Friday 12th February 2016
NEWS TICKER: February 11th 2016: Gaming machine operators will be hit the hardest by the Italian government's plans to reform the gaming sector in 2016, says Moody's in a report published today. "Under the 2016 draft budget law the Italian government plans to overhaul the gaming and sports betting industries. We expect a moderate increase in taxes for gaming machine operators, which is credit negative," says Donatella Maso, a VP-Senior Analyst at Moody's. "In addition, licence renewals for betting shops and corners will result in high one-off costs, although it is unclear whether these will occur in 2016 or the following year." However, the measures under the draft budget law are not as severe as some companies and investors had expected based on the first draft of the law proposed last October - Fixed income manager BlueBay Asset Management has hired Jean-Yves Guibert and Marc Kemp into their Global Leveraged Finance team. Based in London, Guibert has joined as a senior credit analyst in High Yield from BNP Paribas, where he was head of European High Yield Sector Specialists and Marc Kemp has joined as institutional portfolio manager. Kemp was previously at JPMorgan, where he was most latterly a managing director and head of European High Yield Sales. Justin Jewell, co-head of Global Leveraged Finance Long Only says, “In normal credit cycles, the period of market stress is usually sharp but short lived and corresponds with worsening economic conditions. This cycle could be very different, as the distortions created by zero interest rate policies and quantitative easing (and their reversal) will likely result in economic and credit cycles that are less closely aligned. We would further argue that this cycle will likely show a lengthier period of spread widening, as defaults are likely to occur over a longer period.” - Marsh, a global leader in insurance broking and risk management, has appointed Sir Iain Lobban KCMG CB, former Director of the UK security and intelligence organisation GCHQ, as senior adviser on Cyber Risk. In the newly-created role, Sir Iain will provide strategic advice as Marsh works with governments, regulators and clients on how best to address the growing threat of cyber risk. He will report to Mark Weil, CEO, Marsh UK & Ireland and join Marsh’s global Cyber Centre of Excellence. Sir Iain was Director of GCHQ – the UK government’s communications headquarters– between 2008 and 2014 having previously served as director general of operations from 2004 - BNP Paribas Securities Services has won a mandate to provide Nationwide Building Society with clearing and custody services for the UK market. Nationwide Building Society is the world’s largest building society with assets of £200b, and 15 million customers across the UK. BNP Paribas Securities Services has been appointed as the settlement and gilt custody provider, safekeeping Nationwide Building Society’s £12.7bn worth of gilt assets in the UK. - The UK Debt Management Office says an additional £149.975m nominal of 3½% Treasury Gilt 2045 will be created for settlement on 12 February 2016 inrespect of the amount purchased by the Gilt-edged Market Makers and investors during the Post-Auction Option Facility, which closed at 2pm today. This additional stock will be sold at the average accepted price of £127.524 and will take the total amount outstanding of3½% Treasury Gilt 2045 to £25,315,238,000.00 nominal - The Lyxor Hedge Fund Index was down -0.9% in January. 5 out of 11 Lyxor Indices ended the month in positive territory. The Lyxor CTA Long Term Index (+2.2%), the Lyxor Global Macro Index (+0.7%), and the Lyxor Fixed Income Arbitrage Index (+0.7%) were the best performers, says the ETF major. Hedge Funds displayed esilience in January. Both markets and analysts started the year with reasonable growth expectations. These were aggressively revised down, triggered by the release of the disappointing Chinese PMI and the CNY depreciation. Strikingly, investors started to price in more serious odds for a Chinese hard landing, the growing central banks’ impotence, the risk of a US recession, and the return of global deflation. Lyxor says, in that context, CTAs thrived on their short commodities and long bond exposures. FI Arbitrage and Global Macro funds exploited monetary relative and tactical opportunities. To the exception of the L/S Equity Long Bias and Special Situations funds – hit on their beta - the other strategies managed to deliver flat to modestly negative returns - Why did investors think that the US Fed would raise rates in this jittery global market? Investors shed stocks in Asia today, on the back of what was a reasonable statement to the House of Representatives Finance Committee, that the US central bank would remain cautious on future rate hikes. According to Swissquote analysts, “Recent market turmoil and uncertainties surrounding China’s growth prospect could weigh on US growth if proven persistent. A few days ago, Stanley Fisher, Fed Vice Chairman, also delivered a cautious speech reminding us that Fed policy will remain data dependent and that it was too soon to tell whether the current market conditions will prevent the Fed from moving on with its rate cycle”. The global mood among central banks is towards an accommodative rather than tightening monetary policy: this was a theme that investors applauded last year and only last month as the ECB signalled a continuation of its policy, but it wasn’t what Wall Street wanted to hear and early gains lost out to negative sentiment and the US markets ended lower for four days in a row. The real worry of course is that ultra-loose monetary policy signals the fears of central bankers that the global economy continues to wind downwards and that consideration is fueling investor fears. Asia’s trading story has been writ in stone for the last few weeks with havens such as gold, the yen and government bonds the main beneficiaries of continued investor jitters. In commodities, Brent crude oil was down 1.3% at $30.43, while WTI crude futures fell 2.7% to $26.70, despite a drawdown in US stockpiles. Hong Kong's Hang Seng Index fell 3.9%, catching up with the week's selloff as the market reopened from a holiday. South Korea’s Kospi ended the day down 2.93%, while in Singapore the STI fell 0.77%. Japan's market and China's Shanghai Composite Index were both closed. The dollar was down 1.8% against the yen at ¥ 111.28, a sixteen-month low for the dollar against the Japanese currency. In other currencies, the euro was up 0.4% against the dollar at $1.1325, its highest since October. Spot gold in London gained 1.1% to $1218.18 a troy ounce, its highest level since May. In focus today, will likely be the Swedish Riskbank policy decision, with expectations for already negative rates to go even lower. “Markets may like cheap money for longer but they definitely don’t like the idea of a major market turn-down and another recession, hence discussion about need for US negative rates sapping risk appetite overnight. Note Janet Yellen testifying again today, although yesterday likely saw the most important information already discussed,” says Accendo Markets analysts.

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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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