Yesterday, President Obama announced a plan to overhaul US financial regulation in response to a banking and capital markets crisis.
As part of the proposal, oversight of over-the-counter (OTC) derivatives would be imposed, and there would be harmonisation of futures and securities regulation. New payment and settlement system safeguards would be created.
The financial crisis has highlighted the necessity of having a central counterparty in order to mitigate the risk of trading. Better regulation in this area, as well as in the on-exchange clearing and settlement space, should encourage more participants to come back to the market.
In Europe, there is a code of conduct for clearing and settlement, which was introduced in late 2006 and addressed the commitment of the clearing and settlement industry to transparency, interoperability and competition.
While this has not yet been fully achieved, the post-Mifid landscape has gone some way to making the code of conduct a reality and EuroCCP’s call for an interoperability convention, it is hoped, will speed up progress by offering market participants freedom to choose their preferred provider of services separately at each layer of the transaction chain and by establishing a strong European capital market.
In terms of settlement, the European Central Bank is in the process of building a centralised securities settlement infrastructure in the Eurozone, known as Target2S (T2S). T2S will overcome market fragmentation and create a single pool of assets, and users will be able to centralise liquidity in a single central bank cash account, which should generate cost savings. The ECB has said that T2S could reduce securities settlement costs by up to 90 per cent. Target2S is scheduled to go live in the second quarter of 2013.