Paul Blank and I spent yesterday afternoon in the comfortable surroundings of the BT Centre auditorium in Newgate Street at the inaugural meeting of the Clearing and Settlement Working Group (CAS-WG).
Conceived by Chris Skinner of the Financial Services Club, Chris Pickles of BT and the directors of the Realization Group, this is an attempt to start something similar to the successful MiFID joint working group but for clearing and settlement. We went along, not because we thought we had anything to contribute, but believing we could learn something about what happens after someone clicks a “buy” or “sell” button on one of our clients’ single-dealer platforms.
UPDATE: A detailed write-up of the meeting, with photographs, is now available on the Financial Services Club blog.
Dealing with the regulatory fire-hose
It appears that, just as in pre-trade, the post-trade world is having to deal with a torrent of new regulation. The CAS-WG is an attempt to establish a consensus in the industry over how to implement technology to deal with the demands of the regulators before the regulators impose something unacceptable and expensive on the industry. There were representatives from the LSE and BBA as well as UK regulator the FSA; interestingly some other regulators indicated they didn’t have the technical expertise to get involved. This clearly indicates that some regulators may not be considering either existing technology or what’s technically feasible in drafting regulation.
The intention is that the CAS-WG formulate a plan for how the regulators’ objectives can be achieved with the least impact on the technology systems, and costs of market participants. To do this it will have to not only pre-empt the detailed regulation, but involve the regulators along the way.
Why were we there?
Our interest in this area is a consequence of some of the new regulation from the US (Dodd-Frank) and Europe (EMIR) which is going to force some instruments to be traded through SEFs and OTFs and cleared on CCPs. Paul has written extensively about the impact of these regulations on this blog, and discussed how some banks are looking to use their single-dealer platforms to route transactions to the appropriate venue where the bank isn’t permitted to execute the trade itself. But a client’s choice of venue and clearing house may mean that the bank will have to present different prices for the same trade depending on who has a relationship with whom, and whether clearing is included or not.
So regulation and post-trade relationships are likely to impact whether, and at what price, a trade can be presented to a particular client pre-trade. Post-trade issues will therefore have an impact on how Caplin’s clients design their single-dealer platforms.
Interesting facts (at least for me) that came out included:
- New regulations seem to concentrate risk with CCPs – which may be counter productive
- Consensus was that the Buyside is least prepared for these regulatory changes, in particular for posting necessary collateral
- Demands for collateral are likely to suck liquidity out of the system
- It costs 8 times as much to settle a trade in Europe as it does in the US
- Fixing this will increase settlement costs in the short term
- UK and Switzerland have opted out of Target 2 for Securities (T2S) – an initiative to settle all European trades T+2
- T2S is multicurrency (EUR, DKK, RON)
- Most of the 15 (or were there 16?) Giovannini barriers to European cross-border trading have been solved or circumvented, but perhaps not as originally envisaged
- International standards bodies (FPL, SWIFT, ISDA) have already published a technology roadmap which is being implemented
Full coverage of the event has now been published by The Financial Services Club (FSC) on their blog here
The next plenary session of the CAS-WG is scheduled for the end of May. If you’d like to get involved just drop a line to email@example.com and someone will get back to you.