We had the final 2012 plenary meeting of the Financial Services Club Clearing & Settlement Working Group (CAS-WG) yesterday.
Well attended by industry luminaries, the debate was all about the usual stuff: regulations, standards, risk, issues, frustrations and opportunities.
What was particularly interesting for me is that we now have three subject groups working in unison to solve many of the issues and frustrations in order to identify and leverage the opportunities.
A wave of regulatory change
First, there is a Regulations Subject Group that has started to map out the issues in regulatory conflicts and overlap.
This is being achieved by mapping out a complex cube of regulatory change (doubleclick image to enlarge).
The cube will outline how each regulation impacts each part of the post-trade lifecycle mapped against the participants the regulation affects.
This is a major piece of work, but is intended to determine where cross-infection of regulations occur.
A cross-infection is where there is a mismatch in requirements between one regulatory change and another.
The Short Selling Regulation requires that LCH imposes penalties and buy-ins on anything that clears on EquityClear but equity trades are also captured by the CSDR, and its settlement discipline regime.
The result is that a UK equity trade clearing at LCH and settling at Crest will be hit by two sets of regulatory overhead for the same trade: once at LCH under short selling and a second time at Crest under CSDR.
The debate about regulations went on for some time as John Fortescue, VP Prime Services at Credit Suisse Securities Europe and Dave Grace, Post-Trade Securities Strategy for Global Operations at Barclays Bank, discussed EMIR (the European Market Infrastructure Regulation), Dodd-Frank, MiFID II and more.
As per our previous discussions, collateralisation and real-time collateral management between exchange venues will be a critical differentiation factor in the future, as will being able to respond and react fast to change.
But a piece that came up yesterday that was new is the idea of breaking apart global operations and services and going regional.
This came in light of the EU moves towards transaction taxes and a Banking Union, whilst the UK works more closely with the USA on harmonising approaches to breaking up failed banks for example.
Meanwhile, the UK’s Financial Services Authority (FSA) also appears to be gold plating some regulatory requirements, as usual, which means that there are global, regional and national frictions at all levels.
For the banks, buy side and intermediaries, this means complete confusion.
This has been noted in many news sites, but most recently an article in the Harvard Law School Forum provided great insights into the similarities and differences.
As the article notes, there is a great degree of commonality of approach between the EU and the US, but some important differences.
For example, “while both regimes envisage registration and conduct of business rules for dealers, the US regime extends rules and capital requirements to major swap participants (MSPs).”
Similarly, “the US regime requires the execution of OTC derivatives subject to the clearing obligation on a swap execution facility or designated contract market ... in the EU, these issues are being addressed separately as part of the legislative proposals to replace MiFID.”
Finally, “the EU regime has no equivalent to the US ‘push out’ rule restricting the derivatives trading activities of banks, the ‘Volcker rule’ restricting the proprietary trading operations of bank groups or the provisions allowing regulators to restrict bank ownership of CCPs.”
Read the whole article if you want to know more.
As can be seen, the regulatory aspects of clearing and settlement is a key aspect of change in the post-trade world.
Market Infrastructure Change
Following the regulatory discussions, we had a close look at market infrastructures from the Subject Group Chair Kathleen Tyson-Quah.
What was interesting here is that this group is also modelling and identifying how the markets are related and managed by mapping out the order flows between the various post-trade venues.
The Group have built a tool – the Enriched Market Infrastructure Illustration Tool http://emiit.info/ - which shows how each of the exchanges clears with each CCP and CSD (doubleclick image to enlarge).
The aim, over time, is to map out the flows of volumes and values across these venues, which would give the markets and regulators a clear view of where the greatest exposures and systemic risks appear.
The idea of the website is that this is populated by the venues themselves and the Subject Group over time, to become a wikisource of information about the clearing and settlement flows across the City and global markets.
This was similarly supported by the Technology Standards Subject Group, jointly chaired by Virginie O’Shea of Aite Group and Graeme Austin of ISITC Europe.
This group is focused upon LEIs and ISO17442, which became the source of a great discussion, as Andrew Douglas of the DTCC discussed what was happening in this space.
For example, Andrew presented a slide that discussed the USA Commodity Futures Trading Commission’s (CFTC) Swap Record Keeping and Reporting Rule (Part 45).
This is the rule that determined to standardise Legal Entity Identifiers (LEIs) according to the forthcoming rules being laid down by the G20.
The CFTC, as part of Dodd-Frank, implemented this first in the form of a 20 character alphanumeric field called a CICI (CFTC Compliant Interim Identifier).
Unfortunately, this almost derailed the standardisation of these identifiers as it meant that the rest of the world saw CICIs as being an American, rather than global approach. However, as noted at previous CAS-WG plenaries, the convergence of CICI and ISO rules has resolved these concerns to a lesser or greater degree.
The dialogue went around a number of other issues in this space:
- tracking and reporting to trade repositories,
- how many trade repositories will emerge (seven is best guess),
- the concerns of concentration risks of consolidated CCP operations (although right now, CCPs are fragmenting as there are now 23 in Europe alone)
It occurred to me as this discussion swirled around the room as to how all of this is interconnected and why the Working Group and Subject Groups have moved onto the right track.
First, we have a group mapping the relationships between trading venues and operators; second, we have a map of the regulatory structures and how they impact the venues and operators; and finally we have a focus upon the technical requirements to implement the changes required, and how to resolve or highlight those areas where there are gaps or issues.
So, that’s a wrap for 2012.