WHAT'S UP WITH THE LEGAL ENTITY IDENTIFIER?

It’s been a while since the need for recognizing legal organizations and their related entities has been identified. There have been a number of announcements on initiatives but little definitive movement on a coordinated global response to LEI.

Remember that it was difficult to determine their exposure of derivative trades especially for firms, like Lehman, that were facing a credit crisis. The initial drive for LEI was the Dodd Frank Act (DFA) and European Market Infrastructure Regulation (EMIR). Their focus was to reduce counter-party and systemic risk related to derivatives trading and settlement.

February 12^th was the date for SWAP trades to be processed with LEI. Problems were expected but the news about this event has been sparse.

What are your thoughts, good, bad or neutral, concerning global legal entity identifiers?

                        Are the regulators ready to respond to reported anomalies?

                                 Should a global identifier be extended to other assets?

SUPERVISORY COLLEGES FOR INTERNATIONAL CREDIT RATING AGENCIES

These organizations were established as a result of recommendations that the International Organization of Securities Commissions (IOSCO) made in their final report published in July 2013.  Supervisory Colleges for International Credit Rating Agencies creates a mechanism for sharing and discussing information regarding:

• Compliance with local or regional laws and regulations
• Implementation of, and adherence to, the IOSCO Code of Conduct for CRA
• Establishment and operation of rating models

•  Methodologies, internal controls, procedures to manage conflicts of interest
• Procedures for handling material non-public information
• With the goal of promoting better understanding of the risks faced or posed by international CRA and how relevant supervisors are addressing these risks

One lesson learned, was that credit rating agencies face conflicts. The Supervisory Colleges are a creative approach to avoiding similar missteps.

The colleges for S&P and Moody’s will be chaired by the Securities and Exchange Commission (SEC) and the college for Fitch will be chaired by the European Securities Markets Authority (ESMA. The SEC

              What’s your opinion about the need for supervision of credit rating agencies?

     Is this an appropriate response?

What are the critical best practices for the CRA?

CENTRAL SECURITIES DEPOSITORIES (CSD) - THE FUTURE OF LOCAL CSD

How will the announcement by the London Stock Exchange (LSE) to create a Central Securities Depository in Luxembourg impact local CSD? 

Today, most CSD are country-based service centers supporting local market participants via immobilization or elimination of physical certificates, providing book entry trade settlement, collecting interest and dividend payments and processing corporate action. Currently little or no interface to other local CSD is available.

The current local CSD infrastructure requires global participants to join multiple CSD to establish a first-hand presence in local marketplaces. This is expensive beyond multiple membership fees. It requires additional record-keeping, compliance with local regulations, increased risks if regulations don’t offer sufficient protection and additional interface applications.

There are two International Central Securities Depositories (ICSD), Clearstream and Euroclear that address some of inefficiencies of local CSD. They offer services across multiple marketplaces and offer centralized reporting. The LSE announcement adds another ICSD entity for global participants.

                What is the ideal CSD? (Local, International or a combination)

                            Should it be member or privately owned?

                                          How should they be regulated?        

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?