22 May 2014

AFME/ALFI: Reactions to ESMA's DTS for regulation on improving EU securities settlement

AFME recommends that further discussions should take place to consider what processes could be put in place to enforce the CSDR buy-in rules in ‘non-CCP’ scenarios. ALFI sees the benefits of T+2 settlement for exchange traded financial instruments held by investment fund portfolios.

AFME

AFME believes that early matching would be best achieved by CSDs offering the relevant tools to its participants to enable them to match as early as possible, with the necessary control over the settlement cycle. Examples of the tools required would include Hold and Release, linking and prioritisation. The various tools would be used as and when required by members, rather than mandated. In addition, the CSD should provide its participants with appropriate reporting. This reporting should include instruction status of the participants’ trades and reporting on matching or non-matching of settlements, with standard reason codes for non-matching where possible.

AFME does not support CSD’s 'shaping' trades and settlement instructions. This amounts to an excessive amount of discretion for a CSD to exercise. Partial settlement should be undertaken at the discretion of the settling parties only (or the CCP) and should not be mandatory. We would note that T2S provides optionality around partialling on a trade by trade basis.

AFME agrees that buy-ins should not be initiated where they are impossible to execute  or ineffective. We understand ineffective to mean that it is possible to execute a buy-in, but the buy-in would serve no economic purpose to either party. There are numerous cases where a settlement does not represent an underlying contractual agreement between a buyer and a seller to sell securities against an agreed price.

Full discussion paper

ALFI

ALFI sees the benefits of T+2 settlement for exchange traded financial instruments held by investment fund portfolios, while noting the limitations in its application to non-exchange traded instruments held by investment funds and shareholder transactions in investment funds not traded on exchange.

From a risk perspective, ALFI welcomes and supports the application of a harmonised reduced settlement cycle and enhanced settlement discipline for on exchange traded financial instruments across European Member States and trading venues. European capital markets will largely benefit from increased standardisation of settlement cycles, leading inevitably to an increase of market liquidity and investor protection, thus becoming an integral component of the risk management framework for investment managers and depositary banks.

Investment Funds with a global, balanced or multi-assets mandate and a geographically diversified investment policy in securities in the underlying fund portfolio offer a range of contractual settlement dates from T+0 to T+3 plus. As such a movement to T+2 settlement may help the investment manager with the liquidity of the fund overall where existing shareholder settlement terms are T+3 or greater, but moving the shareholder terms at the fund level to T+2 will add pressure on the fund’s liquidity.

Many alternative investment funds UCI’s are designed with a customised liquidity model set at the level of the fund to accommodate the investment in the portfolio’s assets type or the nature of the investment proposition. As such if an investment manager is trading in illiquid assets, in a "prepaid model" he may well require subscription proceeds on or before trade date, this is quite common in private equity and hedge funds. Equally the terms for settling redemption orders from investors may often be delayed by several weeks or months. Settling on T+2 would not work for most of these funds.

Full response