Saturday 28th May 2016
NEWS TICKER, FRIDAY MAY 27TH: BGEO Group plc, the London listed holding company of JSC Bank of Georgia, has this morning announced that Bank of Georgia, Georgia’s leading bank, and the European Bank for Reconstruction and Development (EBRD) have signed a GEL220m (approximately £70m) loan agreement with a maturity of five years. EBRD obtained the local currency funds through a private placement of GEL-dominated bonds arranged by Galt &Taggart, a wholly owned subsidiary of BGEO. This is the largest and the longest maturity local currency loan granted to a Georgian bank, which will allow Bank of Georgia to issue longer-term local currency loans, providing essential support for micro, small and medium sized enterprises to converge to DCFTA requirements, as well as underserved women entrepreneurs. “We are keen to develop financial products and lending practices, to service specifically women-led SMEs, which will ultimately increase their involvement in developing Georgia’s private sector”, says Irakli Gilauri, CEO of BGEO Group - The UK’s CBI has responded to analysis from the Treasury showing that a vote to leave the European Union could negatively impact UK pensions. Rain Newton-Smith, CBI Economics Director, says that: “All pension schemes benefit when funds can be invested across a stable, growing economy, to best support people in their retirement years. Any financial market turmoil caused by a Brexit is likely to have a negative effect on household wealth, the value of funds and damage pensions here at home, especially for those looking to retire within the next few years. The sheer weight of credible evidence points towards a serious economic shock if the UK were to leave the EU, meaning a hit to the value of our private pensions, jobs and prosperity.” - EPFR Global reports that Nine weeks into the second quarter mutual fund investors remain underwhelmed by their choices as they seek to navigate a global economy characterized by political uncertainty in Europe, lacklustre corporate profits and the prospect of another interest rate hike in the US, economic stress in major emerging markets and Japan's experiment with negative interest rates. During the week ending May 25 all nine of the major EPFR Global-tracked Emerging and Developed Markets Equity Fund groups posted outflows, as did Global, High Yield, Asia-Pacific and Emerging Markets Bond Funds, seven of the 11 major Sector Fund groups and three out of every five Country Equity Fund groups. Alternative Funds look to have taken in over $1bn for the fifth time in the past 14 weeks. Overall, EPFR Global-tracked Bond Funds added $2.6 billion to their year-to-date tally while another $9.1bn flowed out of Equity Funds. Some $12bn was absorbed by Money Market Funds with US funds attracting the bulk of the fresh money. EPFR Global-tracked Emerging Markets Equity Funds remained under pressure from many directions. China's economic data and policy shifts continue to paint a mixed picture for growth in the world's second largest economy, the US Federal Reserve is talking up the prospects of a second rate hike this summer, Europe's recovery appears to be running out of stream and the recent recovery in commodities prices is being viewed with scepticism in many quarters. All four of the major groups recorded outflows during the week ending May 25, with the diversified Global Emerging Markets (GEM) Equity Funds seeing the biggest outflows in cash terms and EMEA Equity Funds in flows as a percentage of AUM terms. Latin America Equity Funds extended their longest outflow streak since late 3Q15 as investors who bought into the prospect of political and economic change in Brazil confront the messy reality. However, year to date Brazil has been the top emerging market for all EPFR Global-tracked Equity Funds as managers bet that the impeachment proceedings against President Dilma Rousseff will open the door to more centrist economic policymaking says the funds data maven. Among the EMEA markets, the firm reports that GEM managers are showing more optimism than investors. EMEA Equity Funds have now posted outflows for five straight weeks and investors have pulled over $300m out of Russia and South Africa Equity Funds so far this month, though GEM allocations for both South Africa and Russia climbed coming into this month. The latest allocations data indicates less optimism about China despite is still impressive official numbers - annual GDP was running at 6.7% in 1Q16 - and the edge the recent slide in the renminbi should give Chinese exporters. GDP growth in Emerging Asia's second largest market, India, is even higher. Elsewhere, India Equity Funds have struggled to attract fresh money as investors wait to for domestic business investment and the government's reform agenda to kick into higher gears says EPFR Global – According to New Zealand press reports, stock exchange operator, NZX, will initiate confidential enquiries into listed companies that experience large, unexplained share price movements, to determine whether they may be holding undisclosed "material" information even while remaining in compliance with the market's Listing Rules that require disclosure of material information at certain trigger points. In an announcement this morning, NZX also warned investors not to assume that a listed entity's Listing Rules compliance statements meant they did not have material information in their possession which would potentially require eventual disclosure - Asian stocks were modestly higher today, largely on the back of increasingly softening sentiment from the US Federal Reserve. Most people think there will be one rate hike this year, but likely it will be in July rather than June. Either way, it will be one and not two or three. Fed chair Janet Yellen is scheduled to talk about interest rates at an event at Harvard University today and the expectation is that a softer approach for the rest of this year will be writ large; a good signal of intent will follow today’s quarterly growth stats. The presidential election will encourage caution; continued market volatility will encourage caution and mixed manufacturing data will encourage caution. Japan’s benchmark Nikkei 225 index added 0.4% to touch 16,834.84 and Hong Kong’s Hang Seng rose 0.9% to 20,576.52. The Shanghai Composite Index gained 0.3% to 2,829.67. The Straits Times Index (STI) ended 6.65 points or 0.24% higher to 2773.31, taking the year-to-date performance to -3.80%. The top active stocks today were SingTel, which gained 1.05%, DBS, which gained 0.07%, UOB, which gained0.11%, Keppel Corp, which gained2.47% and Ascendas REIT, which closed unchanged. The FTSE ST Mid Cap Index gained 0.27%, while the FTSE ST Small Cap Index rose 0.30% - The European Bank for Reconstruction and Development (EBRD) says it is taking the first step towards developing a green financial system in Kazakhstan in partnership with the Astana International Financial Centre (AIFC) Authority. EBRD President Sir Suma Chakrabarti and AIFC Governor Kairat Kelimbetov signed an agreement today on the sidelines of the Foreign Investors Council’s plenary session to commission a scoping study for the development of a green financing system in Kazakhstan. The study, scheduled to be completed in 2017, will assess the demand for green investments, identify gaps in current regulations, and make recommendations for the introduction of green financing standards and for the development of the green bonds market and carbon market services. The development of a green financing system would be consistent with the COP21 Paris Agreement, aligning financing flows with a pathway towards low greenhouse gas emissions and climate resilient development. The AIFC Authority was put in place earlier this year and is tasked with developing an international financial centre in Astana. In March, the AIFC Authority, TheCityUK and the EBRD signed a Memorandum of Understanding to support the establishment of the financial centre and to encourage and improve opportunities for the financial and related professional services industries – Turkey’s Yuksel has issued notice to holders of $200m senior notes due 2015 (ISIN XS0558618384), and filed with the Luxembourg Stock Exchange, that the company has agreed a term sheet with the ad-hoc committee of noteholders and its advisors to implement a restructuring of the notes and is currently finalising the required scheme documentation with the Committee. Once agreed, the Company will apply to the English High Court for leave to convene a meeting of note creditors to vote on the scheme proposals as soon as reasonably practicable when the High Court reconvenes after vacation in June 2016 - Following the agreement in principle of the May 24th Eurogroup for the release of the next loan tranche to Greece, domestic authorities have intensified their efforts for the completion of all pending issues reports EFG Eurobank in Athens. According to Greece’s Minister of Finance Euclid Tsakalotos, on the fulfilment of all pending issues, €7.5bn will be disbursed in mid-June, of which €1.8bn will be channeled to clear state arrears – This weekend is the second UK May Bank Holiday. FTSE Global Markets will reopen on Tuesday, May 31st at 9.00 am. We wish our readers and clients a sunny, restful, safe and exceedingly happy holiday.

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EU seeks CSD regulation and proportionality

Thursday, 19 April 2012
EU seeks CSD regulation and proportionality In early March this year the European Commission issued proposals to improve securities settlement in the EU and the operation of central securities depositories (CSDs). The proposal has the potential to speed-up harmonisation of post-trade processes in Europe, thereby helping to make cross-border securities transactions less complex, less risky and less costly. The proposal now passes to the European Parliament and the Council (member states) for negotiation and adoption under Europe’s co-decision procedure. Francesca Carnevale reports. http://www.ftseglobalmarkets.com/

In early March this year the European Commission issued proposals to improve securities settlement in the EU and the operation of central securities depositories (CSDs). The proposal has the potential to speed-up harmonisation of post-trade processes in Europe, thereby helping to make cross-border securities transactions less complex, less risky and less costly. The proposal now passes to the European Parliament and the Council (member states) for negotiation and adoption under Europe’s co-decision procedure. Francesca Carnevale reports.

The EU Commission’s proposal aims to harmonise both the timing and conduct of securities settlement in Europe and the rules governing central securities depositories (CSDs) which operate the infrastructures enabling settlement. CSDs constitute the last layer in the post-trade infrastructure. Their role is to ensure the smooth completion of securities transactions once these have been traded and cleared. The proposal harmonises timing and discipline of securities settlement in the EU and forwards the establishment, for the first time at European level, a common authorisation, supervision and regulatory framework for CSDs.

“The Commission is optimistically working on the assumption that the ­regulation will generally come into force in early 2013. However provisions relating to the harmonised T+2 settlement period won’t come into force until 1 January 2015 and the provisions imposing the dematerial­isation/immobilisation of securities will not enter into force until 1 January 2020,” explains James Tinworth, funds partner in the corporate practice at law firm Stephenson Harwood.



Alan CameronAlan Cameron, head of client segment, financial institutions and broker-dealers, at BNP Paribas ­Securities ServicesEssentially, the proposals are designed to increase the safety of settlements, particularly for cross-border transactions, by ensuring that buyers and sellers receive their securities and money on time and without risks; increase the efficiency of settlements by introducing a true internal market for the operations of national CSDs; and to augment the safety of CSDs by applying high prudential requirements in line with international standards. “Essentially it is about reducing risks and costs; in line with regulation, the industry also has to focus on these elements. Neither element is exclusivel but in reality the industry has tended to focus either or one or the other,” concedes Alan Cameron,  head of client segment, financial institutions and broker-dealers, at BNP Paribas Securities Services.

The proposals have been forwarded to help mitigate risk in the post trade environment, at a time when cross border trading of securities is rising and where legislation (T2S and EMIR, for instance) proposes heightened responsibilities for institutions in the post trade segment. The environment is dynamic: as cross-border transactions in Europe, ranging from usual purchases/sales of securities to collateral transfers, continue to increase and CSDs become increasingly interconnected. These trends are expected to accelerate with the advent of Target2 Securities (T2S), a project launched by the Eurosystem to provide a common technical platform for securities settlement in Europe, which is scheduled to start in 2015.

While generally safe and efficient within national borders, settlement across borders presents higher risks and costs for investors than domestic operations. The EU believes it to be important to have a harmonised set of measures across Europe for settlement, which will also serve to help CSDs. “Post trade costs have come down,” explains Cameron, “ and continue to fall. However, there’s a point where people are concerned about the huge infrastructure that is emerging in this search for harmonisation.”

Up to now CSDs have tended to be regulated at the national level and lack a common set of prudential, organisational and conduct of business standards at ­international (or European) level. This ­regulation does not in essence change this infrastructure.

As it stands under current proposals, CSDs will be authorised and supervised by “national competent authorities specifically designated by the member states”. These authorities must, however, consult and cooperate with “other relevant authorities, which include the authorities from the member states responsible for the oversight of each securities settlement system operated by CSDs and the central banks in whose accounts securities transactions are settled”.

Moreover, “Where a CSD has subsidiaries in several member states the proposed regulation requires the authority responsible for the supervision of the CSD to cooperate with the authorities responsible for the ­supervision of its subsidiaries. This co­operation also implies immediate information of the authorities involved in case of emergency situations affecting the liquidity and stability of the financial system in any of the member states where the CSD or its participants are established,” states the EC Commission website.

The European ­Securities and Markets Authority (ESMA) however will be responsible for ensuring cooperation between national authorities and developing commonly applied technical standards. Within hours of the release of the proposal, the European Central Securities Depositary Association (ECSDA) stated that it welcomed the regulation. The association represents some 42 national and inter­national CSDs across Europe, providing a forum for its members to exchange views and take forward projects of mutual interest. Combined, members of the ­association held approximately €37.9trn in securities at the start of 2011; no mean amount.

ECSDA notes that CSDs support the move to a settlement cycle of two business days after trade date for most securities across Europe. “The adoption of a common framework for settlement discipline could also benefit market transparency and safety by reinforcing incentives for market ­participants to fulfill their obligations and deliver securities on time,” says the association. Soraya Belghazi, secretary general of ECSDA, notes: “Like other critical market infrastructures, CSDs exist to take risk out of the market, which is why global ­regulators and the G20 in particular are keen to encourage their use by market participants. Rather than disrupting the existing market structure in post-trade, ECSDA thinks that financial stability can be enhanced by tight regulation of the limited credit function of some CSDs and by the adoption of an effective resolution regime for market infrastructures.”

Soraya BelghaziSoraya Belghazi, secretary general of ECSDAThe adoption of a common framework for settlement discipline could also benefit market transparency and safety by reinforcing incentives for market participants to fulfil their obligations and deliver securities on time. Even so, not all the EU proposals have been received positively. According to ECSDA some measures put forward by the Commission “do not seem proportionate given the strength and resilience of CSDs particularly during the financial crisis. These measures are not justified by any market failure and should be recalibrated to avoid disrupting the operation of existing CSDs in some markets”.

In particular, the association suggests the regulation could make it more difficult for CSDs to establish links with other CSDs, in contradiction to the spirit of the TARGET2-Securities (T2S) project of the eurosystem which encourages CSDs to build links and to compete for cross-border business. “It is possible that ECSDA is concerned that there will be less need for a CSD to establish links with CSDs in other member states given that it could just passport into the relevant member states under the regulation,” comments Tinworth at Stephenson Harwood. “I assume, however, that ECSDA is primarily referring to the numerous requirements in the proposed Regulation relating to “CSD links”. The main requirement is that a CSD intending to set up a “CSD link” would need to apply for authorisation. It does seem as if the proposed requirements will make it more difficult for CSDs to establish links with other CSDs, although, crucially, Articles 48-50 give CSDs the right to have access to any other CSD,” he adds.

However, Tinworth, adds a more nuanced consideration: “It is not correct to say that T2S is intended to encourage CSDs to build links and to compete for cross-border business. T2S is actually encouraging CSDs to build only one link between CSDs – itself. In any event, the Commission has said that it is trying to ensure that the two initiatives are complementary. I can only find one exception in the regulation that is meant for T2S, however, and there are numerous requirements relating to “CSD links” that provide no exceptions for T2S. These may need to be given some further consideration.”

ECSDA also suggests the regulation would introduce new restrictions on the provision of cash and credit for the purpose of CSD settlement. While ECSDA supports the inclusion of strict safeguards in the ­regulation, “we wish to ensure that CSDs currently offering limited banking services can continue to do so in the future and that likewise, other CSDs are allowed to develop such services in response to market need. Limited banking services of CSDs are primarily used to provide liquidity to market participants on a fully collateralised basis and to facilitate settlement in foreign currencies”.

The EU counters, holding that: “The ­objectives of the proposed regulation are consistent with those of T2S, a project launched by the eurosystem to create a common technical platform to support CSDs in providing borderless securities ­settlement services in Europe. The two ­initiatives are complementary: the proposed regulation harmonises legal aspects of ­securities settlement and the rules for CSDs at European level, allowing T2S, which ­harmonises operational aspects of securities settlement, to achieve its goals more effectively”.

Outsource to T2S

Under the scheme national CSDs will outsource part of their role to T2S, which will be operated by the European Central Bank (ECB) and four national central banks (from France, Italy, Germany and Spain); though they will still have some important functions. As Richard Turrell, global head of product at BNP Paribas Securities Services explains, “T2S is not a record keeper; that function will still sit with the CSDs, but the core function of delivery versus payment will be provided by T2S.”

T2S itself is at a critical point, says Turrell, who explains that there is a financial incentive package in place for CSDs signing on by April 2012 for the first wave of adoption. This includes a waiver of the one-off entry fee, no fees for the first three months following the go-live date, from July to September 2015, and after that month, there will be a fee reduction by one-third for the whole price list until the end of the last regular migration wave.  

“CSDs deciding to sign the T2S Framework Agreement for adoption in April 2012 will benefit from reduced prices; then there is another round in June. After then there will be no financial incentives on offer and CSDs will have to sign up at full tariffs. It means that those CSDs that do sign up in either of the first two rounds will have a competitive advantage,” he states. However, he adds, that he thinks that some CSDs are still struggling with the T2S concept; and might not sign up straight away. “It depends on the way that CSDs will manage this interim period and accommodate their business models to suit the new regime,” adds Turrell. “It involves reviews of their coding practices and the way, for instance, that they will decommission their architecture.”

Richard TurrellRichard Turrell, global head of product at BNP Paribas Securities ServicesThe European Central Bank, in an official release, notes that this early bird package is justified because adopters will encounter “teething problems” and will likely need to support the testing activities of CSDs that migrate later. If a CSD signs by June 2012, it will still benefit from the one-off waiver but will not receive other incentives. “The Programme Office is very confident that the CSDs and their markets have understood the benefits of the project and that they need to participate,” the ECB wrote in a recent project update.

Separately, ECSDA is also concerned with limits on competitiveness and says the ­regulation would prevent CSDs from owning and operating subsidiaries offering non-CSD services. Such a measure would force a number of existing CSDs to overhaul their corporate structures, but it is far from certain that these changes will enhance market safety.

In the light of these limitations, however, Belghazi underscores that the association welcomes the proposal, “as a good basis for discussion. We trust that the European legislator will work to improve the current text in a way which allows CSDs to further contribute to enhance the safety, efficiency and transparency of Europe’s financial markets.”

In the short term, the proposed regulation is likely to create more competition between CSDs, with expected benefits for the quality and price of cross-border services. In the medium to long term, the CSD market could become more consolidated and less fragmented. There could be less intermediation for cross-border holding of securities and CSD services, and cross-border settlement will become safer and cheaper. This would translate into lower costs for investors along the whole post trading chain. The expected reduction in the costs of holding and settling securities, especially cross-border, would benefit both issuers, by increasing their ability to raise capital, and investors, by allowing them to place their funds more efficiently. The ­securities market in the EU would therefore become more efficient in supporting the financing of the economy and ­sustainable growth. SMEs, in particular, would benefit from the expected cost reductions since the fees charged by CSDs for the issuance and custody of their ­securities are often proportionally higher than for larger companies.

However, markets will require further clarity on the scope of the regulation and the way that it dovetails into parallel directives and rules governing the trading markets, such as EMIR and MiFID. Questions are still extant on whether CSDs may be subject to the rules of MiFID for certain services they provide, such as the provision of securities accounts and, possibly, collateral management services. It remains for the European Parliament, the EC and member states to clarify, in the context of the current review of MiFID, whether, similarly to banks, CSDs should be exempted from certain rules of MiFID or not.

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