Market practice harmonisation

Q  The European Central Bank says the EU lacks an efficient, integrated securities infrastructure to support the operation of a single financial market. How can such an infrastructure be built?

A  There is an enormous drive among the public and private sectors in Europe to find more efficient ways for the financial industry to operate. The goal of legislation such as MiFID [Markets in Financial Instruments Directive] and projects including TARGET2-Securities [T2S] are to harmonise the legal framework and the market infrastructure in Europe.

Simultaneously, significant cost reductions are being achieved by financial institutions as they introduce greater efficiencies within their organisations. Greater use of standards such as ISO15022-based messages has also helped move the industry closer to interoperable infrastructures. These standards have helped lower costs for our customers as well as for ourselves.

The combination of public and private sector initiatives is paving the way for a more harmonised and efficient market in Europe.

Q  How are new developments such as T2S shaping the European clearing and settlement landscape?

A  T2S will create a single engine for the settlement of trades. The estimated ?0.28 charge per trade will help to reduce costs further.

T2S will drive harmonisation in different markets, including the introduction of harmonised opening and closing times for settlement cycles, and a variety of optimisation mechanisms that could significantly reduce the number of failed transactions. The project could prove to be a catalyst in the removal of the remaining Giovannini barriers to pan-European clearing and settlement.

While T2S will deliver less complexity in settlement, it has to be remembered that T2S is only addressing the ‘commoditised’ settlement part of the transaction lifecycle. It does not perform asset servicing services, which will remain with the central securities depository [CSD] leaving room to increase the efficiency of these services at the CSD level.

However, the task should not be underestimated – developing TARGET2 for the cash markets was a complex undertaking. For securities, we have to take into account the intricacies of different CSDs and local markets. It is an important initiative that has the potential to achieve lower costs provided it is built to allow CSDs to reduce their costs and those savings are passed on to users.

Q  How does T2S fit in with Citi’s Turquoise involvement?

A  The aim of T2S is to create a single settlement engine with the end goal of reducing costs. The work we are doing with Turquoise is in line with those objectives.

One of the aims of the investment banks that have established Turquoise is to substantially reduce the all-in cost of transacting, and that includes not only trading costs but also the cost of securities clearing and settlement. Citi is acting as the settlement agent for the Turquoise central counterparty, DTCC’s [Depository Trust and Clearing Corporation] EuroCCP – creating a single clearing and settlement solution with improved pricing.

The commercial marketplace is developing solutions today that are precursors to T2S [for which the market will have to wait until 2013]. An example is Citi’s development of European Multi-Market Access [EMMA]. Initially for the Euronext markets, it is a solution that provides a single legal entity securities and cash account to support market activity.

The goals of T2S, Turquoise and EMMA are all aligned – to reduce the cost of trade flow from execution to settlement through harmonisation.

Q  What are the opportunities in the evolving clearing and settlement landscape for you and your users?

A  The European clearing and settlement landscape is moving towards better processing, increased efficiency, a simpler structure, price transparency and general market transparency. The harmonisation of market practices and jurisdictions will make the market more competitive and create opportunity.

Citi is working with CCPs and CSDs in the region to redefine the settlement process in a way that brings extra value in terms of cost reduction. CCPs and settlement agents are looking at the flows of trades and where they can add value. In talking to our customers, we have identified where the costs are in the trade lifecycle and have been able to unbundle our pricing to offer a transparent fee structure that shows clients what they are paying for specific processes. This gives customers more flexibility to choose the services they want.

The landscape today is quite complex – some customers want to hold an account at the CSD themselves. However, they want us to provide some of the additional services, such as corporate actions processing and income processing, in order to reduce the burden on their back offices – and we are doing that.

Historically, it has been very difficult to see how an infrastructure could develop that would address the European Commission’s desire for greater efficiency, while balancing the commercial needs of the entity building the infrastructure.

However, the ECB has become a strong driver for market efficiency, innovation and harmonisation and T2S is proof of that. There is a realisation that we need to keep an open mind about the trade-off between commercial innovation and EU-run processes. There is a great opportunity for the private sector to provide services that complement the public sectors efforts to help to further improve efficiency and bring greater results to clients across Europe.