Q&A: Transformation in Post-Trade
Q&A with Werner Frey
There are a great deal of crucial developments taking place in the post-trade arena – from Central Securities Depository (CSD) regulation and T2S to questions about interoperability and extraterritoriality – all of which pose a number of issues for the industry.
Dr Werner Frey, AFME managing director of the Post-Trade division sheds some light on how the industry is expected to respond to these developments.
Question: What are the key developments that are currently affecting post trade?
Answer: While MiFID (and now MiFID II / MiFIR) has primarily concerned the trading level, the key developments in the scope of current regulatory initiatives in Europe, EMIR and CSD, are above all the post trade areas of clearing and settlement as well as the regulation of the respective market infrastructure service providers: Central Counterparties Clearing Houses (CCPs) and Central Securities Depositories (CSDs). For our members as market users, CCPs and CSDs play a systemically-important role. The regulatory balance of safety and efficiency is therefore key.
How are CSD Regulation and T2S currently affecting the industry?
The proposed CSD Regulation covers a number of provisions that AFME has consistently advocated for years – often developing practice-based solutions – such as the dematerialisation / immobilisation of securities, settlement discipline and the harmonisation of settlement cycles at T+2. The contentious issue of ring-fencing systemically important CSD core functions from ancillary banking services provided by CSDs is currently being analysed in depth.
T2S, the project of the ECB to provide a single pan-European platform for securities settlement in central bank money, targets a significant reduction in cross-border settlement costs. It aims to contribute to the much-needed harmonisation and standardisation of post trading processes in Europe – a key priority of the AFME Post Trade Division – and it is likely to foster competition among CSDs.
In terms of harmonisation, how does industry-led best practice compare to the proposed regulation?
It has been our long-standing conviction that a combination of private sector expertise and public sector authority produces the best results in the much-needed reform process of European post trade.
The encouraging progress in harmonising and standardising corporate actions processing is a good example of a successful industry-led solution to establish best market practice in one of the most complex areas of post trading. However, the provisions of the Code of Conduct on Clearing and Settlement of 2006 on access and interoperability have not been implemented to a satisfactory degree. Consequently, access and interoperability are key aspects of current EU legislation.
In this context, we welcome the recent establishment of a Steering Group – composed of representatives of the Commission, the ECB, ESMA and the industry – to co-ordinate the work of the public and the private sector and to drive reform that will improve the safety, efficiency and competitiveness of Europe's post-trading to the benefit of issuers, market infrastructures, banks and investors.
How is the proposed Legal Entity Identifier likely to impact the industry?
Initiated in the context of the G20 agenda, the LEI aims to act as a powerful tool for regulators in monitoring and managing systemic risk and also to improve firms' risk management and operations. This has proved to be an excellent example of public-private partnership – our colleagues at SIFMA played a leading role in developing the solution at hand, GMFA’s role reflects the global nature of the LEI, the FSB is engaged in depth – and the remaining hurdle is to establish this as a global standard.
What are the priorities in terms of the 2012 regulatory agenda and what concerns do these raise?
To shape the legislative process of the CSD Regulation with a view to warrant a balance between safety and efficiency is obviously a key priority.
We are also adamant that the Securities Law Directive (SLD) should no longer be postponed – a Giovannini Barrier that only the public sector can dismantle. Excellent groundwork has been performed by the Legal Certainty Group, a group of legal experts from different European jurisdictions, to eliminate legal uncertainties and to provide for an adequate degree of harmonisation of securities laws in Europe. We deem this an indispensable element of a single European securities and capital market, to the benefit of its constituents.
What are the issues facing the industry in terms of interoperability going forward?
AFME's Post Trade Division and its predecessor organisations have persistently requested access and interoperability of CCPs for cash securities to allow market users some choice. Current EU regulatory initiatives are working to provide this. However, it will be crucial to disallow dilution and to establish watertight sanctions.
What role do institutions such as the Financial Stability Board and CPSS-IOSCO play in terms of extraterritoriality and third country rule?
The business of most AFME members active in the activities of the Post Trade Division is global in nature. A global level regulatory playing field providing a balance of safety and efficiency is therefore of vital importance. FSB, CPSS-IOSCO – for example, by means of recently published global principles for financial market infrastructures – and the cooperation and coordination between regulators of major markets play a conducive role to such an end.
You also have the opportunity to meet Werner and discuss the topic of Post-trade at our post-trade event in May. Find out more here.