Settlement changes to boost MTF volumes in Spain

Changes to Spain’s settlement infrastructure will increase the amount of trading conducted on alternative venues, according to brokers, but barriers still remain to a truly competitive market.
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Changes to Spain’s settlement infrastructure will increase the amount of trading conducted on alternative venues, according to brokers, but barriers still remain to a truly competitive market.

At the end of October, domestic exchange group Bolsas y Mercados Españoles (BME) outlined alterations to the way multilateral trading facilities (MTFs) can settle trades via Iberclear, Spain’s central securities depository, also owned by the exchange group.

Currently, settlement of a trade by Iberclear requires an identification number that can only be generated via one of the country’s four exchanges in Madrid, Barcelona, Bilbao and Valencia, all operated by BME. To circumvent this, MTFs’ central counterparties (CCPs) have been aggregating their Spanish trades after the end of daily trading then sending them via a central counterparty to a local broker, which then crosses the trades with itself in the closing auction to generate the required identification number.

Under the new proposals, MTFs’ CCPs will be able to form bilateral settlement relationships with Iberclear and receive the identification number directly. This will eliminate the additional cost of passing all trades through a broker and means trades can be sent directly to Iberclear in real time and netted at the end of the day.

“The current solution we have for trading Spanish stocks is adequate, but if all the changes go through as scheduled, we expect 15% of Spanish blue-chip trading to migrate to MTFs by mid-2011,” Hirander Misra, COO, Chi-X Europe, told

The BME has said it will aim to implement changes by mid-2010.

“I would be surprised if the schedule is adhered to,” added Misra. “If the changes are delayed for too long, it could impact Spanish market development. However, competitive pressure on the BME is increasing, and some analysts aren’t as bullish on the exchange as they once were.”

While most sell-side firms regard the costs of the current settlement process as negligible, some of the largest brokers have yet to trade in Spain via MTFs because of back-office risks.

“We don’t trade in Spain on MTFs at the moment because of the risks associated with the settlement process,” said one source at a large investment bank. “At the moment, we would have to send separate settlement files detailing client trades to both the exchange and to the MTFs, which carries a significant risk of error. However, we are in the process of making changes to our back-office system and hope to be using MTFs in Spain before the Iberclear changes are implemented.”

Andrew Bowley, head of electronic trading product management, Nomura – one of the brokers that already trades Spanish equities on MTFs – notes that there are also deeper, fundamental market structure issues that need to be addressed.

“People bemoan the fact that Spain hasn’t fully implemented MiFID, but in reality, they still haven’t fully implemented all the elements of the Investment Services Directive from 1996 which allows overseas firms to have remote membership to exchanges,” said Bowley. “Today we have to trade via a local broker which is cumbersome for firms wishing to do increased business with Spain.”

However, Bowley considers the current MTF solution for settling Spanish trades to be adequate and is surprised that more brokers aren’t already using the solution offered by the likes of Chi-X Europe and Turquoise.

“It is Nomura’s aspiration to enable more trade on MTFs in Spain in the near future,” he said. “The changes to this settlement will make it cleaner and hopefully encourage more people into the market.”

Spain is the fifth biggest domestic exchange by pan-European market share and turnover but the BME still accounts for 99.6% of trading in Spain’s blue-chip index, according to last week’s figures from Fidessa’s Fragmentation Index, an on-order book analysis of where European stocks are traded.

“As the only non-fragmented market in Europe, Spain sticks out like a sore thumb,” said one sell-side source. “Stocks like BBVA and Santander are among the most liquid in Europe and people want the ability to trade these on MTFs.”