POST-MiFID FRAGMENTATION FORCES EVALUATION OF NEW SETTLEMENT STRATEGIES, SAYS TABB GROUP RESEARCH ON EUROPEAN CLEARING AND SETTLEMENT

15 April 2008

TABB Group, in one of its newest research notes, “European Clearing and Settlement: Breaking Barriers–Building Alliances,” addresses a growing need for improving cross-border clearing and settlement practices, as well as buy-side aggregation of transactions in order to properly handle the downstream effects of MiFID and increasingly fragmented markets.

“There are two major issues for the clearing and settlement framework’s ability to efficiently support the emerging trading market,” writes Andrew Howieson, managing director at TABB Group Europe and author of the report. “First, at the central counterparty (CCP) level, new trading venues are introducing new pan-European CCPs because the existing CCPs do not meet their pan-European coverage requirements. This means that multiple CCPs will need to be able to work together efficiently in support of trading in dual-listed stocks. Second, the cost of crossborder clearance and settlement remains unacceptably high and the ’dividend’ that should accrue from the creation of a pan-European market is on hold.”

The report includes that “European equity markets are undergoing record order volumes and decreasing trade sizes, driving rising processing costs. A potential solution to increasing buy-side settlement costs may lie in adoption of the U.S. market’s central clearing model.”

The research is available online currently through ESP Technologies Corp., a technology provider to the buy side that provides a settlement aggregation solution to address buy-side settlement needs. “ESP's patent-pending Clearvoyance™ technology and service for settlement aggregation, addresses the issue post-trade and pre-clearing,” says Joshua S. Levine, Chief Executive Officer of ESP, "Clearvoyance not only reduces processing cost for buy-side and sellside alike, it also provides a powerful tool in helping to mitigate counterparty risk."

According to Howieson, TABB Group also believes that given the fragmented nature of Europe’s clearing and settlement structure, in order to gain maximum economies of scale, a buy-side central clearing provider faces the prospect of connecting to all of the six CCPs and 23 CSDs active in the European market, although the level of fragmentation in the European market may not necessitate achieving these efficiencies concurrently. Agreeing with the TABB Group report’s findings, Levine says, “As European institutions continue to demand solutions with greater efficiency, ESP is well positioned to deliver a market based solution to these problems.”

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