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Clearing Amp Settlement
EU trading reforms threaten upheaval
From the Financial Times of Thu, 02 Oct 2014 13:19:25 GMT
TRADERS MONITOR SCREENS AT CREDIT SUISSE FIRST BOSTON BANK IN LONDON...A trader monitors his screens on the trading floor at the Credit Suisse First Boston bank in London March 13, 2001. Britain's FTSE 100 share index put a brake on early losses by mid-morning today but was still pinned down at levels not seen for two years after an overnight sell-off on Wall Street. REUTERS/Kieran Doherty©Reuters

Europe will next week embark on a “big bang” reform in securities’ trading that is meant to improve the safety of the continent’s financial system but which threatens upheaval for asset managers, institutional investors and custodian banks around the world.

From Monday, securities markets in 25 countries will shorten the time it takes to finalise deals on their markets from a maximum of three days to two.

The switch to what is dubbed “T+2” is part of an arcane and unheralded piece of post-2007 crises markets legislation but the aim is simple.

By reducing the time between a trade being executed and assets being exchanged for cash, the risk of one side in the deal – or “counterparty” – reneging before it is completed will be reduced.

The move “has the potential for reducing systemic risk more than any other regulation. Both parties are at risk with their trade for three days. T+2 has the potential to reduce that by a third,” says Steve Grob, director of strategy at Fidessa, a UK trading technology company.

The changeover is part of broader moves by European regulators to cut the amount of failed trades, reduce counterparty risk and reduce the amount of collateral, or insurance, used to back trades.

They mean investors may be required to pay for some trades a day earlier than they have become accustomed to. Failure to settle trades will also be more severely punished.

The new rule book is only due to come into effect next year but European market operators also had to be prepared for the introduction of Target2Securities, due in the summer of 2015.

This similar-sounding project is backed by the European Central Bank and will create a single platform for securities settlement across Europe, with the deals backed by ECB money.

The ECB scheme will require that all trades that go through it be settled in two days – hence the move to “T+2” has been brought forward, with Monday’s switchover determined on a voluntary basis.

Current arrangements are uneven, with some markets – such as Germany’s – already on two days while others, like the UK, have remained on three days.

The compressed timetable, however, has raised questions about whether the market is ready. For many, the answer depends on their place in the system.

Tim Howell, chief executive of Euroclear, Europe’s largest settlement house, says it would be business as usual for many market infrastructure providers. Its UK business settles about £1tn a day of equities and gilts.

“We’ve been at same-day settlement for a while,” he says. “Where there is a bigger problem is with the ‘buyside’ and asset managers. I suspect we will have some issues and we will see some settlement fails for a short period of time.”

Some warn that the problem is likely to be most acute for Asia clients accessing European systems. A survey released this week by Omgeo, a post-trade processing company, found nearly a fifth of its Asia-Pacific customers, particularly investment managers and regional trust banks, were unaware the switchover was due.

The region faces a further problem because it trades far ahead of Europe. Many asset managers will in effect be forced to supply the funds for trades the next day as its traditional time of three days will cease to exist.

For unprepared investment managers, it may require finding a large broker or custodian bank with strong finances that is willing to provide funding and assume the counterparty risk for European trades.

“We will be the ones taking the overnight positions. Custodians like ourselves will be the ones sitting on lots of assets for customers,” says Julien Kasparian, UK head of sales and relationship management at BNP Paribas Securities Services, one of the world’s largest custodian banks.

Others warn the counterparty may simply pass on the cost of bearing the risk to the investor.

It will force more to automate trade processing by banks and investment managers. While many use high-speed computers and algorithms to trade, some small institutional investors still use Excel spreadsheets or manual input to monitor portfolios and process deals through their back offices.

“The direct effect T+2 has is on your operations. The number of people you’re going to throw at it to make sure that trades are matched is going to be very costly,” says Mr Kasparian.

This article is provided by, which is published and distributed by Paolo Cirio Ltd., registered in England, number 8188080. Registered Office: Suite 36, 88-90 Hatton Garden, City of London, EC1 N8PG, United Kingdom. Paolo Cirio Ltd. alone is responsible and liable for information and services provided through Daily Paywall’s newspaper and website.

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