27 February 2012

FN: Settlement rules will put Europe ahead

The G20 works on a regulatory framework for delivering the financial stability that will underpin new global financial architecture. Current regulatory reforms can be divided into two streams - those initiatives that deal with risks identified by the last crisis, and those pre-emptive in nature.

Within a few weeks, the European Commission is expected to publish its proposal for improving securities settlement and oversight of CSDs, the entities that operate settlement systems. The Commission’s proposal is expected to require trades to be settled within two days of the trade date (T+2) and introduce financial penalties for trades that fail to settle on time. The expected rules are a bold and welcome development that mark Europe out as a leader in the reform of this inefficient area of the market infrastructure.

CSDs and securities settlement are considered two areas of the post-trade landscape where further coordination of rules at an EU level is needed to enhance the safety of the European financial markets. The regulation of CSDs was intentionally excluded from the European Market Infrastructure Regulation – Europe’s other key market structure reform – since Member States felt that greater analysis of CSDs and their operations was required. The Commission considers CSDs to be systemically important post-trade infrastructures because of their critical role in managing and safeguarding securities, and therefore deems it necessary to create a regulatory framework through which CSDs will operate.

The proposal on securities settlement and CSDs shows a determination to improve market structures through pre-emptive regulation, and highlights Europe’s leadership towards shorter settlement cycles compared with the US, which currently operates on T+3. The deadline for the harmonisation of settlement cycles in Europe is being mooted as 2015, which means there are three years for the US to catch up with Europe. If this were to happen, the settlement cycles of Europe, the US and a number of key Asian markets would be harmonised to T+2.

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