Devil in the detail on best execution(3)

However, the cost implications of multiple clearing and settlement will not necessarily affect the buy-side.

By None


the cost implications of multiple clearing and settlement will not necessarily affect

the buy-side. While acknowledging the importance of clearing and settlement,

and the part it plays in best execution, Cowling at BGI is not overly concerned

by the prospect of clearing and settlement fragmentation. It will be the

broker’s responsibility to deal with this part of the trade. "If I’m

taking stock available on both Chi-X and Euronext, I’m just going to book out one

ticket with my broker," he explains. "The broker is the one that has

to settle two separate transactions."

Oliver DrewesArguably, the broker could pass on the cost of dealing

with more settlement venues to the client. Cowling thinks this unlikely. "I

can’t see myself having a conversation with my [broker] counterparts and them

saying, ‘we now have to settle a bargain in Chi-X, Turquoise, Euronext and

maybe LSE, and thus I need to up your commission rate’."


the issue is more than simply one of cost, since it will fall to all trading parties

to prove best execution. Mast at Allianz acknowledges that more work needs to

be done to understand how clearing and settlement will affect buy-side traders

post-MiFID. "On the overall cost side we’ll have to undertake more detailed

analysis to find out what the impact is of clearing and settlement," he



analysis of trading costs is complicated by a lack of harmonisation in Europe’s clearing and settlement arrangements, observes Van

Stappen at Equiduct. In such an environment, clearing and settlement costs may be

difficult to fathom, he cautions, making the calculation of overall trading

costs in the pursuit of best execution an inexact science. "While you may

have an execution venue that always gives you a great price and has lots of

liquidity, to actually trade with them [taking into account the cost of

settlement] could cost you a lot of money," he says. "Therefore, by

definition under MiFID, that’s not best execution for your client and you can’t

trade with them. It’s something people have to think about. Firms need to sit

down and work it out individually for each type of transaction they do."

Cracking the code


inefficiencies inherent in the clearing and settlement of cross-border

transactions have come to the attention of regulators in Brussels and the first steps taken to

eradicate them. In a speech to the Economic and Monetary Affairs Committee of

the European Parliament in July 2006, Charlie McCreevy, European commissioner

for internal market and services, proposed a code of conduct for the industry

to follow. Outlining the challenges presented by Europe’s

disparate clearing and settlement arrangements, he called on the industry to commit

itself unequivocally to a four-point plan (see box). The plan included measures

to improve price transparency and price unbundling of the main clearing and

settlement activities. At inception, the aim was to have the code adopted in

its entirety by the end of 2007.

The fact

that McCreevy backed a code of conduct rather than a directive to tackle

clearing and settlement inefficiencies in Europe

has raised some eyebrows in the industry. "Will a code of conduct make changes

happen to the level at which the legislators would like? I don’t know. I’m

sceptical," confesses PJ Di Giammarino, chief executive officer, JWG-IT,

an independent think-tank looking at the effects of EU regulation on financial

institutions. The next steps taken by McCreevy’s team are being closely

monitored. At this stage, no one knows whether they will take a backseat and rely

on the securities industry to reconfigure itself.

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