G30 - Moving in the right direction

The latest G30 report on global clearing and settlement offers more than a few worthwhile suggestions. But Kristina West says there is still much to be done before the industry will wholly embrace the recommendations.

The release of the new Group of 30 (G30) report on global clearing and settlement could be said to be long overdue, coming as it does 13 years after the last set of G30 recommendations, which were due to be implemented by 1992. However, a number of other groups, including the International Securities Services Association (Issa) and the Committee on Payment and Settlement Systems (CPSS)/International Organization of Securities Commissions (IOSCO), have set out their own recommendations in the intervening years. So how relevant is the G30’s new ‘Plan of Action’?

To say that other groups have also been looking to kickstart improvements in the clearing and settlement infrastructure is not to denigrate the work that the G30 has done in the past. Its 1989 recommendations were the catalyst for many industry reforms, including the reduction in settlement cycles by many markets around the world, the introduction of electronic trade confirmation and the move to delivery versus payment.

However, the 2003 recommendations come at a very different time in the industry’s history. For the developed markets at least, most of the major work has been done, and the clearing and settlement process has its most impressive cost-risk ratio yet. So is the release of another set of 20 goals, at a time when firms are struggling under bear market conditions, really necessary?

Jill Considine, chairman and chief executive of the US Depository Trust and Clearing Corporation (DTCC) and a member of the G30 steering committee, says: “We believe strengthening the global securities network, reinforcing risk management and improving governance are critical to ensuring continued confidence in the integrity of the global financial market.”

John Gubert, head of group securities services at HSBC Holdings and a leading light in the creation of Issa’s own recommendations, takes a pragmatic approach. “The new plan is unlikely to be implemented as a whole, but it will help bring some current debates to a close. It will help focus market and regulatory attention on the issue of contingency. Some of the structural changes could happen quite quickly because they are not stark changes in direction. But others will cost substantial sums, and they will be delayed quite simply because the money is not there.”

The recommendations encompass three main areas: creating a strengthened, interoperable global network; mitigating risk; and improving governance, with specific recommendations covering areas including message standards, trade matching, business continuity and consistent regulatory oversight of the clearing and settlement infrastructure. On the surface, many of the recommendations appear to be following what the markets are already striving towards, while others seem vague in their focus. However, industry participants do see value in the suggestions that the plan of action has to offer, although opinion is by no means consistent.

Paul Symons, head of public affairs at CrestCo, says: “A lot of the value of the report is in leaning on governments and regulators. Clearing and settlement in Europe has been under the spotlight since the introduction of the euro, and there is a perception that there has been a lack of willingness to make changes in order to deliver the benefits of a single currency. This is not true: the settlement industry has done almost as much as it can.”

HSBC’s Gubert, however, takes a different slant: “The question is not which recommendations are the most valuable,” he says, “but which are the most challenging to implement. The most interesting will be those relating to automation and STP, and those pertaining to legal certainty. Automation affects all parts of the infrastructure and all users of the infrastructure. The legal changes cannot be made centrally; change will be needed in many different countries.”

There are certainly some new considerations behind the 2003 report, even if the song remains the same. A key feature is a post-September 11 focus on systemic failure, although last year’s Issa review also added more on contingency planning. In the post-September 11 world, the need for physical contingency appears to be better understood.

However, Gubert raises a significant concern: “There was still no coverage of one potential new area of attack, namely cyber terrorism. This could be much more invasive for the infrastructure than physical attack. Technology in the corporate sense has always had the monetary muscle to build adequate firewalls to stand up to the hackers, but what if the hackers are funded centrally by governments?”

A second area offers more emphasis on interoperability and more clarity on governance, while a further change concerns the way the report has been constructed. Simon Cleary, London-based head of securities market strategy at Belgian messaging services provider Swift, says: “What is different from the original is that the G30 has bracketed its proposals into different sections. This is a reaction to things that have happened in the market since the last report in 1989. Some things are heading in the same direction as the original, such as eliminating paper and standardisation. There are also a couple of high-profile areas, such as reference data standards. It is a wish list to some extent. The next piece of work is forming the committee to look at implementation and compliance.”

So what needs to be done for the industry to meet these recommendations? Perhaps the first step is the convergence of existing recommendations. As already mentioned, the plethora of work from Issa, IOSCO and now the G30 in recent years is not only leading to a duplication of work, but to a confusion of aims. A single point of reference for the industry on a global basis would ensure that markets are working together, rather than just solving their domestic problems but creating cross-border issues in the process.

Perhaps when this has been achieved, more work needs to be done by the G30, primarily to clarify some of its recommendations – those on CCPs and corporate governance have been questioned by industry participants. The G30 also needs to push its recommendations forward – all talk and no action will garner a half-hearted response at best. The first step is to agree who should take the lead. Each recommendation needs its own working group; it needs organisations to come together and drive something to fruition.

DTCC’s Considine says: “The implementation process for these recommendations will be evolutionary, taking into consideration the different nature of individual markets, the way they operate and the varying requirements of customers.”

That said, there is still a great deal of work being carried out in the industry that will make significant progress in fulfilling these recommendations. Europe, for example, is a long way towards meeting the recommendations of the G30, and this would have continued even without the report. They will be useful, however, to the European Central Bank and Committee of Securities Regulators, which are looking to rework the CPSS/IOSCO recommendations specifically for Europe.

CrestCo’s Symons believes the Euroclear group is already following the spirit of the G30 recommendations: “We feel that, within the Euroclear group, we are already addressing many of the recommendations through the business model resulting from the mergers with Necigef, Sicovam and CrestCo. We are already setting standards across five domestic markets, as recommended by the G30. The Euroclear milestones for delivery of a new settlement platform are set for 2005 and 2008, which means they will be completed within the G30’s timeframe.”

Reuters has also been looking at one of the key issues in the G30 recommendations: that of reference data. In conjunction with TowerGroup, Reuters has set up the Reference Data User Group (RDUG) to explore the issues in this area and work towards a solution.

Anthony Kirby, head of global STP at Reuters, says: “TowerGroup ran a survey last year and agreed on the problems, such as inaccurate data being the main reason for trade failures. The question is, what do we do about it? There are different priorities among firms. It is clear that we must deal with these, but it is not clear to firms that there is an easy, quick win. However, the regulators are now putting pressure on the markets to deal with problems, such as through Basel II or the Patriot Act. We will also see peer group competition and reputational risk through poor reference data.”

HSBC’s Gubert highlights corporate actions (CA) and message standards as two vital areas where more work needs to be done. “There are two bits of work we can do – internal and external,” he says. “On the internal side, we are using ISO 15022 to increase the level of CA automation. We need to improve the environment; if you look at a standard CA message, the data is sourced from three or four different areas, such as the prospectus, news releases and data feeds. But how do you automate source data on CA? Then CA needs to be executed as normal transactions. ISO 15022 gives us a messaging envelope – we are working with it to improve communication, but rationalising the data sources and the location of the transaction is critical.

“There is also an issue that basically lies with the Swift community – how do you ensure that messages become standards? ISO 15022 is very rich, but this also allows flexibility of interpretation. Each micro-difference means a system change or manual process, and then you no longer have a standard, just a framework. There is a lot of work to be done. If we could get 75% automation of CA in five years, that would be an achievement,” Gubert concludes.

Swift is certainly aware of its responsibilities on the standards side, although Swift’s Cleary notes that the organisation is looking at this on a wider basis. “The need to complete a single-standards suite and implement it is critical – it will have a major impact on STP. Swift has been pushing standards on communication – that is why it was formed, although originally for the banking community,” he says.

Although the content of the G30 report is obviously crucial, timing must also be taken into consideration. At a time when the markets are struggling there is little spare cash about, and other initiatives are being put on ice, the question must be asked: will the release of these recommendations damage the G30’s aims? The recent failures of the Global Straight Through Processing Association and the T+1 initiative – along with much of the investment that went into these schemes – may have affected attitudes towards such industry-wide schemes on a global basis.

Reuters’ Kirby believes the cost issues will not necessarily be all bad. “Pacing will be a factor,” he says, “especially among buy-side firms. The current climate is hard but healthy – firms are being forced to look at costs. All these recommendations have to be costed for each firm, so how practical are they? Are they do-able? There will be more numbers being kicked around.”

HSBC’s Gubert believes cost will be an issue in deciding how the recommendations should be implemented: “Investments are being delayed, but some of the recommendations don’t need cash, such as those on corporate governance. Others need intellectual capital. Others need big spend, and they will be affected. Contingency will come first – it is foremost in people’s minds at the moment. Standards will be next, as they are also on people’s agendas. Interoperability is somewhere down the road – the infrastructure will be slow to implement something that is often against their vested interest.”

The timescale within which the G30 believes its recommendations should be implemented – between five and seven years – appears to offer some breathing space. However, the recent lesson of ISO 15022 should not be forgotten: if a five-year window is built in, many firms will not start to look through it for four years or more.

CrestCo’s Symons notes how much there is to do in that time. “The big challenge is that it is hard enough to get such recommendations agreed across the EU, let alone globally,” he says. “The roadmap may, therefore, be longer than the report recognises. Even with the commitment to ISO 15022, different countries are still working with their own message structures. If all stakeholders take the report seriously and start working now, the timeframe may just be realistic. However, it is probably verging on the optimistic. We won’t see the resolution of all 20 recommendations within the prescribed timeframe.”

So the big question in the industry is: what now for the G30? The group wants a review in 12 months, but this looks like being a real challenge for the industry. HSBC’s Gubert is afraid the report may lose its momentum. “One of the key dangers is, will this all be forgotten? We need to keep the momentum going. It is hard as the report covers the whole of the securities value chain and there is thus no logical champion for it as a whole. But we must keep the issues and milestones at the forefront of the industry’s thinking. The amount of money available is an issue. It is a huge responsibility for the infrastructure and its users to ensure the development programmes keep going. We must not look for utopia – we must be pragmatic. We must balance short-term cost constraints with the need for long-term resilience.”

It is true that the industry must not underestimate the difficulty of delivering on the recommendations. An interoperable global network is the right vision, but it will take a lot of work.STPforum magazine

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