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, due to be finalised and released later this month, 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.
However, the imposition of a two-day settlement cycle across Europe may create problems for ETF issuers.
“ETF issuers set a daily cut-off point for primary market orders—that is, orders to create or redeem their funds,” Bastian Ohta, director of market making at Unicredit in London, told IndexUniverse.eu back in July. “The cut-off point is often 2.30pm or 3pm. So if a client places a trade with us later in the afternoon than that, the earliest we can go to the primary market is the next day. That’s already T+1 with respect to the original client trade. If the ETF tracks global equities, the valuation point for that primary market order may be the end of the following day, meaning we get the ETF shares only the day after that, i.e. T+3. If we have an obligation to settle with the original client on a T+2 basis in the secondary market, as is the case with trades on the German stock exchange, we face a potential mismatch.”