euroclear moves france

8/13/2019 Euroclear Moves France

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Euroclear moves France, Netherlands and Belgium to T+2settlement

Euroclear will move the Paris, Amsterdam and Brussels markets to T+2 settlement

Securities trading in France, the Netherlands and Belgium is to move to T+2 settlement in October 2014,

following a decision by Euroclear to pre-empt Europe-wide settlement reforms.

Euroclear runs the central securities depositories across large parts of Europe, in which securities are settled

after a trade. T+2 settlement means that securities transactions settle two days after the trade date, rather than

three as at present. The move pre-empts the proposed 2015 start date suggested in the European Commissions

pending CSD Regulation for T+2 settlement across the European Union. It also pre-empts the European Central

Banks T2S platform, due in 2016, which will also operate T+2 settlement.

Euroclears central securities depositories in France, the Netherlands and Belgium will be the first to move.

Euroclear Finland, Sweden and UK & Ireland are also considering a switch to T+2, with recommendations and

timelines expected during 2014.

The concept of a shorter settlement cycle across Europe has its roots in the work of the Giovannini Group in

2001-3, said Valrie Urbain, chief executive officer of Euroclear Belgium, France and Nederland. We concur

with the Association for Financial Markets in Europes recent findings that a move towards a shorter settlement

cycle will increase operational efficiency, as well as drive down counterparty risks. After extensive

consultationwe took the decision to commit to T+2 settlement now and to make the transition earlier than

required.

The AFME study referred to by Urbain, Impacts of implementation of T+2,was published in May 2013 and

suggests that T+2 settlement will reduce risks post-trade. The document recommends that T+2 implementation

should precede T2S in June 2015, to allow market participants time to prepare. It also notes that affirmation,

allocation and confirmation will need to take place on the trade date, with pre-settlement date matching preferably

on the trade date and taking place on T+1 at the latest.

Urbain added that the Euroclear CSDs are ready to settle in T+2, but acknowledged that making the changes

suggested by AFME would require a period of time for market participants to adjust.

Previously, most of Europe had operated on a T+3 model. The main exceptions were Germany, where German

CSD Clearstream has operated T+2 settlement for many years, and Russia, where T+0 settlement has been the

norm. However, in the case of Russia, the creation of a single CSD called NSD in late 2012 heralded the first

step in a move towards T+2 settlement. According to the Moscow Exchange, all stocks, RDRs and sovereign

bonds will be moved to T+2 in September.


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Comment: Europe faces

Settlement raceWith a host of European regulation coming over the next year, its difficult to know what requires immediate

attention.

In the last couple of weeks, the big focus has been on the progression of Mifid II, but market participants may

need to address aspects of a lesser-known incoming regulation far earlier than they realise.

European policy makers are putting the finishing touches tonew laws around settlement,contained in the Central

Securities Depositories Regulation (CSD-R). One of the most significant measures contained within in it is the

harmonisation of European settlement cycles, the period after a trade has been executed. Currently it is usually a

two or three day timescale and Europe wants a uniform period of two days. The switch, known in the industry as

T+2, is due to come fully into effect in January 2015.

But in reality this change will have to be put into practice in just over a years time. This is because the

implementation of T2S,a project with a similar-sounding name but one which the European Central Bank has

predicted will have a transformational effect on Europes financial markets.

Although the ECBs plan comes into effect in June 2015, it requires market participants give themselves ample

time to test the new system. Those tests are contingent on Europes settlement cycles being harmonised to T+2

in summer next year.

The two cannot be implemented separately. Paul Bodart, a member of the T2S Board at ECB was unequivocal

about the importance of shortened settlement cycles to T2S when he said at a recent Omgeo event, Shortened

settlement cycles and T2S go hand in hand. Trading with different settlement cycles will increase risk and failure,

the move to harmonised settlement cycles is critical.

This point was also highlighted in a recent report from the Association for Financial Markets in Europe, which

concluded that the optimum time for the introduction of shortened settlement cycles to T+2 was between August

and November 2014. Ultimately, this means the industry needs to start preparing for shortened settlement cycles

now.

As AFME also identified, one of the main prerequisites for achieving shortened settlement cycle is the need for

market participants to verify trades on the day they are executed. The shorter the time it takes for the two parties

to agree on the price and quantity details of their trade, the faster the trade can be settled. AFME also noted that

this process needed to be automatedwhich means that some institutions will have to significantly reengineer

their internal processes, which may incur costs.

But the rewards will be worth it because CSDR will bring three significant benefits to the securities industry:

reductions in the numbers of failed trades; a reduction in counterparty risk and more efficient use of collateral.

Faster verification of trades will significantly reduce counterparty risk since the economic details of a trade will be

agreed between counterparties more quickly. Given the volatility we are currently experiencing in both the equity,

and fixed income marketswhich looks likely to continue as central banks begin to exit stimulus programmes

acceleration of the settlement cycle becomes even more important.

Second, a reduced settlement cycle from three days to two will mean that clearing brokers will have less risk

exposure to their underlying clients. Finally,much-needed collateral for trading will be freed up as market

participants will only need to post margin with their clearing brokers for two days rather than three.
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This last point in particular will be welcomed by those concerned by the impact on the market of regulation that

will require more over-the-counter derivatives to be cleared.

Finally, it should not be forgotten that CSD-R propose fines for late settlement. The exact levels of punishment

have yet to be determined but the most likely penalty for counterparty which does not deliver the security within

the two-day settlement timeframe would be a cost relating to a buy-in.

As envisaged, if a trade does not settle, the market infrastructure operator would buy back the asset in the

market at prevailing market price, and then deliver it to the non-defaulting party. The defaulting counterparty

would incur the cost of this. If a buy-in is not possible, cash compensation would be paid instead.

The draft CSD-R also contains provisions for market infrastructure operators to report settlement failure statistics

to their regulators and also publish annual statistics for rates of trade failure. It also proposes that participants

who consistently and systematically fail to deliver can be suspended.

Being ready early, with all systems and processes tested, will save the risk of such costs being incurred. With just

over a year before harmonised and shortened settlement cycles are introduced, market participants should start

to prepare now if they wish to reap the benefits which it will deliver and avoid the financial penalties should they

not be ready.

Marianne Brown is chief executive of Omgeo, a trade processing group jointly owned by the Depository Trust and

Clearing Corporation and Thomson Reuters

EU to reduce settlement period for securitiesFrom 1 January 2015, securities transactions in European Union

regulated markets will have to settle no later than the secondbusiness day after trading takes place. This will shorten thesettlement cycle by a day in most member states, creating anumber of benefits but also some difficulties.

When the Central Securities Depositories Regulation (CSDR) comes into effect from 2015, it will create a

common regulatory framework for securities settlement across the European Union (EU).

One of its key measures is the harmonisation of the maximum settlement period for securities transactions at two

days after the trading day, T+2, and even shorter periods will be allowed. Most EU countries currently settle on

T+3, though a few, including Germany, are already on T+2.

After the 2008 financial crisis, the European Commission decided that national CSDsas key institutions

performing the vital post-trade process of securities settlement, as well as maintaining records of securities

accounts and transactionsneeded to harmonise their practices and improve the safety and efficiency of

transaction settlement.


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Central Securities Depositories (CSD) operations are generally safe within their countries, but when handling

intra-EU securities transactions the risks, likelihood of 'fails' and costs increase. Also, a longer settlement cycle

creates a longer period of counterparty risk exposure. Harmonisation through the CSD Regulation will help create

a true, open single market in CSDs and settlement, reduce the risks, improve efficiency and reduce costs.

The CSDR has three key components. First, it requires transferable securities issued by companies to be

dematerialised (ie kept in electronic rather than paper format) or immobilised and represented in book-entry form

on a CSD before they can be traded on regulated trading venues. This requirement is anticipated to come into

effect on 1 January 2020.

Harmonisation through the CSD Regulation will help create a true, open single market

in CSDs and settlement, reduce the risks, improve efficiency and reduce costs

Second, as already stated above, it harmonises securities settlement periods at a maximum of two days after the

trading day, T+2, across the EU. This requirement comes into effect on 1 January 2015, in time for the launch of

Target2 Securities (T2S) in June 2015. T2S is the provision by the European Central Bank of a central settlement

function for securities in central bank money in the euro area, with other European currencies invited to join.

Third, it introduces a common set of rules to harmonise 'settlement discipline' across the EU. These consist of ex

ante measures to prevent settlement fails, and ex-post measures to address settlement fails.

The CSDR dovetails with two other important regulatory developments in the securities sector: the second

version of the Markets in Financial Instruments Directive (MiFID II), which regulates trading venues; and the

European Market Infrastructure Regulation (EMIR), which regulates central counterparties and trade repositories,

especially in relation to over-the-counter (OTC) derivatives transactions.

T+2 the detail and the rationale

As stated above, the CSDR requires the intended settlement date to be no later than on the second business day

after the trading takes place. Elsewhere, the CSDR sets out that longer settlement periods of transactions in

transferable securities cause uncertainty and increased risk for securities settlement systems participants, and

that different durations of settlement periods across Member States hamper reconciliation and are sources of

errors for issuers. The CSDR states that it is therefore necessary to provide a common settlement period which

would facilitate the identification of the intended settlement date and facilitate the implementation of settlement

discipline measures.

The history

The first Giovannini report, published by the European Commission in 2001, recommended that settlement

periods should be harmonised across the EU. Meanwhile in the US at about the same time, the Securities

Industry Association (SIA) embarked on a project to examine the feasibility of moving to T+1, but decided it would


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not work due to the high use of paper and low levels of straight-through processing in the industry, and the fact

that foreign exchange settled on T+2.

The problem of long settlement cycles was highlighted by the 9/11 attacks in 2001 and the collapse of Lehman

Brothers in 2008, both of which left billions of dollars of securities transactions in the pipeline waiting to be

settled, creating hazardous levels of counterparty exposure.

The European Commission set up the Harmonisation of Settlement Cycles Working Group in 2009. The group

decided that T+1 would not work for the same reasons identified by the SIA, along with the fact that less batch

processing could be done and that it would create difficulties for trades involving counterparties in distant time

zones. The group therefore recommended T+2, which would harmonise with foreign exchange settlement

periods. Most of the EU operates to T+3 though Germany, Slovenia and Bulgaria are on T+2.

The US and Japan currently operate on a T+3 settlement cycle, Hong Kong is on T+2, and Russia is following

suit. The US will probably move to T+2 in the near future. Last year, the US CSD, the Depository Trust &

Clearing Corporation (DTCC) commissioned Boston Consulting Group to look into the costs and benefits of

shorter settlement cycles. It estimated that the costs of moving to T+1 would be so high that it would take 10

years for the costs to be recouped, whereas for T+2 the payback would come after three years.

The implications

For domestic electronic securities transactions in the EU, T+2 will have little impact, as most market participants

could already settle mainstream securities in two days if they needed to. For cross-border trades and less liquid

securities, especially those involving paper, there will be significant benefits of moving to a two-day cycle, but

also some potential challenges.

The key benefits, as I have already suggested, are:

Reduced counterparty exposure and, in turn, less systemic risk

Harmonisation of the rules across the EU, leading to greater certainty and clarity, increased efficiency and lower

costs in the long term

Greater efficiency and lower risk through 'dematerialisation' under CSDRelectronic records replacing paper

documentation

The possible challenges include:

The short-term costs and risks of dismantling existing practices and complying with new practices

Certificated trades possibly becoming harder to process

Overnight batch processing of trades having to become more efficient if they are to be completed in time

Communications with counterparties in different time zones, especially in Asia and the Americas, becoming

compressed


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Securities lendingstock that has been lent, especially down several layers, may be difficult or impossible to

recall in two days. Germany has been on T+2 for some time and its securities lending market functions well, but

other countries may have a different experience

Market participants that fail to deliver securities within four days of the agreed settlement date will be subject to

penalties, and will have to buy those securities in the market and deliver them to their counterparties

Looking ahead

Securities firms will need to take into account a number of wider operational and strategic business

considerations. In particular, shorter settlement might lead to more rapid trading and higher volumes. It could also

free up additional capital, because capital tied up in counterparty exposures could be released earlier.

Currently most trades are settled in batches and netted overnight, with firms having until the evening of T+2 to

get trades into the last batch and then settling the remainder in real-time on T+3. Under the new regime, the last

batch will be at the end of T+1, which could mean fewer trades making the batch (and therefore fewer netted),

and more settled in real-time on T+2. Longer term, batch processing itself may need to be reconsidered in favour

of earlier and more frequent real time settlement, in order to promote efficiency.

For all the potential drawbacks of shorter settlement, they should be outweighed by the benefits. As for

implementation, the move from T+5 to T+3 went smoothly, and there is every reason to expect that the migration

to T+2 will be successful too.

euroclear moves france

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