Custodians are welcoming the new UK gilts dealing and settlement system. This is the latest stage in the dematerialisation of the UK securities industry and took place last month with the long-awaited implementation of the upgraded CGO (Central Gilts Office) system, widely referred to as CGOII.
Gordon Lindsay, managing director of RBS Trust Bank in London, reckons that CGOII ensures we can offer a more efficient, safer and cost-effective method of settlement for gilts". Since implementation, RBS says it has achieved a 100% settlement performance compared to around 98% pre-CGOII. "Every fail took two to three times longer to sort out than if it went through the first time," explains Lindsay. "CGOII cuts out risk and it cuts out the hassle."
CGOII is essentially the gilt equivalent of the Crest share dealing system in the UK market. Indeed, part of the reason for the delay in implementation was that the decision to adopt the same software as Crest threw up bugs which had to be removed before implementation could take place. The end result, however, according to a Bank of England spokesperson, is that the market now gets the benefit of two very similar systems and the possibility that the two might merge at some time in the future is still being investigated.
An electronic book entry system for gilts has operated in the UK market for some 10 years, but the original CGO system was beginning to creak at the edges. CGOII, in particular, is seen to bring two key benefits it facilitates the stripping and reconstruction of gilts, and allows back offices to process repos more efficiently. Both were possible under the old system, but were messy and long-winded.
'Strips' have been popular in the US and on mainland Europe for some time and the Bank of England found growing interest in the UK. CGOII now allows strips to be effected on a real-time basis. Similarly, while repos could be effected under the old system, each leg had to be input separately. Now, under CGOII, they can be input at the same time.
Basically an institutional vehicle, there are still grumbles of discontent from those who wish to deal in the gilts market on a small basis and are subject to long delays. The Bank of England spokesperson suggested however, that while admittedly early days, it was a case of "so far, so good". Trading of strips is now due to start on 8 December. David Hunt"