CENTRAL COUNTER-PARTIES (CCP) – HOW MANY ARE NEEDED?

With the global focus on reducing counter-party risk the number of central counter-parties has increased in recent years. CCP play a major role in ensuring safe markets and best practices. Their primary purpose is to mitigate risk between trade counter-parties. CCP traditionally provide a broad range of services to support their members. These services may include; trade reporting, trade comparison, collection of margin or clearing deposits.  

As new regulations take effect there may be an increase in the number of CCP.  The industry relies on the CCP to ensure that counter-parties perform as expected. The CCP becomes a critical component during market price swings, asset class scandals and CCP members face market, internal operational or technology challenges. CCP require broad business expertise and technology platforms to enable their ability to recognize, address, contain and resolve these challenges before the “knock-on” impact on CCP other members?

The industry, as well as regulators, continues to address these as well as other issues. It would be helpful for all market participants and regulators to identify and address these issues on a proactive rather than reactive basis.

What’s ideal CCP ratio for a marketplace, transaction or asset class?

Should the costs associated with a CCP be an issue?

What other CCP related issues are you concerned about?

FINANCIAL TRANSACTION TAX (FTT)

Now scheduled to go into effect in mid 2014 if the there is an agreement before the end of 2013 if addressed .by member states.

Additional revenue is always welcomed. Harmonization of taxes across the EU is also a positive step. Another purpose of the tax was for the financial services industry to pay back some of the money they received during the credit crisis.

But will the imposition of this tax drive participants and / or transactions to offshore markets?  Will all transactions be taxed? What about financing transactions such as “Repos” and transaction types that don’t currently exist?

A new tax sends a signal to the business affected and often has negative consequences.  I have seldom seen a new tax or fee that has raised the estimated revenues. In this era of global markets perhaps a better alternative is to reduce or eliminate existing taxes to attract new business raising income levels and in-turn tax revenues.

The following questions must be addressed before proceeding to provide clarity and ensure that undesired effects are avoided.

Does this tax really make sense?

What‘s the purpose?

   What can the unintended results be?

TRADE DATE + ? SETTLEMENT

The greater the number of days between trade and settlement dates the greater the risk of failure and higher costs to industry participants

It appears that the global industry has chosen Trade Date + 2 (TD+2) as the new standard for trade settlement. Does this make sense in 2013? I don’t believe so….The standard should be trade and settlement the same day (TD+0).

Why does it take longer than a day to settle a trade? Most trades are executed in automated markets. Today there are central securities depositories, so physical certificates don’t move as they once did in the “old days”. And investors wire funds on a same day basis to, or maintain balances with their, brokers to effect settlement. So, why do we need more than a day to settle a trade?

I appreciate that the migration to TD+0 will greatly impact investors, operations, industry infrastructure and technology organizations. But it is time for the global industry to admit that each incremental reduction introduce risks and doesn’t really deliver the benefits that TD+0 will.

Any reduction in the time between trade and settlement requires global coordination to avoid havoc for investors and industry infrastructure organizations. It seems that it is simpler to do this once and limit the inherent risks from multiple reduction cycles.

In addition, all participants will need time to plan and implement the operational and technology changes to support the new schedule. This includes investors, brokers, banks, custodians, prime brokers, central securities depositories, clearing corporations and the regulators.

What are your thoughts about this?

Agree….or ….. disagree – why?

 

              Is there a better way?

COMMON BACK OFFICE – IS IT TIME?

I am amazed by securities industry firm’s technology budget allocated to post trade activities. Granted that these activities are critical, but the fact is that there is very little value-added that differentiates one firm’s process versus another’s from an investor or industry perspective.

A shared back office (SBO), established as an industry owned utility can internalize and process all these activities delivering efficiencies, reduced risk and considerable cost savings. Additional benefits of a shared back office include;

1. Free up capital, now allocated to back office technology projects, for client service enhancements and revenue generating products and services

2. Improve post trade process efficiencies

3. Reduce the number of transaction processed

4. Ease the transition to a shorter time between trade and settlement

5. Generate timely and accurate metrics for industry participants and regulators

Though this would be a major change, the industry has faced similar challenges with great success. This change is similar in scope to the establishment of Central Securities Depositories (CSD). This resulted in brokers and banks moving physical securities from their vaults to the CSD so that the certificates could be immobilized. This was a step towards eliminating movement of physical stock certificates between industry participants.

This change appears to be a “win, win” for the industry. Of course we need to select the organization that would provide the service and define responsibilities of the members and service provider.

             What do you think about this - If no, why not - If yes, it should it be 
              provided?

        What organizations should coordinate development of this service?

                  What are the benefits and / or downside?

BUY-SIDE - LEFT OUT IN THE COLD

Why has the Buy-side been left out of a process that reduces transaction volumes and protects the securities industry via time-tested risk mitigation processes?

That the buy-side doesn’t participate in the post trade date process, that protects street-side participants and ensures timely and accurate settlement, is an oversight by the industry as well as the regulators. Post trade processes evolved, from the early 1970’s, originally driven by the paper work crunch of the late 1960’s. Today these processes ensure that the industry is safe and capable of supporting substantial growth in trade volumes. These processes include trade comparison, trade netting and settlement.    

But the infrastructure only protects the street-side which leaves buy-side participants outside the process. In turn this exposes the street-side to risk of settlement failures and the need to process additional transactions volumes.

There are alternative methods of buy-side participation; one where the investor would become a member and participate directly. Another is having the investor’s Custodian or Prime Broker represent the investor and participate on their behalf. Both alternatives would require some accommodation by the industry infrastructure and the Buy-side but it would be a “win-win” for everyone.

What are your thoughts?

Do you agree…..or…… disagree?

                             What are the benefits or disadvantages?

HOW DO WE IMPROVE BUY-SIDE TRADE AFFIRMATION RATES? – UNITED STATES

The current affirmation rate for institutional trades is about 80% in the US. In this day of no-or low touch trading and automation this is an anomaly and delays trade life-cycle process improvements. In addition it may be contributing to higher costs.

It’s crucial that the industry, both buy-side and sell-side participants, address the issues that are blocking a 100% affirmation rate. This will deliver control and cost benefits to all participants and make the process safer and timely settlement predictable.  

What drives the Buy-side lack of interest in proactively participating in a process that ensures that the trade will settle as expected and at the same time adds a level of safety to the process? This raises certain questions:

Why isn’t the Buy-side motivated to participate in this process?

Do they understand the importance of the confirmation / affirmation process?

What needs to be done to achieve 100% affirmation by T+!?

MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE II (MIFID II) - GLOBAL

Though many believe that version II is more stringent than the version I, version II does address many of the issues that will provide and strengthen investor protection, leverage the technological advances including new market-places and the resulting data fragmentation.

One issue that concerns the Buy-side is the official response to dark pools. Recent attention on this trading marketplace has focused on negatives aspects of dark pools. This has heightened Buy-side attention as they believe that dark pools offer distinct advantages. I have confidence that the Council will weigh the upside and downside of dark pools. They need to protect the integrity of the market but also must maintain the benefits provided by alternatives trading systems.

Also it is critical to move faster than the expected 2014 / 2015 implementation date.  A two- year gap leaves too much time for new technology to increase or further impact the business resulting in practices with dire consequences. Instead a more evolutionary solution of regulatory changes, on a timely basis, to address current and evolving challenges will deliver faster solutions to market unbalances and level the playing field for all market participants.

Another challenge is ensuring that the Buy-side is involved and encouraged to offer opinions and hopefully contribute to the resolution.