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Financial market is known for its constant changes. Since its inception, it has seen many changes in terms of financial reporting to regulators, risk or the way client assets are managed. Since the Lehman Brothers collapse, the industry has seen one of the biggest changes in the way derivative markets are managed and how banks can indulge in proprietary trading under the Dodd-Frank Act.
Financial market is known for its constant changes. Since its inception, it has seen many changes in terms of financial reporting to regulators, risk or the way client assets are managed. Since the Lehman Brothers collapse, the industry has seen one of the biggest changes in the way derivative markets are managed and how banks can indulge in proprietary trading under the Dodd-Frank Act.
More
recently, there is yet change
being brought to the
way securities trades will be settled in the Euro zone known as Target to Securities (T2S).
T2S is a new European securities settlement engine which will
allow delivery-versus-payment (DVP)
settlement in funds across all European securities markets much like DTC markets
in United States.
T2S was introduced to standardize the settlements process
across the many nations that make up the Eurozone. Currently all the securities
trade in Eurozone settle differently and regulators now want to make the
settlement process more uniform. T2Sis expected to go live in 2015.
In the
past, the European financial market was created to meet the requirements of
national financial markets. In most cases, there were one or two dominant
players at each stage of the value chain—typically
only one stock exchange for
trading, possibly one central counterparty (CCP)
for clearing and at least one central securities
depository(CSD) for settlement. Furthermore, each of
these national infrastructures was primarily designed to manage securities that
were denominated in the national currency.
Despite
the introduction of the Euro over a decade ago, the provision of clearing and
settlement remains heavily dependent on domestic settlement. Investors still
trade mostly in domestic securities and in domestic currency. This does not
provide an optimal settlement process in the Eurozone. Due to this, the risk is
still concentrated and not diversified which arise due to the single currency.
Even the United States was in a very similar
position a long time back, with a fragmented trading and post-trading
infrastructure. The inefficiencies in the post trading system eventually took
its toll and the US government had to take measures to consolidate this
fragmented system. The US now has a consolidated trading and settlement
environment, with the Depository
Trust & Clearing Corporation (DTCC) responsible for the clearing and
settlement of all equities and corporate bonds, and the Federal Reserve System responsible
for government bonds.
The EU authorities, though, have so far not taken
any such dramatic steps. The initiatives taken up to now have focused
on removing the domestic settlement process. Market forces would determine the
optimal market structure, whether this is a single provider, as in the US, or
multiple providers. The most important initiatives from the EC are the Markets
in Financial Instruments Directive (MiFID) and Code
of Conduct for Clearing and Settlement.
T2S is intended to complement these existing
initiatives by improving competition, providing better price transparency and improving
current practices across Europe. Settlements have traditionally been the domain
of national depositories, so it was difficult for a depository in another
country to gain access to these securities. By creating a pan-European platform,
T2S aims to mitigate these challenges between national markets in a way which
could not have been achieved by the MiFID or the Code of Conduct on their own.
Current Workflow Structure:
1-IB will execute trade with brokers.
2-At the same time they will contact their custodian bank
to provide trade details.
3-Custodian will then inform Clearing broker to ensure
trade matching and settlement is done by them.
4-Both executing broker and clearing broker will match
the trades and ensure settlement is done.
5-It is currently the job of clearing broker that trade
matching is done on domestic exchanges and inform of any disparity.
New Workflow Structure:
1-All the steps remain the same as per the old structure,
but the clearing broker will not be part of the trade settlement process.
2-Custodian and Executing broker will directly be
involved and settle the trade via new platform.
3-This will then ensure that trade can settle without the
involvement of domestic exchange and improve cross border settlement process in
EURO currency.
Very soon
investment banking courses and training across financial courses, MBA etc will
need to start including this topic into their curriculum to provide learners
with first-hand information. Also, with the introduction of T2S, careers
in investment banking are expected to get a boost with more job opportunities
getting created across IB Operations. Learn more about T2S and the settlement
process in our comprehensive financial course called CIBOP
(Certified Investment Banking Operations Professional).
