity standards are needed for firms to more quickly and cost effectively implement the new regime. The Financial Stability Board, which extends the mandate of the Financial Stability Forum, is looking at the development of global standards for liquidity reporting, in addition to the reviews being undertaken by the US and the EU.
Thursday, April 09, 2009
Equens and Fed Banks join forces on cross-border payments
As banks lick their wounds in the wake of the subprime crisis and assess which transaction-related businesses they wish to remain in, the Federal Reserve Banks in the US and European payments processor Equens have joined forces to provide a low cost channel for processing payments between Europe and the US.
Cross-border payment volumes are relatively low compared with domestic payments and have high fixed costs associated with them. The new cross-border service will provide a standardised channel for processing low-value payments in multiple currencies, including the USD and euro, and forms part of the FedGlobal ACH Services that were announced at the Payments 2009 conference in Orlando, Florida recently.
Both Equens and the Federal Reserve Banks are part of the International Payments Framework, which aims to use the latest industry standards that are part of the Single Euro Payments Area (SEPA) to increase efficiency and lower cost in the processing of global cross-border low value payments.
While the announcement by Equens and the Federal Reserve Banks is geared towards banks looking for a more cost efficient channel for processing low value cross-border payments, some banks will not be happy about ACHs treading on their toes or challenging traditional cross-border business models.
Cross-border payment volumes are relatively low compared with domestic payments and have high fixed costs associated with them. The new cross-border service will provide a standardised channel for processing low-value payments in multiple currencies, including the USD and euro, and forms part of the FedGlobal ACH Services that were announced at the Payments 2009 conference in Orlando, Florida recently.
Both Equens and the Federal Reserve Banks are part of the International Payments Framework, which aims to use the latest industry standards that are part of the Single Euro Payments Area (SEPA) to increase efficiency and lower cost in the processing of global cross-border low value payments.
While the announcement by Equens and the Federal Reserve Banks is geared towards banks looking for a more cost efficient channel for processing low value cross-border payments, some banks will not be happy about ACHs treading on their toes or challenging traditional cross-border business models.
Monday, March 30, 2009
Smarter regulation, not more regulation
With many expecting the imminent meeting of the G20 group of countries to shake up the financial regulatory landscape, commentators believe that the rest of the world will follow the UK's call for broader financial services reforms.
PJ DiGiammarino of think tank, JWG-IT, expects that there will be a "big push" by the G20 to support the de Larosière and Lord Adair Turner (chairman of the FSA) recommendations. " A serious rework of capital adequacy, liquidity, hedge fund control, offshore oversight, remuneration and the supervisory architecture is now on the cards - starting this year," he states.
The UK financial services regulator, the FSA, has indicated that in future regulatory supervision will take the form of "making judgments on the judgments of senior management". The US is talking about the need for firms to be able to measure their counterparty exposure enterprise-wide within a matter of hours, not days or weeks. However, there are those that maintain it is about smarter regulation, not more regulation, says Charles Ilako, partner, global regulatory practice, PricewaterhouseCoopers.
Sceptics, including myself, believe that little 'meat' is likely to come out of this week's G20 meeting. Those looking for specifics are likely to be disappointed as the G20 group of countries is hardly in agreement on many matters, with countries like China and Brazil apportioning most of the blame for the current crisis on Western governments, regulators and financial service providers.
And despite utterances to the contrary, protectionism is likely to creep in as national governments and regulators look to prop up domestic institutions at the expense of foreign financial service providers.
Pricewaterhouse calls for a global financial regulatory body to coordinate regulation globally, but there are many unresolved questions as to how such an arrangement could work in terms of governance and structure (will certain countries have more say or be given more weighting than others, for example).
PricewaterhouseCoopers suggests making global the European Systemic Risk Council, but regulatory supervision will still be required at the national level and the enforceability of anything a global or supra-national regulator says or recommends is questionable and likely to be at the behest of national regulatory bodies.
While the new world of financial regulation is raising the bar, all this talk of enterprise-wide risk management does not bode well for banks, who let's face it do not have a true enterprise-wide view of their risk or exposure, as this tends to be measured in operational silos.
"We typically find the trader doesn't have a detailed view of the stress tests, the CFO doesn't know the reliability of the reference data and nobody knows who owns the record," says DiGiammarino. "Key information needed for integrated risk management and regulatory compliance is locked in isolated silos and no single individual, or even a single operating committee, has an overall view."
PJ DiGiammarino of think tank, JWG-IT, expects that there will be a "big push" by the G20 to support the de Larosière and Lord Adair Turner (chairman of the FSA) recommendations. " A serious rework of capital adequacy, liquidity, hedge fund control, offshore oversight, remuneration and the supervisory architecture is now on the cards - starting this year," he states.
The UK financial services regulator, the FSA, has indicated that in future regulatory supervision will take the form of "making judgments on the judgments of senior management". The US is talking about the need for firms to be able to measure their counterparty exposure enterprise-wide within a matter of hours, not days or weeks. However, there are those that maintain it is about smarter regulation, not more regulation, says Charles Ilako, partner, global regulatory practice, PricewaterhouseCoopers.
Sceptics, including myself, believe that little 'meat' is likely to come out of this week's G20 meeting. Those looking for specifics are likely to be disappointed as the G20 group of countries is hardly in agreement on many matters, with countries like China and Brazil apportioning most of the blame for the current crisis on Western governments, regulators and financial service providers.
And despite utterances to the contrary, protectionism is likely to creep in as national governments and regulators look to prop up domestic institutions at the expense of foreign financial service providers.
Pricewaterhouse calls for a global financial regulatory body to coordinate regulation globally, but there are many unresolved questions as to how such an arrangement could work in terms of governance and structure (will certain countries have more say or be given more weighting than others, for example).
PricewaterhouseCoopers suggests making global the European Systemic Risk Council, but regulatory supervision will still be required at the national level and the enforceability of anything a global or supra-national regulator says or recommends is questionable and likely to be at the behest of national regulatory bodies.
While the new world of financial regulation is raising the bar, all this talk of enterprise-wide risk management does not bode well for banks, who let's face it do not have a true enterprise-wide view of their risk or exposure, as this tends to be measured in operational silos.
"We typically find the trader doesn't have a detailed view of the stress tests, the CFO doesn't know the reliability of the reference data and nobody knows who owns the record," says DiGiammarino. "Key information needed for integrated risk management and regulatory compliance is locked in isolated silos and no single individual, or even a single operating committee, has an overall view."
Tuesday, February 17, 2009
Liquidity standards - The FSA is on the war path
It seems that the UK financial services regulator, the Financial Services Authority (FSA) much maligned by the media and the public in the wake of banking failures under its watch, is eager to restore its credibility by wielding the heavy hand of regulation in the form of its onerous requirements for strengthening standards around liquidity risk.
The FSA is the first regulator to issue a consultation paper (CP 08/22) on strengthening liquidity standards and has set the rather ambitious deadline of October this year for banks, investment banks and building societies to comply with its new liquidity risk standards, which does not leave firms much time for planning, selecting solutions, building interfaces, testing and firm-wide education, says Selwyn Blair-Ford, senior domain expert, UK & Ireland, Financial Reporting Services, FRS Global, particularly given that the FSA is not expected to finalize the new rules until April.
Reading between the lines of the Consultation Paper (CP 08/22), one can see that the FSA is eager to come down hard on those banks with business models characterised by unsustainable lending practices and a reliance on wholesale funding or funding from foreign subsidiaries rather than retail deposits.
One of the key tenets under the new liquidity risk standards is that banks will need to maintain "adequate" liquidity at all times without relying on other parts of the group. Blair-Ford says this requirement will "break up" the centralised treasury management model that most banks operate under and will require liquidity to be held locally, which is an expensive undertaking. This appears to be specifically aimed at preventing what happened in the case of Lehman Brothers, where the illiquid US operation reportedly "sucked" all the liquidity out of its European offices.
In its consultation paper, the FSA estimates that IT, reporting and training costs for the new liquidity risk standards will cost firms between £150 million to £200 million, however industry feedback suggests that the FSA has underestimated the "true" costs to the industry.
Regardless, the FSA makes no apologies for its ambitious implementation time frame or what it terms "tough prudential standards", and while it may be tempting to think that the regulator will at worst fine firms for non-compliance with the new liquidity risk standards, according to FRS Global, the penalties are likely to be more severe and could take the form of bank directors (bank chairmen, executive and non-executive board members) being "disbarred".
It appears that the FSA is on the war path eager to make amends for the unwanted media and public attention it has received for falling asleep at the wheel and it will be interesting to see which firm or firms are first in the firing line. Could it be a US bank? After all, many think this is largely a US banking problem that spread to other markets, and it seems the FSA is keen to extend its regulatory tentacles beyond UK shores.
The FSA is the first regulator to issue a consultation paper (CP 08/22) on strengthening liquidity standards and has set the rather ambitious deadline of October this year for banks, investment banks and building societies to comply with its new liquidity risk standards, which does not leave firms much time for planning, selecting solutions, building interfaces, testing and firm-wide education, says Selwyn Blair-Ford, senior domain expert, UK & Ireland, Financial Reporting Services, FRS Global, particularly given that the FSA is not expected to finalize the new rules until April.
Reading between the lines of the Consultation Paper (CP 08/22), one can see that the FSA is eager to come down hard on those banks with business models characterised by unsustainable lending practices and a reliance on wholesale funding or funding from foreign subsidiaries rather than retail deposits.
One of the key tenets under the new liquidity risk standards is that banks will need to maintain "adequate" liquidity at all times without relying on other parts of the group. Blair-Ford says this requirement will "break up" the centralised treasury management model that most banks operate under and will require liquidity to be held locally, which is an expensive undertaking. This appears to be specifically aimed at preventing what happened in the case of Lehman Brothers, where the illiquid US operation reportedly "sucked" all the liquidity out of its European offices.
As a result of the FSA's new requirements around managing liquidity risk the FSA anticipates that "...many institutions will need to significantly reshape their business model over the next few years as a result. Current agreements and practices will have to be reviewed and the status quo may no longer be acceptable. In line with our objectives, our regime will continue to put the responsibility of adopting a sound approach to liquidity risk management on firms and their senior management"."There is an arms race to see who is the toughest [regulator]," says Blair-Ford of FRS Global. He anticipates that the cost of complying with the new liquidity risk standards will make banking less profitable, not exactly what the beleaguered banking sector wants to hear, but then it seems the FSA wants to change the face of banking, at least when it comes to stemming the systemic implications of liquidity risk, and if it has to claim a few scalps along the way or force further bank consolidation then so be it.
In its consultation paper, the FSA estimates that IT, reporting and training costs for the new liquidity risk standards will cost firms between £150 million to £200 million, however industry feedback suggests that the FSA has underestimated the "true" costs to the industry.
Regardless, the FSA makes no apologies for its ambitious implementation time frame or what it terms "tough prudential standards", and while it may be tempting to think that the regulator will at worst fine firms for non-compliance with the new liquidity risk standards, according to FRS Global, the penalties are likely to be more severe and could take the form of bank directors (bank chairmen, executive and non-executive board members) being "disbarred".
It appears that the FSA is on the war path eager to make amends for the unwanted media and public attention it has received for falling asleep at the wheel and it will be interesting to see which firm or firms are first in the firing line. Could it be a US bank? After all, many think this is largely a US banking problem that spread to other markets, and it seems the FSA is keen to extend its regulatory tentacles beyond UK shores.
Thursday, February 12, 2009
Strengthening or weakening liquidity standards?
The UK financial services regulator, the Financial Services Authority (FSA) has been consulting with banks and financial market participants on its response to the so-called liquidity crisis.
Boasting the memorable title of CP08/22:Strengthening Liquidity Standards, the FSA consultation paper talks about "high-level" requirements for banks to maintain "adequate" liquidity at all times without relying on other parts of the group.
The consultation paper also mentions the need for adequate systems and controls for liquidity management; quantitative standards for liquidity; standards around quality and quantity of liquid assets and the requirement for a liquidity buffer of "high quality unencumbered assets"; as well as data pertaining to a "firm-specific" and "market-wide view" of liquidity risk.
It sounds reminiscent of Basel II in that the consultation paper talks about qualitative and quantitative standards. I would not be surprised if the FSA's consultation paper gives rise to a cottage industry of conferences, vendor solutions and consultants, all eager to plug their FSA- friendly liquidity risk management expertise.
While the FSA proposes that it will conduct a supervisory liquidity review of each firm, alarm bells start ringing when one reads that the FSA is still pursuing a "high-level" principles-based approach to regulation.
In light of recent market events, which clearly demonstrate that the banks themselves and the regulators got it so horribly wrong, one has to question whether a wholly principles-based approach to regulation works. The FSA also mentions that responsibility for liquidity risk lies with the banks themselves, not the central banks or regulators, but haven't we seen the devastating consequences of what happens when banks are left to their own devices?
Some risk management consultants I have spoken to have also expressed misgivings about the consultation paper (CP08/24) that the FSA published on stress and scenario testing back in December 2008.
The FSA proposes to introduce a "reverse-stress test" requirement for banks, building societies, investment firms and insurers, requiring firms to consider "the scenarios most likely to cause their current business model to become "unviable".
Sounds great in theory, but as one risk management consultant pointed out to me, the banking industry and the FSA are not "up to speed" on scenario planning, unlike the oil and aerospace industries which have 40 years of experience. So what chances do we have of the banks and the FSA, who are part of the problem, getting it right?
The consultant said the current risk management strategies banks use such as Value at Risk (VaR) were no good at predicting extreme events. Using the example of a plastic ruler being bent, the consultant said while mathematics could calculate how much the ruler would bend, it could not predict at which point it would snap. "[The collapse of] Lehman Brothers was like the ruler snapping," he said. Yet, standard risk models failed to predict the point at which Lehman's would snap, let alone the consequences that ensued.
While placing more emphasis on stress testing and scenario planning in terms of contemplating a myriad of "what if" scenarios may help firms better anticipate the unexpected, the consultant said that the problem with the FSA's approach is that it was taking the standard risk models (how much the ruler is bending) and applying them to something that only matters when the ruler snaps.
Boasting the memorable title of CP08/22:Strengthening Liquidity Standards, the FSA consultation paper talks about "high-level" requirements for banks to maintain "adequate" liquidity at all times without relying on other parts of the group.
The consultation paper also mentions the need for adequate systems and controls for liquidity management; quantitative standards for liquidity; standards around quality and quantity of liquid assets and the requirement for a liquidity buffer of "high quality unencumbered assets"; as well as data pertaining to a "firm-specific" and "market-wide view" of liquidity risk.
It sounds reminiscent of Basel II in that the consultation paper talks about qualitative and quantitative standards. I would not be surprised if the FSA's consultation paper gives rise to a cottage industry of conferences, vendor solutions and consultants, all eager to plug their FSA- friendly liquidity risk management expertise.
While the FSA proposes that it will conduct a supervisory liquidity review of each firm, alarm bells start ringing when one reads that the FSA is still pursuing a "high-level" principles-based approach to regulation.
In light of recent market events, which clearly demonstrate that the banks themselves and the regulators got it so horribly wrong, one has to question whether a wholly principles-based approach to regulation works. The FSA also mentions that responsibility for liquidity risk lies with the banks themselves, not the central banks or regulators, but haven't we seen the devastating consequences of what happens when banks are left to their own devices?
Some risk management consultants I have spoken to have also expressed misgivings about the consultation paper (CP08/24) that the FSA published on stress and scenario testing back in December 2008.
The FSA proposes to introduce a "reverse-stress test" requirement for banks, building societies, investment firms and insurers, requiring firms to consider "the scenarios most likely to cause their current business model to become "unviable".
Sounds great in theory, but as one risk management consultant pointed out to me, the banking industry and the FSA are not "up to speed" on scenario planning, unlike the oil and aerospace industries which have 40 years of experience. So what chances do we have of the banks and the FSA, who are part of the problem, getting it right?
The consultant said the current risk management strategies banks use such as Value at Risk (VaR) were no good at predicting extreme events. Using the example of a plastic ruler being bent, the consultant said while mathematics could calculate how much the ruler would bend, it could not predict at which point it would snap. "[The collapse of] Lehman Brothers was like the ruler snapping," he said. Yet, standard risk models failed to predict the point at which Lehman's would snap, let alone the consequences that ensued.
While placing more emphasis on stress testing and scenario planning in terms of contemplating a myriad of "what if" scenarios may help firms better anticipate the unexpected, the consultant said that the problem with the FSA's approach is that it was taking the standard risk models (how much the ruler is bending) and applying them to something that only matters when the ruler snaps.
Thursday, February 05, 2009
Neither clear nor settled
At a much scaled down Finexpo (which is perhaps a sign of the times) in London today, those regulators and market participants that have watched on in frustration at the slow pace of consolidation and interoperability among European securities settlement and clearing providers, were told they "should be careful what they wished for".
Those were the words of Simon Wheatley, director of regulatory liaison, LCH. Clearnet, which signed a "non-binding" agreement to merge with the US-based Depository Trust & Clearing Corporation (DTCC) in October last year, only to attract another suitor, interdealer broker Icap and a consortium of investment banks who are believed to also be in discussions with LCH.Clearnet.
Referring to the European Code of Conduct for Clearing and Settlement which looks to promote certain standards in terms of price transparency, access, interoperability and service unbundling, Wheatley said that "competition" [between clearers at least] did not come free.
Asked whether a single clearer in the form of the US-style DTCC model would increase risk or reduce risk, Wheatley said that while it may take away some issues, it would introduce others, and that one size did not necessarily fit all.
Marco Strimer, CEO, SIX x-clear said that ultimately the Code of Conduct was about consolidation and that not everyone would make it to the finishing line. However, he added that consolidation of central counterparties (CCP) also meant that all market participants would need to change their systems. In other words consolidation, while seemingly desirable does have its costs, particularly for those that have to adapt to accommodate it.
On the settlement side, things seem to be moving more quickly with ICSD Euroclear consolidating settlement platforms and harmonizing market practices in three markets
as part of its Single Platform initiative, which will eventually encompass seven CSDs.
The European Central Bank is also looking to standardize settlement of euro denominated securities on its yet-to-be completed TARGET2-Securities (T2S) platform, but while the ECB received indications of intent from most of Europe's CSDs that they would use T2S once it went live, it has yet to secure legally binding commitments from them, which could take much longer than anticipated.
Ilse Peeters, director of public affairs at ICSD Euroclear said that she did not expect the ECB would receive legally binding commitments by March as there were still outstanding questions regarding the governance, pricing structure and legal aspects of T2S. John Tanner, head of equity post-trade service development at the London Stock Exchange said that questions also remained regarding the Bank of England and sterling's participation in T2S.
So it seems all is not clear nor settled by any means in Europe's fragmented clearing and settlement landscape.
Those were the words of Simon Wheatley, director of regulatory liaison, LCH. Clearnet, which signed a "non-binding" agreement to merge with the US-based Depository Trust & Clearing Corporation (DTCC) in October last year, only to attract another suitor, interdealer broker Icap and a consortium of investment banks who are believed to also be in discussions with LCH.Clearnet.
Referring to the European Code of Conduct for Clearing and Settlement which looks to promote certain standards in terms of price transparency, access, interoperability and service unbundling, Wheatley said that "competition" [between clearers at least] did not come free.
Asked whether a single clearer in the form of the US-style DTCC model would increase risk or reduce risk, Wheatley said that while it may take away some issues, it would introduce others, and that one size did not necessarily fit all.
Marco Strimer, CEO, SIX x-clear said that ultimately the Code of Conduct was about consolidation and that not everyone would make it to the finishing line. However, he added that consolidation of central counterparties (CCP) also meant that all market participants would need to change their systems. In other words consolidation, while seemingly desirable does have its costs, particularly for those that have to adapt to accommodate it.
On the settlement side, things seem to be moving more quickly with ICSD Euroclear consolidating settlement platforms and harmonizing market practices in three markets
as part of its Single Platform initiative, which will eventually encompass seven CSDs.
The European Central Bank is also looking to standardize settlement of euro denominated securities on its yet-to-be completed TARGET2-Securities (T2S) platform, but while the ECB received indications of intent from most of Europe's CSDs that they would use T2S once it went live, it has yet to secure legally binding commitments from them, which could take much longer than anticipated.
Ilse Peeters, director of public affairs at ICSD Euroclear said that she did not expect the ECB would receive legally binding commitments by March as there were still outstanding questions regarding the governance, pricing structure and legal aspects of T2S. John Tanner, head of equity post-trade service development at the London Stock Exchange said that questions also remained regarding the Bank of England and sterling's participation in T2S.
So it seems all is not clear nor settled by any means in Europe's fragmented clearing and settlement landscape.
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