Spanish Clearing, Settlement and Registry System Reform: The countdown has begun

By Noemi Domenech | 29 May 2014

The revolution Spain is facing today is due to a huge wave of regulatory and operational changes which will have a profound effect on the local market infrastructure. With the Reform, the Spanish Registry, Clearing and Settlement System will fall in line with the rest of European Systems, which will improve competitiveness and will lead to Spain joining in 2017 the pan - European TARGET2 Securities (T2S). However, in order to achieve this goal Spain must undergo a preliminary process to harmonize its rules and procedures and, of course, this process represents a huge milestone if we take into account some of Spain’s specific features, such as the obligation to register securities shortly after the trade date, the absence of a central counterparty and the fact that finality is set on the trade date.

A large-scale reform is planned and it will have a great impact, the result being a profound reshaping of the Spanish market which will lose many but not all of its particularities by Q2 2015, affecting all the procedures and processes that financial firms performed on a daily basis.

To get a better understanding of the tremendous impact the reform will have we need to analyze the main changes that will occur in the different areas. Let’s begin with the Trading Area, where changes in the communication details will be introduced. This will allow for the new CCP requirements, such as the existence of clearing members, account numbers at CCP level and others. Trading members also will have to decide whether they will become individual clearing members (ICM) or use the services of a General Clearing Member (GCM).

The following area to be affected will be the Clearing area, in which the major change will be the introduction of a Central Counterparty (CCP). This will lead to the emergence of 4 different types of clearing members:

  • Ordinary Non-Clearing Member (Ordinary NCM);
  • Segregated Non-Clearing Member (Segregated NCM);
  • Individual Clearing Members (ICM);
  • General Clearing Members (GCM).

The NCMs will have to use a GCM, while ICMs would be able to clear proprietary trades and their clients’ trades. Segregated NCMs will have their own account structure at the CCP level. There will be different types of accounts:

The Daily Account: which will be used for the execution of intraday trades where a CCP account number is not indicated. As this account must be empty at the end of the day, any balances will be transferred to the clearing member’s own account.

The Proprietary account: in which are recorded the operations of the Member.

The Client Account: where transactions of several clients are recorded. This type of account can be further split into a Gross Third Party Account, where there will be a rough calculation of collateral and settlement instructions, or Net Third Party Account, where there will be a net calculation of collateral and settlement instructions.

The Individual Account: where transactions of a single client will be recorded. This account will be calculated net of guarantees and settlement instructions.

And finally we come to the Financial Intermediary Special Individual Account: Under IBERCLEAR rules, financial intermediaries qualify for a special clearing model. The Financial Intermediary Special Individual Account at the CCP must mandatorily be an individual account, associated with a settlement account (also individual) at IBERCLEAR.

The CCP will likewise implement fail management procedures and relevant penalties in such a way as to minimize failed trades. In case of failures, an automatic borrow process will be in place to be carried out by the CCP. In addition, a buy-in procedure will be used four days after the initial settlement date for liquid shares. For non-liquid shares, the buy-in will take place after six days and the buyer will be compensated in cash.

Turning to the Settlement area where the major change will be the movement of the Finality from the trade date to the settlement date and the appearance of the possibility to keep segregated accounts at the CSD level.

A special procedure will come into place for intermediaries who will not know the registration details at the time of the trade will be introduced. Those intermediaries who do not have the registration details between trade date (TD) and TD+1 will be allowed to trade and settle the net balances against the CCP in their own name and provide final registration details on settlement date. A specific settlement account for this activity must be opened at the CCP and CSD. Yet, another important milestone in this area will be the move to a T+2 settlement cycle.

Finally, in the Registration and Supervision area, communication between the market infrastructures and the trading, clearing and settlement agents will be managed by an ancillary system, the ‘PTI’, which will simplify the requirements and ease burdens on these entities and make it easier for the CNMV to trace trade details. Each participant will have to supply the PTI with the required information on a daily basis. Regarding the corporate events management there will be a harmonization process following the standards defined by the Corporate Actions Joint Working Group such as the use of record date, ExDate and payment date.

In conclusion the reform will certainly ease the access to T2S for the Spanish market. But before we reach this point (Spain is anticipated to be joining T2S in 2017), all market participants will have to find the right answers to a number of challenges and changes, and due to the current business situation these decisions are not easy ones to take.

It goes without saying we are currently immerse in a challenging process, what is at stake is Spain´s capacity to overcome the hurdles and fulfill its commitments to the European’s standards and we are confident that it will.

 

By Noemi Domenech, Marketing Manager at Software Financiero Bolsa.

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