However,
the cost implications of multiple clearing and settlement will not necessarily affect
the buy-side. While acknowledging the importance of clearing and settlement,
and the part it plays in best execution, Cowling at BGI is not overly concerned
by the prospect of clearing and settlement fragmentation. It will be the
broker’s responsibility to deal with this part of the trade. "If I’m
taking stock available on both Chi-X and Euronext, I’m just going to book out one
ticket with my broker," he explains. "The broker is the one that has
to settle two separate transactions."
with more settlement venues to the client. Cowling thinks this unlikely. "I
can’t see myself having a conversation with my [broker] counterparts and them
saying, ‘we now have to settle a bargain in Chi-X, Turquoise, Euronext and
maybe LSE, and thus I need to up your commission rate’."
However,
the issue is more than simply one of cost, since it will fall to all trading parties
to prove best execution. Mast at Allianz acknowledges that more work needs to
be done to understand how clearing and settlement will affect buy-side traders
post-MiFID. "On the overall cost side we’ll have to undertake more detailed
analysis to find out what the impact is of clearing and settlement," he
says.
Pre-trade
analysis of trading costs is complicated by a lack of harmonisation in Europe’s clearing and settlement arrangements, observes Van
Stappen at Equiduct. In such an environment, clearing and settlement costs may be
difficult to fathom, he cautions, making the calculation of overall trading
costs in the pursuit of best execution an inexact science. "While you may
have an execution venue that always gives you a great price and has lots of
liquidity, to actually trade with them [taking into account the cost of
settlement] could cost you a lot of money," he says. "Therefore, by
definition under MiFID, that’s not best execution for your client and you can’t
trade with them. It’s something people have to think about. Firms need to sit
down and work it out individually for each type of transaction they do."
Cracking the code
The
inefficiencies inherent in the clearing and settlement of cross-border
transactions have come to the attention of regulators in Brussels and the first steps taken to
eradicate them. In a speech to the Economic and Monetary Affairs Committee of
the European Parliament in July 2006, Charlie McCreevy, European commissioner
for internal market and services, proposed a code of conduct for the industry
to follow. Outlining the challenges presented by Europe’s
disparate clearing and settlement arrangements, he called on the industry to commit
itself unequivocally to a four-point plan (see box). The plan included measures
to improve price transparency and price unbundling of the main clearing and
settlement activities. At inception, the aim was to have the code adopted in
its entirety by the end of 2007.
The fact
that McCreevy backed a code of conduct rather than a directive to tackle
clearing and settlement inefficiencies in Europe
has raised some eyebrows in the industry. "Will a code of conduct make changes
happen to the level at which the legislators would like? I don’t know. I’m
sceptical," confesses PJ Di Giammarino, chief executive officer, JWG-IT,
an independent think-tank looking at the effects of EU regulation on financial
institutions. The next steps taken by McCreevy’s team are being closely
monitored. At this stage, no one knows whether they will take a backseat and rely
on the securities industry to reconfigure itself.