The harmonisation of post-trade processes has been an ongoing project in the European securities market for some time, but has enjoyed only varying degrees of success. Optimists hope that the European Commission’s Capital Markets Union (CMU) initiative will provide new impetus. Far-reaching policy programmes such as CMU are happening at a time of enormous technological innovation in areas such as data management and distributed ledgers which may provide new opportunities for process efficiency and harmonisation.</p> In terms of recent efforts toward standardisation across Europe’s securities markets, the Central Securities Depository Regulation (CSDR) has effected adoption of T+2 ahead of migration to TARGET2-Securities (T2S), the European Central Bank’s (ECB) pan-EU single settlement platform. The third wave of migration took place in mid-September, with central securities depositories (CSDs) from Belgium, France, Netherlands, Luxembourg and Denmark linking up. Nine more CSDs will connect next year, making 21 connecting to T2S by September 2017.</p> A survey at Monday’s ‘EU securities markets transformation – Is the glass half empty or half full?’ session revealed that 54% of the audience believe CSDs will be most impacted by T2S, while 36% anticipated that the strongest effect would be felt by sub-custodians. Sub-custodians, particularly those operating in single markets, have been alarmed by the competitive forces unleashed by T2S and CSDR. By providing a single entry point for European securities settlement, T2S enables global custodians to forego establishing sub-custodian relations in many local markets. Moreover, a handful of local market CSDs are launching asset servicing services in competition with sub-custodians.</p> “T2S could be challenging for banks which operate as single market sub-custodians. But it will be broadly positive for multi market sub-custodians and will increase competition. This will help organisations remove inefficiencies,” said Mathieu Maurier, global head of sales and relationship management at Societe Generale Securities Services</strong>.</p> Removing barriers</strong></p> While T2S removes a number of the hindrances to harmonised securities clearing and settlement identified by the Giovannini Group at the turn of the century, it will not erase them all. CMU may help, via its mandate to review and remove regulatory barriers to market-based finance. As part of its efforts to help mid-tier firms source nonbank funding more easily, for example, CMU will ease the provisions around prospectuses contained within the Prospectus Directive.</p> “There is a general concern about overreliance on bank financing throughout the EU, compared to the US. We need a more intelligent use of capital markets across the EU to boost jobs and growth. Impeding capital flows is something that needs to be removed in the EU,” said Kay Swinburne, Conservative MEP for Wales and long-standing member of the European Parliament’s Economic and Monetary Affairs Committee</strong>. Swinburne was speaking in the Monday afternoon session, ‘Single market and capital markets union – The future role of financial market infrastructures’.</p> In the same session, Laurence Caron-Habib, head of public affairs at BNP Paribas Securities Services</strong>, indicated that the European Post Trade Forum, a European Commission working group comprising of a number of securities market trade associations and experts, was working towards the removal of barriers in the post-trade space, in support of CMU’s efforts at harmonising the post-trade industry.</p> Removing the Giovannini barriers requires consensus on cross-border harmonisation in the public as well as private sector, meaning broader political discourse can impact progress. A poll held in the CMU session found that 59% of attendees believed the recent UK referendum in favour of leaving the EU would delay the progress of CMU. While some panellists and delegates felt ‘Brexit’ would inevitably prove a distraction from CMU, others identified T2S as a force for securities market post-trade harmonisation that is already going ahead without the UK’s involvement.</p> Godfried De Vidts, director of European affairs at inter-dealer broker ICAP and chairman of the ICMA’s European Repo and Collateral Committee</strong>, said that public and private sector parties needed to sift through and identify the most pressing issues.</p> “CMU is fundamentally a good thing, but it has not yet drilled down into clearing and settlement,” he asserted. “Member states need to be brave when it comes to CMU formulation, and there are a huge number of issues that need to be addressed in the post-trade space in rules, such as the impact of European Market Infrastructure Regulation (EMIR). Take the challenges around collateral and margining: one of the unintended consequences of Basel III capital requirements is that there is less high-grade collateral to post to central counterparties, and limited collateral fluidity. These sorts of issues need to be resolved by CMU in the post-trade world.”</p> Data quality</strong></p> </p> </div> </div> </div> Another consequence of recent legislative reform that market participants would like CMU to resolve is the dual-sided reporting of derivative transactions under EMIR. Tuesday morning’s panel on the evolution of the FX market also highlighted the difficulties caused by trade repositories receiving two sets of data from counterparties following the execution of any European derivatives trade, such as an FX option or swap. The introduction of the new rules in February 2014 has led to errors, inaccuracies and an inability by repositories to reconcile trades, particularly if the unique transaction identifier, the trade ID provided by both counterparties, does not match. “Dual-sided reporting has its challenges, and this is something we would like to be addressed as we have been working with market participants to find solutions,” said Steven French, head of regulatory strategy and product at post-trade solutions provider Traiana</strong>. Although the European Securities and Market Authority is working with trade repositories and market participants to improve data quality in transaction reports, French suggested blockchain and machine learning could play a role in analysing the voluminous data sets currently being captured and stored. “The regulators have a huge amount of data and artificial intelligence or machine learning is a viable way forward to enable them to process all of this information,” said French, adding that Traiana is exploring use of such technology in its own product offering to help regulators identify risks in the derivatives market.</p> Rules such as EMIR have reinforced the importance of sound data management among securities and derivatives market participants; from January 2018, MiFID II’s reporting requirements will push it even higher up the c-suite’s agenda. The surging volume of reporting requirements and increased client disclosure is already forcing financial institutions to introduce better mechanisms to control, manage and aggregate their data. Speaking at Thursday’s session, ‘Data management – The quest of the endless journey’, Cian Burke, head of securities services at HSBC</strong>, acknowledged that disruptive technology could play a role in streamlining data management for securities services providers.</p> “There is also industry pressure for the creation of a centralised market utility holding client data. This would not give any particular provider a competitive advantage, but I suspect any utility holding on to all of that data would be reluctant to take on the huge liability which could arise in the event of a problem,” said Burke.</p> Achieving alpha</strong></p> The evolving role of innovative technologies in client relationship management was also explored in a panel session on the emergence of robo-advisors, platforms which combine increasingly sophisticated user-interfaces with machine-learning systems to provide investment advice, such as portfolio weighting recommendations. Robo-advisors first made their presence felt in the US market, where a number of startups grabbed market share by offering cheap, user-friendly investment advice to retail customers. US asset managers responded with their own platforms and the European market is beginning to witness the launch of similar offerings, both from incumbents and from new entrants.</p> Panellists agreed that cost pressures and regulatory change were driving the growth of robo-advisors, with some noting the recent challenges faced by asset managers in producing satisfactory returns. “Cutting costs at asset managers is one way by which organisations can achieve alpha in the current interest rate environment and volatile market conditions,” said Edward Glyn, managing director and global head of relationship management at solutions provider Calastone</strong>.</p> In terms of regulatory drivers of robo-advisor market share, some panellists pointed to the negative impact on the availability of investment advice by regulatory restrictions on commissions in the investment industry, notably under the incoming MiFID II. Others saw the growth of robo-advisor platforms in terms of a generational shift, pointing to their high levels of success in engaging millennials in retirement planning decisions and other aspects of saving and investment. Whether deploying new technologies, re-examining recent reforms or adjusting business models, the Securities stream at Sibos 2016 demonstrated that there are many ways in which the industry is working to improve the efficiency of the investment process in the services of end-users.</p>