Buy-side firms have shown qualified support for the creation of a fixed settlement period for securities trades in Europe, as part of a consultation on developing a standardised regime for central securities depositaries.
Responding to a consultation paper published by the European Commission (EC) on 13 January, UK buy-side industry body the Investment Management Association (IMA), wrote, “We believe harmonisation is important in post-trade space and could reduce both the associated risks and costs.” However, it also added that while “there is broad agreement that harmonisation of settlement cycles would be desirable… the real benefit would arise only if such harmonisation were on a global basis.”
European securities markets do not follow a common settlement period. For equities, regulated markets either settle on a T+2 or T+3 basis.
The IMA said it was supportive of the move to standardise the settlement period to T+2, but only if the EC addressed certain issues beforehand, including: the time available to execute foreign exchange required for settlement; reduced time to recall stock on loan or used as collateral; difficulties faced by local operations servicing clients in different time zones; funding mismatches when switching exposure from non-European markets with longer settlement cycles; and the investment that would be needed by many market participants to increase their levels of automation.
Furthermore it said it would not support a move to T+1, for which it said the issues noted above would present insurmountable challenges.
Buy-side firm AXA Investment Managers agreed that harmonisation on a T+2 settlement period was desirable as it would reduce areas of operational risk such as failed trades, claim management plus counterparty and settlement risk, although it cautioned that “reducing settlement periods may also result in a higher incidence of failed trades, which of course is not desirable. And differences in national public holidays across member states add another complexity, which is compounded when settlement periods are reduced.”
However Euroclear, the international central securities depository (CSD), questioned the appropriateness of legislation that would be developed from this consultation to determine settlement discipline and cycles, which it said applied to market players other than CSDs such as trading venues, central counterparties and custodian banks.
Rival international CSD Clearstream's response was made on behalf of Deutsche Börse Group, its parent, and backed the T+2 settlement period, but suggested setting up a working group under the lead of pan-European regulatory body, the European Securities Markets Association, to define a harmonised settlement discipline regime including buy-in, penalty, cash settlement processes and the respective timings. “An ESMA-coordinated approach is proposed to avoid regulatory arbitrage,” it concluded.
It was broadly agreed that timing should be coordinated to work with Target 2 for Securities. Sell-side trade body the Association for Financial Markets in Europe said “This means that it must be implemented in all EU markets by the end of Q2 2013. It should be implemented as a big-bang; a long implementation period carries with it high risks.”
“We would encourage the earliest possible confirmation and publication of an intention to impose T+2, and the earliest possible communication of our proposed deadline for implementation of 30 June 2013,” it concluded.
Responses to the consultation will provide guidance for the EC services in preparing a formal legislative proposal, which is currently scheduled for adoption in June 2011.