European Commission To Get Tough On ‘Settlement Fails’
European regulators are set to impose a two-day settlement cycle across Europe and introduce fines for those who fail to settle trades on time, according to a Financial Times report.
The newspaper says a draft European Commission report, released in November, proposes that paper-based share certificates are abolished in favour of electronic registration of securities. It says this would allow the settlement period to be harmonised across Europe’s network of central securities depositories (CSDs) and allow more streamlined cross-border transactions.
Once the new deadlines are in place, it wants CSDs to issue fines to those who fail to settle on time. “The key objective is to reduce settlement fails cross-border and to discourage any competition on risk, for instance between markets that may have different penalties systems in place,” the draft says.
Anecdotal evidence suggests many trades in European exchange-traded funds are not settled on time. However, there is a lack of official data to provide a clear picture.
In any case, the reported increase of delayed settlements in Europe is likely to have been worrying regulators for some time, particularly as this may have contributed to the rogue trading scandal that was uncovered at UBS in September. However, the complicated structure of Europe’s clearing and settlement facilities means introducing uniform rules across the continent is difficult.
In the US, all trades are cleared through the Depositary Trust and Clearing Corporation, but in Europe, national CSDs handle clearing and cross-border trades can be complicated, particularly as settlement timeframes vary across the region. While most of Europe operates on a three-day settlement cycle, in Germany trades are cleared after two days. This inconsistency is something the European Commission wants to address by proposing that the rest of Europe is brought in line with Germany.
NYSE And Deutsche Börse Submit Remedy Proposal
Deutsche Börse and NYSE Euronext have submitted a remedy proposal to the European Commission’s Directorate-General for Competition (DG Competition). According to a joint press release issued on 18 November, the remedies “are designed to address the remaining concerns of DG Competition in derivatives trading and clearing while preserving the compelling industrial logic of the transaction”.
The proposal consists of two key components: divesting the European single equity derivatives businesses held by both exchanges in the areas in which they overlap, and giving third parties access to Eurex Clearing—at least in some cases.
These concessions are designed to reassure the EC’s concerns regarding the proposed merger, which would result in over 95% of European futures contracts trading being carried out by the new entity. A particular area of focus is the tendency of exchanges to operate ‘vertical silos’ by finalising trades via their own clearing house. The MiFID proposal released in October seeks to address this issue by requiring exchanges to open up these silos.
The question is whether the move by Deutsche Börse and NYSE Euronext goes far enough towards achieving this—and the stipulation that access will be given to unspecified ‘derivatives product innovations’ is arguably less than wholehearted. On the other hand, it is a commitment that has not been given by any other vertical silo in the market. Whether this will be enough for the merger to get the green light remains to be seen.
The review by DG Competition is now scheduled for completion by 23 January.
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2012
