Appendix A European Clearing and Settlement Matrix

Transcription

1 Appendix A European Clearing and Settlement Matrix Note: The following matrix is an accumulation of cross-border and member state specific issues identified by market participants in relation to clearing and within Europe as compiled by the EPDA. The identified issues have not been placed in any particular order but for ease of reference have been broadly group under headings such as Sovereign Relationships. Greater efforts have been placed on the Eurozone member states although some efforts has been afforded to identifying issues with some of the non-euro and Central European states. It should be stated that this list may not be inclusive of all issues faced by market users and that the issues highlighted herein due to time constrains highlighted within the introduction have not yet been verified with all interested parties and therefore, there may be errors set out herein. In such cases, these will be corrected in future drafts but the EPDA accepts no liability for any loss or damage incurred through the use of, or reliance upon, the information contained herein.

2 Euro-zone Tier 1 Cross-Markets Belgium France Germany Ireland Italy Netherlands Spain 1. Regulatory / Legal / Fiscal Relationship Inconsistency of insolvency and bankruptcy laws across Europe (e.g. common law vs. Napoleonic code) -par of issues identified in Barrier 13 and 14 No consistency in application in international rules e.g. recalls harmonise under ICMA rules All countries have differing tax rates / reclaim methods / methods of certification (There is no consistent approach across Europe) - Barrier 11 and 12 Tax in general is becoming more complex / more specialised (i.e. withholding / capital gains) MIFID Directive (due to be implemented under UK regulation by April 07) goes someway to harmonising certain rules as to dealing relationships and dealing policies NB: Primary markets deadlines are harmonised at 10:00 AM (earlier than secondary market deadlines), in order to provide safety to the issuing Member States.Barrier 15 uneven application of national conflict of law rules (hague convention) Repurchase agreements (AFTB-type agreement) allows the automatic calculation of interests and generation of second leg of the transaction, which allows high rate and market safety. However, this could be improved by allowing substitution of collateral. Confusion over the use of the repo message exists in France. Many counterparts who have not signed up for the AFTB type agreement use the locked in message to instruct their trades under the GMRA when in fact a strict interpretation should result in them instructing two cash trades. This impacts on ability to cancel the trade under the GMRA and may have further ramifications as to call periods and ability to In Clearstream Frankfurt, free of payment deliveries do not require prematching results in manual effort in cases where bonds have to be rejected Italy has a 10 year backlog of foreign investor withholding tax reclaims Market practice to conduct telephone prematching for all trades Broker dealers operating segregated accounts at their agent bank do not need to have any checks on available position prior to the instruction being sent to the CSD however all trades are telephone matched. Local agents do not appear willing to use the prematching functions built within Monte Titoli s functionality. Tax is withheld at source, reclaim required Different rules and deadlines are applied to direct market members vs. secondary market participants There is a post registration process in Spain so what is the issue? Need to explain impact is it cost or delay in on ward delivery or further trading?

3 substitute collateral. 2. Sovereign Relationships Forms of discrimination still exist most domestic markets protect the business executed in those markets, e.g. the majority of Italian and French repos settle via their respective domestic systems. This has a great effect on economies of scale that the industry is able to achieve Barrier 10 Lack of choice in determining location for primary market Barrier 10 Autoborrow availability and autolender requirements differ for each market Require trades to be sent real time to ICMA TRAX and also require monthly turnover reporting duplication of effort - Barrier 10 Require PDs to be autolenders of bonds in the BNB system - this is not easy to process when the agent banks use an omnibus account. Barrier 10 Trade in repo market but have 'expectations' about when trades will settle (i.e. they like them early in the day) and in any case one cannot fail to them - causes inefficiency if bonds have to be 'reserved' day before Barrier 10 Still have E/C bank KV issues within the repo market. Several E/C bank traders refuse KV due to inefficiencies as funding must be available overnight although this may change with Euroclear allowing free intraday autolending/borro wing Settlement must take place in Clearstream Frankfurt yet majority of government debt settles in Euroclear via LCH clearnet Germany has not accepted the new Harmonised Reporting Format for primary dealer reporting Fragmentation of creates fails and liquidity issues for KV participants looks like information only direct market participants of the Italian market are required to put up extra collateral to satisfy market payments Settlement must take place in Monte Titoli. Being non-italian is seen as an obstacle. This means complying to legacy systems and practices. There is no acceptance of true repo trades. Fails are treated unusually in that they can never be submitted to the net cycles. Trades that fail are required to be re-keyed into the CSD on the next business day thus causing rework. This is one market where there is Good practice via E/C. Settlement takes place in Euroclear Cannot fail on government bonds. Buys in and forced exchange of bonds occurs. No fails market in practice although bank of spain will send a letter complaining even if you have paid the full fail cost to borrow the bonds from them. Non Bank of Spain (BoS) participants suffer vs (BoS) participants. Settlement must take place at SClV. Post registration process is unique in Spain. Require PDs to be autolenders of bonds in the Bank of Spain system - this is not easy to process when the agent bank uses an omnibus account.

4 3. Trading Venues - ECNs, IDBs Trading platforms select the clearing and institution and offer little choice Auction systems of euro-zone issuers favour domestic institutions 4. Central Counterparties (CCPs) Duplication and lack of consistency e,g, no integration of LCH and Clearnet businesses - no margin offset, different treatment of fails and no elimination of duplicate infrastructure Harmonise buy in rules & deadlines across the markets- Barrier 7 Mixture of netting methodologies Minimum interoperability between existing CCPs Shaping or max quantity differs in various markets If not able to adopt single CCP with strong user governance and ownership, would look for competing CCPs that were interoperable. Fines for short positions On date, no information is made available concerning possible fails involving the Central Counterparty LCH.Clearnet is available as a CCP through MTS Belgium 5. Third party Services (Agent Banks and ICSDs) Lack of central clearer across Settlement European Govt. Bonds or can occur interoperability between CCPs after last Too many differing Bridge agents with their own rules and deadlines, making it difficult to trade a true cross border market (e.g. some European agent's have in the domestic market occurring after the last bridge between Euroclear and MTS system cannot automatically accommodate negative accrual within its messaging STP which sometimes requires dealers to manually make payments to compensate for inaccurate matching There is currently only one automated decoupage (partial) per day at 4.30 p.m. require at least an additional decoupage before 1.30 p.m. (E/C borrowing deadline although this may be rectified with Euroclear allowing free intraday borrowing/lendi ng LCH.Clearnet serves as a Central Counterparty In regards to Eurex clearing, we do not have the ability to partial pair-offs LCH C/net SA and CC&G Bridge is a good example of two Clearing Houses working together for the benefit of the market Buy in on CCP trades at S+10 - increased form S+5, but still too soon - S+30 like France would be preferable. Settlement can occur after last Bridge Buy ins are mandatory on same day trades plus fines CCP is limited to SENAF trading only Settlement can occur after last Bridge Settlement can occur after last Bridge

5 themselves, meaning cannot realign bonds impacts triparty activity) Despite a single currency there are still many providers of clearing and services which is a problem for the market unless common market standards are adopted. Custody charges are markedly different across each of these agents (and even between markets using single custodian) particularly where there is little competition -. Agents impose cash cut off times prior to Target cut off, and in some cases prior to end of the CSD mandatory window this imposes funding inefficiency and cost. 6. ICSDs/Agent Banks ICSDs operate as platforms and as agent banks. They are also very active in the triparty repo market. Bridge between EC bank and CBL is real-time until 10:30am and then multi-batch during day - should be real time (or at least batches every 15 minutes) to allow efficient turnaround of securities (this was voiced a number of times require true real time matching and real time turnaround of securities) Cost and flexibility of borrowing securities is too high Euroclear/Kas (German Dom) should also be real-time, not batch. We should be able to cancel and re-index in the same batch if this remains Agent Banks do not generally offer real-time processing and only two or three batches during the day which does not allow efficient turnaround of securities Euroclear bank /Clearstream/Kas bridge should have better views into each other s system in order that PDs are better aware of why a certain trade has not matched/settled In Euroclear bank, some European currencies (eg Skandi markets) have funding deadlines before Euroclear Bank works on a real-time processing system whereas the domestic agents work on a batch method Euroclear bank works on a real-time system whereas the domestic market (NBB) works on a batch process Settlement circles work if all trades are settling domestically but in some cases where one trade is x- border the circle does not work automatically and could require someone to have sufficient holdings to initiate the circle Batch processing in Italy day and night cycles Availability of bonds in Euroclear bank (if received from the local market) require a confirmation from EC bank s agent this process takes up to 1 hr which can impact deliveries & borrowing in EC bank Execution of Bond stripping & reconstitutio ns are time consuming due to the manual confirmation process related to the domestic market No specific mechanism s for repos due to unclear legal status and lack of demand. Automatic Lending and Borrowing Mechanism s not used. Realignments from domestic to EC bank have to be instructed on S-1, if instructions are submitted on S, this can lead to issues with the confirmation process between EC bank and its Agent Bank as even where a trade is matched and theoretically cannot fail it is not settled until the rest of the market is essentially matched.

6 deadlines - makes funding a "best guess" effort rather than a science which has cost implications for PDs Harmonise buy in rules & deadlines across the markets Auto compensation of income should be reviewed (a) harmonisation of compensation process across all bonds all markets b) auto compensation should be available over the bridge E/C bank vrs CBL c) All ICSD s should follow the same compensation process Repo tracking of income is available in Belgium and France but not in the other Euro markets National CSDs could improve cooperation with ICSD s instead of focusing on the market share of the of their government debt No market convention for cancelling unmatched instructions and in Euroclear bank this results in outstanding unmatched instructions left for months/years in the system and on an internal PDs system unless they can get the counterparty to cancel. The ability to freeze and unilaterally cancel matched trades hinders the management of cash positions and forecasts Lack of competition in the provision of access to commercial bank money. Euroclear Bank/Clearstream process stamp duty on Crest transactions in different ways. 7. CSDs Each market has differing attitudes to fails and the penalties in dealing with them. Greece as an example Cross-border movements from CSDs should be more efficient (improves matching and ) + extend deadline to facilitate No harmonisation of 'standard' time across markets - all should end at same time (and this should be before market standard cash cut off - e.g. 15:00). Cross border movements to In case of primary dealership you do not have the ability / possibility to cancel a matched trade even for free of payment realignments Reporting ( results) is Settlement cut off of 4 PM Within EC France it is currently not possible to instruct via SWIFT BTF s/ BTANS settle T+3 for international, T+1 for domestic On exchange trading via contract notes on Xontra the process does not validate the minimal trading unit as per issuer specification (i.e. if a broker sends a contract note which differ from the conditions of the security the Settlement cut off of 3.10 PM There is no link between the overnight process on Monte Titoli and Euroclear / CBL Whilst overall rates look impressive, they could be Settlement cut off of 4 PM There is no link between the overnight process on Iberclear and Euroclear / CBL Where trades are to settle as a result of the circles

7 Euroclear bank and Clearstream Lux have very conservative deadlines - should be much closer to end of window. Member States and central banks impose Central Bank money for systemic risk purposes: participants with no direct access to central bank money must have the possibility to choose the commercial bank providing them with access to liquidity, on the basis of a free and open competition. Where only central bank money is allowed that creates barrier to remote clearing (need to pay local bank for liquidity provision or have a local bank oneself). Harmonise buy in rules & deadlines across the markets Cross border movements do not happen between CSD and CSD, only happen from CSD to ICSD Harmonisation of instructions from CSDs, driving agent banks. Improved communication flows and clarity between ICSD and CSD already improved i.e fax to but are still not realtime (i.e. direct web access needed) Securities Financing activity can be done using standard transfers, therefore difficult to distinguish between other standard activity. Whilst owned by Euroclear bank and having good realignment functionality, the local CSD operates differently in respect of issues such as the submission of trades with a historic date unless the c/party is instructing. In such cases, the local CSD cancels at end of day if no instructions received and prevented from instructing for a past value/settleme nt day Rules regarding repos trade can only fail for 7 business days before EC France cancel it inappropriate behaviour (inconsistent with repo agreement). Matching of instructions at the depository is at sicovam systems do not reject the order) considered as being not a measure of true efficiency as local agents do not submit transactions into RRG for at Monte Titoli if the c/part does not have the position (unless the participant operates a segregated account at the agent). This results in a subset of transactions that are excluded from the net cycles and hence may impact overall efficiency. The reliability of Monte Titoli to match and settle trades on value day has consistently underperforme d in comparison to the market Trades that fail at the end of the RTGS cycle ( the last to run on value date) are not left at the depository for the next day. It would appear that most agents pull the instruction at the end of and process you are not given the opportunity to partial settle if the situation arises i.e remain long of bonds and have a full failed sale (opportunity cost) (Acentada)

8 account level hence it is quite common to cross match and settle. As a result of this brokers can have a settled trade on their books yet their client has not received the securities. re-prematch the following day, submitting into the RTGS cycle of s+1. The messaging system within Monte Titoli does allow for participants to flag the number of days that they want the instruction to exist. It would be more efficient to leave the instruction out there, avoiding re-work. Primary market issuance is not eligible for in the net cycles. Instead, the initial take down from the Lead and subsequent secondry market sells appears to settle in RTGS. It would be better to settle in the net cycles, in central bank money 8. Book entry depositories

9 Euro-zone Tier 2 (including Switzerland & UK) Austria Finland Greece Luxembourg Portugal Switzerland UK 1. Regulatory / Legal / Fiscal Relationship Yield calculated using Annual Method. Accrued interest on actual/actual basis Requirement to set-up individual local accounts/ids for custody clients Accrued interest calculated on actual/actual basis. Income forms plus certificate of beneficial ownership forms are required on all coupons. No reclaim process is in place Accrued interest calculated on actual/actual basis. Regulation of fails and buy-in penalties are inconsistent with international standards (e.g. right for buyer to cancel or renegotiate trade if it fails). payment instructions are limited to maximum payments of 100 MN Tax withheld at source, reclaim required 2. Sovereign Relationships Transaction reporting required via CREST (rather than via ISMA) in addition to trade reporting Stamp Duty on certain fixed income transactions which causes processing problems in ICSDs 3. Trading Venues - ECNs, IDBs web based auction via HDAT application for platform auctions Auction process by Fax and phone 4. Central Counterparties (CCPs) Clearing and Settling No CCP No CCP No CCP LCH trades require possible through manual matching! LCH.Clearnet 5. Third party Market Clearing (Agent Banks) If traded on Vienna SE; Clearing and settling via Oesterreichische Kontrollbank AG. If traded on Paris/Frankfurt; clearing and settling via Euroclear and Clearstream. Settle T+3 6. ICSDs X-Border instructions are automatically deleted on S if they are not executed / settled. These need to be instructed again Settlement of debt traded on MTS occurs through Euroclear and clearstream. Bonds settle T+3 Bills settle T+2 Bonds Traded through MTS are settled via Bank of Greece. Bonds settle T+3 T-Bills settle T+3 Realignment process between Bank of Greece and Euroclear is not realtime Settlement Through Euroclear and Clearstream Bonds settle T+3 Bills settle T+2 Number of batches between SIS and CBF need to be extended Realignments between Euroclear bank & Domestic have to be instructed against payments this can cause

10 manually the following day funding issues 7. CSDs Batch processing between OEKB and Euroclear is limited to only one window in the morning for which instructions have to be submitted before a.m. this impacts x-border activity and could subsequently lead to EC borrowing Settlement deadline currently already at 2.00 p.m. CET this limits disposition opportunities with Euroclear OTC trades are treated differently to market trades (HDAT) of market trades are mandatory, shortfalls are compensated automatically by Bank of Greece Matching of OTC trades are not mandatory. Therefore can lead to forced borrowing Netting opportunities are not prioritised and are processed at the end of the cycle funding deadline differs considerably to the deadline (funding deadline at 1.00 pm. But deadline at 5.00 p.m.) this makes realtime funding impossible The ability to freeze and unilaterally cancel matched trades hinders the management of cash positions and forecasts. Lack of self collateralisation makes access to Central Bank money more expensive. Online Instructions submitted via Crest GUI do not require a verification from a second person (4- eyes principle is not applicable) ISO15022 messages are not available for all operations, preventing generic SWIFT interface (requires proprietary messaging infrastructure). 8. Book entry depositories

11 CCE & Nordic Denmark Czech Rep. Hungary Norway Poland Sweden 1. Regulatory / Legal / Fiscal Relationship Tax withheld at source, no reclaim process in place In general Accrued interest calculated on actual/actual basis. Except for three year floating bonds issued for retail where day count basis equals the number of days in year in which coupon period commences Client specific account structure requires individual accounts for segregating bonds for each client 2. Sovereign Relationships 3. Trading Venues - ECNs, IDBs MTS Denmark Mainly OTC Prague SE Bloomberg Bond Trader NewEuroMTS 99% trade OTC Budapest SE NewEuroMTS No electronic platforms (TBC) 95% trade OTC MTS-CeTO Warsaw SE Benchmarks > 1bn trade via NewEuro MTS MTS Quasi 4. Central Counterparties (CCPs) No CCP No CCP No CCP No CCP No CCP 5. Third party Market Clearing (Agent Banks) Bonds Settle T+3 T-Bill settle T+0 T-Bonds clear and settle through UNIVYC T-Bills clear and settle through short term bond system of Czech National bank. Bonds Settle T+3 T-Bill settle T+0 Bonds and Bills settle delivery versus payment at the Central Clearing House and Depository(Budapest Ltd) Bonds and Bills settle T+2. Mainly trade OTC T-Bills settle via Register for Securities maintained by National Bank of Poland(KDPW) Bonds clear and settle through National Depository for Securities. Bonds/Bills settle T+2

12 6. ICSDs There is no clear preference in the market place to settle domestically or Euroclear which require additional disposition effort 7. CSDs There is no clear preference in the market place to settle domestically or Euroclear which requires additional disposition effort Bonds are ineligible at EC Pre-Matching needs to be completed on S-1 but in exceptional cases can be extended to S if both parties agree The funding deadline is before the deadline so that funding cannot be performed on real time figures Bonds are ineligible at EC Maximum denomination of 500MM bonds 8. Book entry depositories