The UK catches up
After a false start with the London Stock Exchange’s failed Taurus project, the Bank of England took control and launched the highly successful Crest settlement system.
Crest is now the UK’s central securities depository (CSD) and settlement system. It has enabled UK shares to move from paper certificates to computer records, a process known as dematerialisation. Crest also enables transactions to be settled faster. At its launch, transactions within Crest were settled 10 days after the trade, a process known as 10-day rolling settlement, or T+10. The settlement period has now been reduced to five-day rolling settlement, T+5, and is likely to be further shortened in the future.
Since the introduction of Crest, change and improvement has been continuous. This year is no exception with a number of significant changes already having taken place and others that will impact later this year. Specific changes in 1999 include:
q the introduction of settlement discipline
q the introduction of unit trust and OEIC settlement into Crest
q moves towards the merger of equity, gilt and money market settlement systems within Crest
q new proposals for linkages between European systems to provide for cross-border settlement.
Settlement discipline is a system of fines which has been introduced to ensure that all participants in Crest match and settle their transactions on time.
Introduced on March 1 1999, settlement discipline brings considerable benefits:
q it enhances the integrity of the settlement process by providing a high degree of timeliness of settlement
q it enhances the integrity of data made available to the eegulators for transaction reporting purposes
q it reduces the need for manual intervention in relation to unmatched or unsettled transactions
q it provides a firm basis for members’ cash management
q it reduces the position risk and counterparty risk which can arise from late settlement.
Crest is developing a system for full settlement of unit trust and OEIC transactions through Crest. The first phase of development, which has already been completed, allows payment for purchases and redemptions to pass between the Crest participant and the unit trust or OEIC manager, via Crest’s assured payments system.
A number of managers, including Gartmore, M&G and Fidelity, have already signed up and others are predicted to follow during the year. Major benefits of the new system will be the introduction of a predictable settlement date and the use of a dedicated courier service to deliver documents to and from product providers.
At its inception Crest was only responsible for the settlement of equity trades. Moves have been afoot for some time to increase its scope to enable it to settle government securities, traditionally settled by the Bank of England’s Central Gilts Office (CGO) and money market instruments which are settled by the Central Money Markets Office (CMO).
Responsibility for CGO and CMO passed to Crest at the end of May. Plans are now under way to merge the CGO and Crest systems at the end of the first quarter of 2000 and discussions are also taking place to decide how best to deal with money market instruments once this is complete.
For Europe, the development of the Euro-zone has created an international challenge, with demand from users for an integrated structure for a pan-European clearing and depository for all equities and bonds. One result of this has been the recent merger of European providers, Deutsche Börse Clearing and Cedel International to form a European Clearing House (ECH). Not to be outdone, Euroclear has proposed a European ‘hub and spoke’ concept with itself at the centre.
Three different concepts of how this system may develop have been floated by rival European CSDs. These are:
q a central securities settlement ‘hub’ into which domestic CSDs input all their cross border trades
q a series of European settlement hubs which provide cross-border settlement services to local markets and in turn operate high quality bi-lateral links to the other European regional hubs.
q a bilateral linkage between every European CSD creating a ‘spaghetti’ model of links across Europe.
Crest, a leading member of ECSDA is a proponent of the regional hub concept. It has already announced a bilateral link with SIS, the Swiss depository, and a further link is planned later this year with Deutsche Börse Clearing in Germany. These initial links will provide trade settlement in Swiss and German securities free of payment, although plans are well advanced to provide delivery against payment in Euros next year.
Whatever system is finally adopted, it is likely that Crest will have a significant voice in its operation. As Iain Saville, Crest’s chief executive points out, “We Crest settle over four times as many transactions each day as Cedel; even without gilts and money markets we have more assets under custody and our costs per transaction are 10% of theirs.”
One intriguing aspect about the rate of change in UK settlement systems is that notwithstanding all the changes in 1999, Crest is on record as saying that the changes proposed have been limited to provide the market with time to complete its year 2000 millennium bug programme! Clearly market participants can look forward to even more rapid change next year. A number of developments are already planned, as follows; in addition it is likely that development of cross-border settlement will continue apace:
q the settlement of CGO transactions within Crest
q the reduction in settlement period from T+5 to T+3 or possibly an even shorter settlement period
q reduction in non-market matching standards to move in line with market standards and best custodial practice in international markets
q the dematerialisation of unit trust certificates.
The highly successful introduction of Crest has enabled the UK market to match international standards and to be in a position to take a lead in the ongoing debate about pan-European cross-border settlement systems. After a busy 1999, the only thing that market participants can be sure of is that the rate of change will continue unabated in the future.
By a special correspondent