Wednesday, April 29, 2009

DTCC abandons merger with LCH.Clearnet

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.

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.

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.