Friday 12th February 2016
NEWS TICKER: FRIDAY, JANUARY 12TH: Morningstar has moved the Morningstar Analyst Rating™ for the Fidelity Global Inflation Linked Bond fund to Neutral. The fund previously held a Bronze rating. Ashis Dash, manager research analyst at Morningstar, says, “The fund’s rating was placed Under Review following the news that co-manager Jeremy Church was leaving Fidelity. Lead manager, Andrew Weir, who has managed the fund since launch in May 2008, remains in charge and is further supported by the new co-manager, Tim Foster. While we acknowledge Weir’s considerable experience in the inflation-linked space, some recent stumbles and below-benchmark returns over time have led us to lower our conviction in the fund. This is currently reflected by our Neutral rating.” - Italian GDP growth looks to have stalled to 0.1pc in the last quarter of 2015, falling below analyst expectations of 0.3% growth. The Italian economy grew by just 0.6% last year having come out of its worst slump since before the pyramids were built. The slowdown will put further pressure on reforming Italian prime minister Matteo Renzi, who has been battling to save a banking system lumbering under €201bn (£156bn) of bad debt, equivalent to as much as 12% of GDP. It is a serious situation and one which threatens Italy’s traditionally benign relationship with the European Union. The EU’s bail in rules for bank defaults seeks to force creditors to take the brunt of any banking failures. Italy suffered four bank closures last year, which meant losses of something near €800m on junior bond holders (with much of the exposure held by Italian retail investors). No surprise perhaps, Italian bank stocks have taken a beating this year, Unicredit shares are currently €3.06, compared with a price of €6.41 in April last year. In aggregate Italian banking shares are down by more than 20% over the last twelve months. Italian economy minister Pier Carlo Padoan told Reuters at the beginning of February that there isn’t any connection between the sharp fall in European banking stocks, as he called on Brussels for a gradual introduction of the legislation. He stressed that he did not want legislation changed, just deferred - Is current market volatility encouraging issuers to table deals? Oman Telecommunications Co OTL.OM (Omantel) has reportedly scrapped plans to issue a $130m five-year dual-currency sukuk, reports the Muscat bourse. Last month, the state-run company priced the sukuk at a profit rate of 5.3%, having received commitments worth $82.16m in the dollar tranche and OMR18.4m ($47.86m) in the rial tranche. Meantime, Saudi Arabia's Bank Albilad says it plans to issue SAR1bn-SAR2bn ($267m-$533m) of sukuk by the end of the second quarter of 2016 to finance expansion, chief executive Khaled al-Jasser told CNBC Arabia - The US Commodity Futures Trading Commission (Commission) announces that the Energy and Environmental Markets Advisory Committee (EEMAC) will hold a public meeting at the Commission’s Washington, DC headquarters located at 1155 21st Street, NW, Washington, DC 20581. The meeting will take place on February 25th from 10:00 am to 1:30 pm – Local press reports say the UAE central bank will roll out new banking regulations covering board and management responsibilities and accountability – Following yesterday’s Eurogroup meeting, Jeroen Dijsselbloem, says that “Overall, the economic recovery in the eurozone continues and is expected to strengthen this year and next. At the same time, there are increasing downside risks and there is volatility in the markets all around the world. The euro area is structurally in a much better position now than some years ago. And this is true also for European banks. With Banking Union, we have developed mechanisms in the euro area to bring stability to the financial sector and to reduce the sovereign-banking nexus. Capital buffers have been raised, supervision has been strengthened, and we have clear and common rules for resolution. So overall, structurally we are now in a better position and we need to continue a gradual recovery”. Speaking at the press conference that followed the conclusion of the February 11th Eurogroup, Dijsselbloem also acknowledged that “good progress” has been made in official discussions between Greece and its officials creditors in the context of the 1st programme review. Yet, he noted that more work is needed for reaching a staff level agreement on the required conditionality, mostly on the social security pension reform, fiscal issues and the operation of the new privatization fund. On the data front, according to national account statistics for the fourth quarter of 2016 (flash estimate), Greece’s real GDP, in seasonally and calendar adjusted terms, decreased by 0.6%QoQ compared to -1.4%QoQ in Q3. The NBS Executive Board decided in its meeting today to cut the key policy rate by 0.25 pp, to 4.25%. - Today’s early European session saw an uptick in energy stocks, banking shares and US futures. Brent and WTI crude oil futures both jumped over 4% to $31.28 a barrel and $27.36 respectively before paring gains slightly; all this came on the back of promised output cuts by OPEC. That improving sentiment did not extend to Asia where the Nikkei fell to a one-year low. Japan's main index fell to its lowest level in more than a year after falling 4.8% in trading today, bringing losses for the week to over 11%. Yet again though the yen strengthened against the US dollar, which was down 0.1% ¥112.17. Swissquote analysts says, “We believe there is still some downside potential for the pair; however traders are still trying to understand what happened yesterday - when USD/JPY spiked two figures in less than 5 minutes - and will likely remain sidelined before the weekend break.” Japanese market turbulence is beginning to shake the government and may spur further easing measures if not this month, then next. Trevor Greetham, head of multi asset at Royal London Asset Management, says “When policy makers start to panic, markets can stop panicking. We are seeing the first signs of policy maker panic in Japan with Prime Minister Abe holding an emergency meeting with Bank of Japan Governor Kuroda. We are going to get a lot of new stimulus over the next few weeks and not just in Japan. I expect negative interest rates to be used more in Japan and in Europe and I expect this policy to increase bank lending and weaken currencies for the countries that pursue it”. Greetham agrees that both the yen and euro have strengthened despite negative rates. “Some of this is due to the pricing out of Fed rate hike expectations; some is temporary and to do with risk aversion. In a market sell off money tends to flow away from high yielding carry currencies to low yielding funding currencies and this effect is dominating in the short term”. Australia's S&P ASX 200 closed down 1.2%. In Hong Kong, the Hang Seng settled down 1.01. in New Zealand the NZX was down 0.89%, while in South Korea the Kospi slid 1.41%. The Straits Times Index (STI) ended 1.25 points or 0.05% higher to 2539.53, taking the year-to-date performance to -11.91%. The top active stocks today were DBS, which declined 0.91%, SingTel, which gained 1.13%, JMH USD, which declined 1.39%, OCBC Bank, which gained 0.13% and UOB, with a0.34% advance. The FTSE ST Mid Cap Index declined 0.50%, while the FTSE ST Small Cap Index declined0.31%. Thai equities were down 0.38%, the Indian Sensex slip 0.71%, while Indonesian equities were down another 1.16%. The euro was down 0.3% against the dollar at $1.1285, even after data showed Germany's economy remained on a steady yet modest growth path at the end of last year. Gold fell 0.7% to $1238.80 an ounce, after gold gained 4.5% Thursday to its highest level in a year. Greetham summarises: “Like a lot of people, we went into this year's sell off moderately overweight equities and it has been painful. What we have seen has been a highly technical market with many forced sellers among oil-producing sovereign wealth funds and financial institutions protecting regulatory capital buffers. However, economic fundamentals in the large developed economies remain positive, unemployment rates are falling and consumers will benefit hugely from lower energy prices and loose monetary policy.”

Latest Video

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.

Current Issue

Related News

Related Articles

Related Videos