Devil in the detail on best execution(2)

Breaking up

By None

Breaking up


fragmentation of liquidity were not enough for traders to cope with,

fragmentation of clearing and settlement seems set to present an additional challenge.

At a time when traders have to keep a more watchful eye on an ever-growing

number of trading venues to comply with best execution, they will also have to

monitor a series of clearing and settlement arrangements.

Under Article

21 of MiFID, achieving best execution demands more than simply getting the best

price for clients. It also requires traders to take into account the likelihood

of settlement and overall trading costs, which includes clearing and settlement.

"Member States shall require that investment firms take all reasonable steps

to obtain, when executing orders, the best possible result for their clients

taking into account price, costs, speed, likelihood of execution and

settlement, size, nature or any other consideration relevant to the execution of

the order," Article 21 reads.


actively encourages cross-border trading and, alongside it, the cross-border clearing

and settlement of securities. Article 34 of the Directive allows investment firms

from one EU member state to access the counterparty clearing and settlement systems

in another.

At the best

of times, clearing and settlement makes up a large portion of overall trading

costs. Having to access multiple venues across Europe

only increases the costs. "For all transactions but particularly those

that are cross-border, clearing and settlement costs are likely to be many

times the trading cost because there are so many intermediaries," says Willy

Van Stappen, chief operating officer of pan- European exchange Equiduct. A

typical transaction could involve the broker who executes the trade, the custodian,

potentially a central counterparty and the local central securities depository

(CSD). These entities also have to report the trade, adding to the cost. "There

is an enormous amount of reporting among the same intermediaries, that goes all

the way back to the originator of the trade. That is many, many times the trading

cost," observes Van Stappen.


costs that are typically measured in euro cents are often swamped by clearing

and settlement costs that can add up to several euros, observes Van Stappen. The

settlement component of a ‘straightforward’ transaction can cost as much as €10,

he explains. When a large order is broken up – as would be the case when an algorithmic

engine is used, for example – the final bill is likely to be substantially higher.

"That applies across the board, whether it is fixed income or straight

equities," says Van Stappen.


clearing and settlement initiatives announced thus far by Turquoise and Chi-X

are going to cause fragmentation, predicts Van Stappen. He believes

fragmentation of settlement location, differing rules and different processing

for corporate events across Europe could

create risk and additional costs, including multiple margins. "You could

easily imagine a situation where a firm is long in a London Stock

Exchange-listed security traded on Turquoise – and cleared in EuroCCP – and

short in Equiduct. Without the clearing organised at the same place, you would

pay the margin twice and could potentially have stock borrowing and lending costs

too," he warns.


traders have taken on board the challenge, cost and complexity of clearing and

settlement in a post- MiFID landscape of multiple liquidity venues is seriously

in doubt. "Most traders to my knowledge have not focused on the precision

of post-trade activities; for example, trade confirmations of OTC derivatives,

impact on STP rates, the depot costs of settling securities and any unintended

consequences of MiFID on corporate actions," says Anthony Kirby, chair of the

MiFID JWG Best Execution Working Group. "Traders who are expecting the

costs of clearing and settlement to be expressed in basis points will be sorely

disappointed," he warns. "This is far from trivial."

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