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CONTENTS
04 INTRODUCTION
FRANCESCO VANNI d’ARCHIRAFI
Global economic, financial and regulatory
integration presents huge challenges but
also tremendous opportunities
07 REGULATIONS
JULES STEWART
EU regulations are aimed at the creation of an integrated
market system that will reduce the cost of raising capital and
provide a level playing field for firms and clients across Europe
10 MIFID
MICHAEL IMESON
Banks are positioning themselves to take advantage of
MiFID, while alternative trading platforms are being set up
to take on the established exchanges
13 SEPA
NAVEED SULTAN
Sepa’s introduction could affect numerous
internal financial processes and it is vital
that corporations start preparations now
16 CLEARING AND SETTLEMENT
HEATHER MCKENZIE
Clive Triance, head of securities and fund services and
direct custody and clearing, Europe, Middle East and
Africa, at Citi, responds to questions on moves towards
improved processing, efficiency and transparency
IN ASSOCIATION WITH
■ 4 I EMBRACING CHANGE I INTRODUCTION
Business models
must evolve
Regulation aims to promote greater stability and improve
efficiency that should be embraced. Institutions that revisit
their business models to create new opportunities will
succeed in the globally integrated financial market
Francesco
Vanni
d’Archirafi
A survey of finance leaders anywhere in
the world would probably show that
increasingly complex regulation and
growing competition are the two main
issues that they have to contend with at
present.
In the past 20 years, the financial
services industry has undergone great
change, including deregulation, a host of
technological innovations and the
growing impact of globalisation. In
response, the regulatory framework has
also changed.
Reform continues apace and that is
having a profound impact on the banking
industry’s structure, efficiency and
profitability.
Pace of change
Citi believes that change is accelerating
and that the forces behind it are both
fundamental and universal. While those
challenges are here and now, and bring
with them far-reaching implications, they
also provide real business opportunities
for those willing to take the initiative and
embrace change.
In Europe, that process has brought
with it consolidation within and across
markets, increased cross-border
financial service provision, the
emergence of new and increasingly
sophisticated products and services
together with alternative trading markets
and systems. Technology is influencing
innovation as providers seek to offer
faster systems, enhanced real-time
information, greater control and
improved levels of accessibility.
Finance is, by its nature, a
technologically intensive business and
the advances of the past 10 years have
had a far-reaching impact on financial
institutions. Regulatory changes, driven
in part by a response to technical
innovation, are affecting the world’s
financial systems and nowhere more so
than in Europe.
Cost of correction
The purpose of regulation is to correct
market inefficiencies and to promote
greater stability, but it comes at a price,
the most obvious being the expense of
compliance. The implementation of
detailed provisions is not only costly but
also time consuming; IT systems need to
be overhauled, and internal procedures
and often well-established business
practices amended.
The EU’s efforts to create a single
financial services market will require
banks and businesses to change
fundamentally the way they work.
Deregulation and technology have led
to greater complexity and new risks. As
a result, different forms of oversight
have been required, and the tools and
interventions of regulators have had to
change.
‘Change is accelerating and
the forces behind it are both
fundamental and universal.
The challenges provide real
business opportunities for those
willing to take the initiative’
■ 4 I EMBRACING CHANGE I INTRODUCTION
Business models
must evolve
Regulation aims to promote greater stability and improve
efficiency that should be embraced. Institutions that revisit
their business models to create new opportunities will
succeed in the globally integrated financial market
Francesco
Vanni
d’Archirafi
A survey of finance leaders anywhere in
the world would probably show that
increasingly complex regulation and
growing competition are the two main
issues that they have to contend with at
present.
In the past 20 years, the financial
services industry has undergone great
change, including deregulation, a host of
technological innovations and the
growing impact of globalisation. In
response, the regulatory framework has
also changed.
Reform continues apace and that is
having a profound impact on the banking
industry’s structure, efficiency and
profitability.
Pace of change
Citi believes that change is accelerating
and that the forces behind it are both
fundamental and universal. While those
challenges are here and now, and bring
with them far-reaching implications, they
also provide real business opportunities
for those willing to take the initiative and
embrace change.
In Europe, that process has brought
with it consolidation within and across
markets, increased cross-border
financial service provision, the
emergence of new and increasingly
sophisticated products and services
together with alternative trading markets
and systems. Technology is influencing
innovation as providers seek to offer
faster systems, enhanced real-time
information, greater control and
improved levels of accessibility.
Finance is, by its nature, a
technologically intensive business and
the advances of the past 10 years have
had a far-reaching impact on financial
institutions. Regulatory changes, driven
in part by a response to technical
innovation, are affecting the world’s
financial systems and nowhere more so
than in Europe.
Cost of correction
The purpose of regulation is to correct
market inefficiencies and to promote
greater stability, but it comes at a price,
the most obvious being the expense of
compliance. The implementation of
detailed provisions is not only costly but
also time consuming; IT systems need to
be overhauled, and internal procedures
and often well-established business
practices amended.
The EU’s efforts to create a single
financial services market will require
banks and businesses to change
fundamentally the way they work.
Deregulation and technology have led
to greater complexity and new risks. As
a result, different forms of oversight
have been required, and the tools and
interventions of regulators have had to
change.
‘Change is accelerating and
the forces behind it are both
fundamental and universal.
The challenges provide real
business opportunities for those
willing to take the initiative’
■ 6 I EMBRACING CHANGE I INTRODUCTION
Initiatives such as the Single Euro
Payments Area (Sepa), the Markets in
Financial Instruments Directive (MiFID)
and TARGET2-Securities (T2S), which
will bring changes to the payments,
securities and clearing and settlement
infrastructure, will completely alter the
competitive landscape. If they are
successfully introduced and work in the
way that has been anticipated, a
reformed financial services market will
offer more opportunities and choice,
enhanced transparency and greater
diversity for all participants.
taking place, from a focus on cost
reduction to value generation, as
companies seek to transform the way
they operate.
Across the value chain, innovative ways
of delivering solutions to clients are being
created. The convergence of technology,
distribution and communication will help
to accelerate the pace of evolution, while
breakthrough applications will rapidly
transfer across borders as
interoperability of market infrastructures
and common standards become the
order of the day.
Bringing change
Client demands
The successful implementation of MiFID,
the aim of which is to make Europe’s
investment services industry more
efficient and competitive, will provide
opportunities to gain a commercial
advantage in the European marketplace,
while T2S is paving the way for increased
efficiency and better pricing for clearing
and settlement.
Alongside MiFID, Sepa has been
designed to standardise and harmonise
processes and payments instruments
across Europe. For example, it will help to
accelerate cost reductions, drive greater
automation and increase centralisation.
Companies will benefit from the faster
transfer of funds and the centralising of
their payment processes.
The demand is increasingly for
convenience, mobility, control and
transparency. At the same time, we
need to ensure we are being
responsible business partners and
supporting sustainable business
practices to meet our clients’ and
employees’ broadening demands.
Service is paramount, delighting the
client imperative.
The client is at the centre of everything
we do. At the end of the day, it is their
evolving needs we need to meet if we
want to succeed. Companies should not
be entrenched in where they have come
from, but rather focus on where they are
going and, more importantly, where their
clients are taking them. We need to give
our clients what they want, how they
want it, where they want it.
Global economic, financial and
regulatory integration presents huge
challenges but also tremendous
opportunities; we need to embrace
change. It is those that revisit their
business models and create
opportunities in the evolving EU
landscape that will succeed in the
globally integrated financial market. ■
Paradigm shift
The financial services industry is facing a
paradigm shift that will require banks to
operate in a totally different way. The
shifting global regulatory climate, the
globalisation of commerce and the
impact of technological innovation are
combining to intensify competitive
pressures. Banks are being forced to
challenge historical business models as
they confront multiple demands with
limited resources, whether that is
infrastructure maintenance, developing
new products and services, or running a
branch network. A shift in emphasis is
Francesco Vanni d’Archirafi is head of
Transaction Services and Global
Commercial Bank, Europe, Middle East
and Africa (EMEA), at Citi
REGULATIONS I EMBRACING CHANGE I 7 ■
Regulation for
harmony
Since 1999, the EU has been working on its plan for an
integrated market system. MiFID, a key part of the Financial
Services Action Plan, is another step in the right direction
Jules
Stewart
In less than six months’ time, another
key building block in the EU’s drive to
create a single market for financial
services will have been put in place.
The Markets in Financial Instruments
Directive (MiFID), due to come into force
on 1 November, will make it possible for
investors to trade shares that are listed
on any of the EU member states’
exchanges.
The basic thrust of MiFID, as with all
the financial services directives that
Brussels has been working on since
1999, is to bring about an integrated
market system that will reduce the cost
of raising capital and provide a level
playing field for firms and clients across
Europe.
EU action plan
Within the EU, most of its ongoing
regulatory work is based on implementing the Financial Services Action Plan
(FSAP). Comprising of 42 measures that
have been designed to create one
regime for all 27 members of the EU, this
self-regulatory initiative was designed to
provide greater harmony between
■ 8 I EMBRACING CHANGE I REGULATIONS
In understanding the impact of
regulation, it is important to
distinguish between different
sorts of financial services firms
Europe’s regulatory frameworks and to
create a framework based on common
objectives implemented through the use
of rules based on principles.
“You could compare the benefits to the
wider economy of the FSAP to those one
might get from the construction of a
motorway, in the sense that it is only
when the last bit of a motorway has
been built and people can drive from,
say, London to Birmingham that the full
benefits are seen,” says Peter Parker,
manager of the EU team international
strategy and policy co-ordination at the
UK’s Financial Services Authority (FSA).
“In the case of European directives, this
will happen once the last bit of the
jigsaw is slotted into place in the shape
of MiFID.
“There is, of course, a difference
between their being transposed into
national binding requirements, which we
did on time in January, and their coming
into operation on November 1. This staggered implementation was designed to
give firms time to adapt their systems to
the new requirements. Once the FSAP
measures are in operation in the larger
member states, one ought to see significant downward pressure on costs. This
will presumably be translated into lower
costs for those wanting to raise capital.”
Designed to harmonise
Oliver Drewes, spokesman for Charlie
McCreevy, the European Commissioner
for the Internal Market and Services, says
the objective of financial integration is to
make it easier for businesses to carry out
financial transactions and decrease the
regulatory burdens and hurdles, primarily
by harmonising legislation. By using regulation to encourage greater coherence,
transparency, lower costs and a more
open financial services sector, it will, in
turn, help to generate increased economic growth. At the moment, significant differences remain between
Europe’s banking systems and, as a
result, few institutions are benefiting
from economies of scale.
So, according to Mr Drewes, this is not
regulation for regulation’s sake. “Put
simply, it is easier to deal with one set of
rules than with the current list of at least
27 different sets of regulations. But it is
also important to make sure that you
don’t come forward with directives that
add more complexity to the industry,”
he says.
Integration efforts
EU financial services firms and foreign
banks with large operations in Europe
have been committing significant
resources to the development of a single
integrated market. They have had
projects running for a year or more and
estimates on money invested to gear up
their systems are in the £30m-£50m
range. Banks are also conducting impact
assessments in areas such as best
execution, pre-trade and post-trade
transparency, client classification, transaction reporting and record keeping.
However, there are wider business
benefits for banks and corporates to gain
from compliance with these new
REGULATIONS I EMBRACING CHANGE I 9 ■
regulatory requirements. There are a host
of opportunities that they can take
advantage of as new regulations come
into force.
For example, under the recently
adopted Single Euro Payments Area
(Sepa), EU citizens will now be able to
pay bills anywhere in the 27-country bloc
using cards and credit transfers from a
single bank account. The effective
implementation of Sepa will require close
co-operation between banks, regulators,
corporations and national public sector
institutions.
Common rules
The introduction of MiFID will result in a
common set of rules and will help to
increase the number of investment
services that can then be ‘passported’ by
firms, making it easier for them to conduct cross-border business.
TARGET2-Securities (T2S) will create a
single engine for the settlement of trades
that will simplify clearing and settlement
with the goal of better pricing, increased
transparency and a more competitive
clearing and settlement landscape
across Europe.
And, as part of a trans-Atlantic financial
integration process, US and European
leaders reached agreement in April to
increase regulatory co-operation, and
implement pending banking and
accounting proposals that are aimed at
reducing costs for industry and consumers. This comes after the US markets
watchdog, the Securities and Exchange
Commission, announced it had reached
a series of arrangements with European
counterparts to work together more
closely.
Competitive advantages
However, the FSA’s Mr Parker says that,
in understanding the impact of regulation, it is important to distinguish
between different sorts of financial
services firms. Highly sophisticated
entities such as global investment
banks will want to have efficient, nonduplicative regulatory relationships
because they are active in a number of
marketplaces and will seek competitive
advantages from these regulations.
“They may find that the cost of a modest increase in regulatory requirements
in some areas would be more than offset by the fact that they did not have to
have separate systems, for example
reporting requirements for each member state,” he says.
“A local building society, on the other
hand, will not generally care about
cross-border business to any significant
extent and therefore its relationship will
be with its domestic regulator, and it
will probably be concerned far more
with the burden of local requirements
than the potential benefits of requirements that are harmonised across the
EU at a more costly level,” adds Mr
Parker.
The current wave of regulation in the
EU has been designed to create a single
financial services market. Because they
are designed to provide banks with new
revenue and business opportunities,
these kinds of regulatory changes are
likely to be embraced in other regions in
the future as banks seek to provide a
much wider range of products and
services, at more competitive prices, to
meet the needs of both customers and
businesses alike.
■ 10 I EMBRACING CHANGE I MiFID
MiFID spawns new
execution venues
Investment firms preparing for MiFID are getting ready to seize
the commercial advantages. Alternative trading and market
data platforms are being created to challenge the supremacy
of the established exchanges
Michael
Imeson
The aim of the Markets in Financial
Instruments Directive (MiFID) is to shake
up Europe’s investment services industry
and make it more efficient, competitive
and dynamic. The shake-up is already
happening, even though the directive
does not comes into effect until
November 1.
Perhaps the most visible manifestation
of how investment firms are seeking to
exploit the business benefits has been
the rush to set up new trading platforms
and market data services that will
increase trading speeds and cut costs,
and take away business from the traditional exchanges. These new services
have been made possible because
MiFID abolishes the ‘concentration rule’
and introduces measures such as the
best execution and transparency
MiFID I EMBRACING CHANGE I 11 ■
Perhaps the most visible
manifestation of how
investment firms are
seeking to exploit the
business benefits has been
the rush to set up new
trading platforms
requirements (see box: MiFID explained).
Since last autumn, for example, there
has been the set up of Turquoise, a panEuropean alternative trading system (or
multi-lateral trading facility – MTF – as
these systems are known under MiFID);
Instinet-ChiX, an equities MTF; Equiduct,
a pan-European retail trading platform
registered as a ‘regulated market’ under
MiFID, which means it is governed by
slightly different standards from an MTF;
and Project Boat, a market data provider.
Creating noise
Of the four, Turquoise has probably
created the most noise. It was set up in
London last November by seven investment banks: Citi, Credit Suisse,
Deutsche Bank, Goldman Sachs, Merrill
Lynch, Morgan Stanley and UBS. It will
be operational by the end of this year.
“Our intentions are to introduce competition in the marketplace through
lower costs, higher speeds and rich functionality,” says a Turquoise spokesman.
“We’re not just talking about this from a
trading point of view, but from a posttrade services – clearing and settlement
– perspective as well. Exchanges have
not been very responsive to the needs of
their users, but our platform will be.”
Turquoise is recruiting its own management team, independent from the founding banks that are the shareholders. The
consortium is also aiming to attract
liquidity from other market participants,
which will use the new execution venue
on an equal footing with the founders.
Post-trade plumbing
The latest significant development was
the appointment of European Central
Counterparty (EuroCCP) in April as the
clearing house to handle Turquoise’s
clearing and settlement, in partnership
with Citi’s global transaction services
business, which will act as the
settlement agent.
EuroCCP, a subsidiary of the US
Depositary Trust & Clearing Corporation
(DTCC) and based in London, will act as
the central counterparty for Turquoise,
providing netting, anonymous post-trade
processing and risk management.
Positions will then be passed to Citi for
settlement in the relevant central
securities depositories.
“We see this as a major milestone in
making Turquoise work because we need
to be able to clear and settle securities
■ 12 I EMBRACING CHANGE I MiFID
MiFID explained
On November 1, MiFID will replace the
Investment Services Directive, which
has governed the activities of
investment firms and markets in the
EU since 1995.
MiFID’s objectives are to change
the organisation and functioning of
investment firms, remove barriers in
Europe’s capital markets, encourage
more cross-border trading, foster
more competition and increase the
efficiency of firms and markets. The
directive is a key part of the EU’s
Financial Services Action Plan, which
is intended to help the EU to compete
more effectively against the US and
emerging markets.
The directive consists of two sets
of measures:
■ The level 1 measures, which are the
key principles written out in the
directive. They include abolishing
seamlessly in Europe, and keep prices
low,” says the spokesman. “It might only
be the ‘plumbing’, but the plumbing is
important and in some ways the hardest
thing to get right.”
The next steps
Turquoise will soon make a decision on
who will supply its trading platform. It
also has to apply for an MTF licence from
the UK’s Financial Services Authority,
which will be its lead regulator.
Its creators do not underestimate the
scale of the task in competing with the
established exchanges. “The incumbents
start with a massive advantage because
they have the liquidity, and liquidity
attracts liquidity,” says the spokesman.
“But they have a lot of unhappy customers. They have modern central limit
order books but have not kept up with
the concentration rule, which
requires investment firms in some
member states to route orders only
through national exchanges;
updating the ‘single passport’ for
investment firms; and
strengthening and harmonising
investor protection rules.
■ The level 2 measures, which are the
detailed measures drawn up by the
European Commission to ensure
the uniform application of the level
1 measures. There are four main
categories of level 2 measures:
conduct of business requirements
for firms; organisational
requirements for firms and
markets; transaction reporting
requirements for firms and
co-operation among competent
authorities; and transparency
requirements for firms trading
shares.
some of the developments in the
marketplace, such as the growth in high
frequency trading.
“So we start at a disadvantage but we
believe we will have a disruptive effect
and will create a new pool of liquidity
because we know what their customers
are unhappy with.
“They are unhappy with trading costs,
they are unhappy with some issues
around latency and the flexibility of the
platforms, and they are unhappy with
expensive clearing and settlement
services.”
Turquoise is a prime example of how
some banks are positioning themselves
to take advantage of MiFID. But it will not
be easy. The traditional exchanges, along
with the other new execution venues
being set up, will fight for their market
shares, too. ■
SEPA I EMBRACING CHANGE I 13 ■
Getting into the
right mindset
Corporates should start factoring the Single Euro Payments Area
into their plans now so that any changes to internal financial
processes do not need to be re-engineered when Europe’s new
harmonised payments infrastructure finally takes shape
Naveed
Sultan
In his book on globalisation, The World is
Flat, US business writer Thomas
Friedman reminds us that computers
had only a gradual impact on business in
the 1980s. Firms invested millions of
dollars in IT systems but the returns were
slow to materialise. Only when companies began to adapt their workflows did
the IT revolution really take off. The
impact of the euro on the cash and
treasury processes of corporates in
Europe was similar. Companies began to
adapt their cash flow processes to the
single currency at their own pace,
typically implementing euro cash pools
and rationalising account structures only
when this coincided with other change
requirements.
Those that took a cautious approach to
computerisation or indeed the euro did
not go the way of the dinosaurs, but
many did lose precious ground to
competitors by failing to adapt their
processes to major shifts in the business
environment. The Single Euro Payments
Area (Sepa) also provides corporates
with an opportunity to review and
upgrade their financial processes. In fact,
Sepa can be a catalyst for a new level of
integration of the financial supply chain.
While only banks need to worry about
‘Sepa compliance’ for now, corporates
that adopt a wait-and-see stance for the
introduction of a single payments infrastructure across Europe may miss a
significant opportunity to cut costs,
review sub-optimal processes and further centralise their European cash and
treasury operations.
Completing the picture
Sepa is perhaps best understood as an
admission by Europe’s politicians that
the euro did not fully deliver the single
market vision of free-flowing goods, services, capital and labour across Europe’s
borders. That vision of economic union is
still a work in progress, much like many
corporations’ current attempts to create
a single infrastructure for managing their
European cash flows. In reality, the
euro’s introduction left much of Europe’s
existing national payments infrastructures untouched.
Corporates reacted appropriately by
adopting overlay structures that left
national operations largely intact while
taking an important first step towards
pan-European treasury centralisation.
But the inefficiencies of multiple local
products and processes remained. Just
as Sepa and the Payment Services
Directive (PSD) bring the politicians’
dream of a single European market a
step closer, so too can it help corporates
further optimise their European cash
management operations.
To look more closely at how Sepa may
do this, let us take the example of a corporate that has consolidated European
SEPA I EMBRACING CHANGE I 15 ■
■ 14 I EMBRACING CHANGE I SEPA
disbursement processing across Europe
in a shared service centre on a single
enterprise resource planning (ERP)
system. Certainly this corporate has
achieved significant cost savings by
lifting processes out of the local environment, but inefficiencies remain. The firm
still needs to operate country processes
separately because of the lack of
standardisation between payment
instruments across Europe. With the
introduction of pan-European instruments under Sepa, the corporate has
the prospect of reducing dozens of payment types to a single set. As well as
enabling further internal process rationalisation, the standardised, electronic
payment formats will improve the
efficiency of cash flows between crossborder counterparties, thus helping the
firm’s financial and physical supply
chains to operate in parallel.
Sepa will also pave the way for future
optimisation. It may renew the business
case for pan-European process improvement projects such as auto reconciliation or e-billing services that were not
cost effective while Europe’s patchwork
payments infrastructure perpetuated
instruments that provided such varying
levels of information quality. Corporates
have continually demonstrated their
appetite for improving efficiency in the
financial supply chain. Programmes
such as TWIST and RosettaNet have
established common rules that enable
corporates to process invoices,
purchase orders and related payment
flows more efficiently, and which are
now integrated with Swift’s XML-based
message suite.
These initiatives have already brought
significant financial supply chain benefits to many corporates, but Sepa offers
further opportunities, both for corporates that wish to migrate to the Sepa
instruments in parallel with use of
TWIST standards, for example, and for
first-movers that now wish to make their
bank communication processes as
streamlined as their corporate-tocorporate message flows.
Factor Sepa into your plans
Perhaps the most important change a
corporate can make ahead of the
introduction of Sepa is a change of
mindset. Corporates should start to
factor Sepa into their plans now so that
any scheduled changes to internal
financial processes do not need to be
re-engineered when Europe’s new harmonised payments infrastructure finally
takes shape.
In the next 12-18 months, a company
may need to review account structures,
payment types, banking relationships,
corporate-bank connectivity, payment
terms or ERP platforms. The introduction
of Sepa could have an impact on any of
these and as such its impact should be
considered sooner rather than later. It is
clear that the existing local payment
products must eventually be decommissioned, so early movers away from these
products can ensure competitive advantage. For example, a firm should consider which payments might benefit
quickly from Sepa Credit Transfers, and
use these as the business case for
developing the capability.
Other volumes can follow on a phased
basis. Similarly, a company that plans to
expand into new markets should discuss
the most appropriate account structure
with its existing banking partner, as it
may no longer be necessary to establish
local accounts for its overseas operations once customers in those markets
start to use standardised payment
instruments. There are many applications of Sepa and each organisation will
need to respond differently.
Companies should build the business
case today by committing IT and other
resources to facilitate the switch to new
payment instruments as soon as they
become available. Given the pressure on
discretionary investment, the challenge
is often securing a green light for a
much-needed but sometimes hard to
justify project, despite the long-term
benefits that it might generate.
Naturally, the impact of Sepa will be
different on every organisation, depending on its industry sector, management
culture, degree of automation and geographic spread. Some firms will be able
to reduce their use of local bank
accounts significantly; for others, local
accounts will remain critical. Treasurers
will have to work within the complexities
of business reality.
Customer needs
Banks should be committed to
supporting their customers’ requirements however they decide to tackle
Sepa. Most will look to supply Sepa
solutions via their existing branches and
channels to ensure clients can quickly
integrate the new instruments into their
current banking infrastructure, and
simplify their in-house processes.
Corporates need to prepare now to
make the maximum use of the opportunity provided by the migration of
Europe’s payments to a single
infrastructure. Priorities might include:
● Review Sepa’s impact on any internal
processes and systems.
● Review use of payment types/
formats, account structure and banking
connectivity.
● Check that their bank is on schedule
to be Sepa compliant.
● Identify areas of banking activities that
could benefit quickly from Sepa.
● Start talking both internally and to
business counterparts now to draft a
plan for migration to new instruments
(including period of parallel running with
existing instruments).
● Identify budget and resources required
to effect migration.
● Keep up-to-date on plans to decommission the local payment products and
processes.
But whatever the priorities, for any treasurer looking to drive efficiency and optimisation, Sepa is not something happening
in January, 2008, it is already here. ■
Naveed Sultan is managing director, head
of cash management, Europe, Middle
East and Africa, at Citi
SEPA I EMBRACING CHANGE I 15 ■
■ 14 I EMBRACING CHANGE I SEPA
disbursement processing across Europe
in a shared service centre on a single
enterprise resource planning (ERP)
system. Certainly this corporate has
achieved significant cost savings by
lifting processes out of the local environment, but inefficiencies remain. The firm
still needs to operate country processes
separately because of the lack of
standardisation between payment
instruments across Europe. With the
introduction of pan-European instruments under Sepa, the corporate has
the prospect of reducing dozens of payment types to a single set. As well as
enabling further internal process rationalisation, the standardised, electronic
payment formats will improve the
efficiency of cash flows between crossborder counterparties, thus helping the
firm’s financial and physical supply
chains to operate in parallel.
Sepa will also pave the way for future
optimisation. It may renew the business
case for pan-European process improvement projects such as auto reconciliation or e-billing services that were not
cost effective while Europe’s patchwork
payments infrastructure perpetuated
instruments that provided such varying
levels of information quality. Corporates
have continually demonstrated their
appetite for improving efficiency in the
financial supply chain. Programmes
such as TWIST and RosettaNet have
established common rules that enable
corporates to process invoices,
purchase orders and related payment
flows more efficiently, and which are
now integrated with Swift’s XML-based
message suite.
These initiatives have already brought
significant financial supply chain benefits to many corporates, but Sepa offers
further opportunities, both for corporates that wish to migrate to the Sepa
instruments in parallel with use of
TWIST standards, for example, and for
first-movers that now wish to make their
bank communication processes as
streamlined as their corporate-tocorporate message flows.
Factor Sepa into your plans
Perhaps the most important change a
corporate can make ahead of the
introduction of Sepa is a change of
mindset. Corporates should start to
factor Sepa into their plans now so that
any scheduled changes to internal
financial processes do not need to be
re-engineered when Europe’s new harmonised payments infrastructure finally
takes shape.
In the next 12-18 months, a company
may need to review account structures,
payment types, banking relationships,
corporate-bank connectivity, payment
terms or ERP platforms. The introduction
of Sepa could have an impact on any of
these and as such its impact should be
considered sooner rather than later. It is
clear that the existing local payment
products must eventually be decommissioned, so early movers away from these
products can ensure competitive advantage. For example, a firm should consider which payments might benefit
quickly from Sepa Credit Transfers, and
use these as the business case for
developing the capability.
Other volumes can follow on a phased
basis. Similarly, a company that plans to
expand into new markets should discuss
the most appropriate account structure
with its existing banking partner, as it
may no longer be necessary to establish
local accounts for its overseas operations once customers in those markets
start to use standardised payment
instruments. There are many applications of Sepa and each organisation will
need to respond differently.
Companies should build the business
case today by committing IT and other
resources to facilitate the switch to new
payment instruments as soon as they
become available. Given the pressure on
discretionary investment, the challenge
is often securing a green light for a
much-needed but sometimes hard to
justify project, despite the long-term
benefits that it might generate.
Naturally, the impact of Sepa will be
different on every organisation, depending on its industry sector, management
culture, degree of automation and geographic spread. Some firms will be able
to reduce their use of local bank
accounts significantly; for others, local
accounts will remain critical. Treasurers
will have to work within the complexities
of business reality.
Customer needs
Banks should be committed to
supporting their customers’ requirements however they decide to tackle
Sepa. Most will look to supply Sepa
solutions via their existing branches and
channels to ensure clients can quickly
integrate the new instruments into their
current banking infrastructure, and
simplify their in-house processes.
Corporates need to prepare now to
make the maximum use of the opportunity provided by the migration of
Europe’s payments to a single
infrastructure. Priorities might include:
● Review Sepa’s impact on any internal
processes and systems.
● Review use of payment types/
formats, account structure and banking
connectivity.
● Check that their bank is on schedule
to be Sepa compliant.
● Identify areas of banking activities that
could benefit quickly from Sepa.
● Start talking both internally and to
business counterparts now to draft a
plan for migration to new instruments
(including period of parallel running with
existing instruments).
● Identify budget and resources required
to effect migration.
● Keep up-to-date on plans to decommission the local payment products and
processes.
But whatever the priorities, for any treasurer looking to drive efficiency and optimisation, Sepa is not something happening
in January, 2008, it is already here. ■
Naveed Sultan is managing director, head
of cash management, Europe, Middle
East and Africa, at Citi
■ 16 I EMBRACING CHANGE I CLEARING & SETTLEMENT
Market practice
harmonisation
Clive Triance, head of securities and fund services and direct
custody and clearing, Europe, Middle East and Africa, at Citi, tells
Heather McKenzie how the EU clearing and settlement landscape
is moving towards better processing, increased efficiency and
general market transparency
Heather
McKenzie
The European Central Bank says
the EU lacks an efficient, inte grated securities infrastructure to
support the operation of a single
financial market. How can such an
infrastructure be built?
There is an enormous drive among
the public and private sectors in
Europe to find more efficient ways for the
financial industry to operate. The goal of
legislation such as MiFID [Markets in
Financial Instruments Directive] and projects including TARGET2-Securities [T2S]
are to harmonise the legal framework
and the market infrastructure in Europe.
Simultaneously, significant cost
reductions are being achieved by
financial institutions as they introduce
greater efficiencies within their organisations. Greater use of standards such as
ISO15022-based messages has also
helped move the industry closer to
interoperable infrastructures. These
standards have helped lower costs for
our customers as well as for ourselves.
The combination of public and private
sector initiatives is paving the way for a
more harmonised and efficient market in
Europe.
Q
A
How are new developments
such as T2S shaping the
Q
European clearing and settlement
landscape?
T2S will create a single engine for
the settlement of trades. The
estimated €0.28 charge per trade will
help to reduce costs further.
T2S will drive harmonisation in different markets, including the introduction
of harmonised opening and closing
times for settlement cycles, and a variety of optimisation mechanisms that
could significantly reduce the number of
failed transactions. The project could
prove to be a catalyst in the removal of
the remaining Giovannini barriers to
pan-European clearing and settlement.
While T2S will deliver less complexity
in settlement, it has to be remembered
that T2S is only addressing the
‘commoditised’ settlement part of the
transaction lifecycle. It does not perform
asset servicing services, which will
remain with the central securities
depository [CSD] leaving room to
increase the efficiency of these services
at the CSD level.
However, the task should not be
underestimated – developing TARGET2
for the cash markets was a complex
undertaking. For securities, we have to
take into account the intricacies of
different CSDs and local markets. It is
A
‘We need to
keep an open
mind about
the trade-off
between
commercial
innovation
and EU-run
processes’
■ 16 I EMBRACING CHANGE I CLEARING & SETTLEMENT
Market practice
harmonisation
Clive Triance, head of securities and fund services and direct
custody and clearing, Europe, Middle East and Africa, at Citi, tells
Heather McKenzie how the EU clearing and settlement landscape
is moving towards better processing, increased efficiency and
general market transparency
Heather
McKenzie
The European Central Bank says
the EU lacks an efficient, inte grated securities infrastructure to
support the operation of a single
financial market. How can such an
infrastructure be built?
There is an enormous drive among
the public and private sectors in
Europe to find more efficient ways for the
financial industry to operate. The goal of
legislation such as MiFID [Markets in
Financial Instruments Directive] and projects including TARGET2-Securities [T2S]
are to harmonise the legal framework
and the market infrastructure in Europe.
Simultaneously, significant cost
reductions are being achieved by
financial institutions as they introduce
greater efficiencies within their organisations. Greater use of standards such as
ISO15022-based messages has also
helped move the industry closer to
interoperable infrastructures. These
standards have helped lower costs for
our customers as well as for ourselves.
The combination of public and private
sector initiatives is paving the way for a
more harmonised and efficient market in
Europe.
Q
A
How are new developments
such as T2S shaping the
Q
European clearing and settlement
landscape?
T2S will create a single engine for
the settlement of trades. The
estimated €0.28 charge per trade will
help to reduce costs further.
T2S will drive harmonisation in different markets, including the introduction
of harmonised opening and closing
times for settlement cycles, and a variety of optimisation mechanisms that
could significantly reduce the number of
failed transactions. The project could
prove to be a catalyst in the removal of
the remaining Giovannini barriers to
pan-European clearing and settlement.
While T2S will deliver less complexity
in settlement, it has to be remembered
that T2S is only addressing the
‘commoditised’ settlement part of the
transaction lifecycle. It does not perform
asset servicing services, which will
remain with the central securities
depository [CSD] leaving room to
increase the efficiency of these services
at the CSD level.
However, the task should not be
underestimated – developing TARGET2
for the cash markets was a complex
undertaking. For securities, we have to
take into account the intricacies of
different CSDs and local markets. It is
A
‘We need to
keep an open
mind about
the trade-off
between
commercial
innovation
and EU-run
processes’
■ 18 I EMBRACING CHANGE I CLEARING & SETTLEMENT
an important initiative that has the
potential to achieve lower costs
provided it is built to allow CSDs to
reduce their costs and those savings are
passed on to users.
How does T2S fit in with Citi’s
Turquoise involvement?
The aim of T2S is to create a single
settlement engine with the end goal
of reducing costs. The work we are
doing with Turquoise is in line with those
objectives.
One of the aims of the investment
banks that have established Turquoise is
to substantially reduce the all-in cost of
transacting, and that includes not only
trading costs but also the cost of
securities clearing and settlement. Citi
is acting as the settlement agent for the
Turquoise central counterparty, DTCC’s
[Depository Trust and Clearing
Corporation] EuroCCP – creating a
single clearing and settlement solution
with improved pricing.
The commercial marketplace is
developing solutions today that are
precursors to T2S [for which the market
will have to wait until 2013]. An example
is Citi’s development of European MultiMarket Access [EMMA]. Initially for the
Euronext markets, it is a solution that
provides a single legal entity securities
and cash account to support market
activity.
The goals of T2S, Turquoise and EMMA
are all aligned – to reduce the cost of
trade flow from execution to settlement
through harmonisation.
Q
A
W h a t a r e th e o p p o r tu ni t ie s in t h e
e v o l v i n g c l e a r i n g a n d se tt l e m e n t
l a n d s c a p e f o r y o u a n d y o u r u s e r s?
The European clearing and settlement landscape is moving towards
better processing, increased efficiency,
a simpler structure, price transparency
Q
A
and general market transparency. The
harmonisation of market practices and
jurisdictions will make the market more
competitive and create opportunity.
Citi is working with CCPs and CSDs in
the region to redefine the settlement
process in a way that brings extra value
in terms of cost reduction. CCPs and
settlement agents are looking at the
flows of trades and where they can add
value. In talking to our customers, we
have identified where the costs are in
the trade lifecycle and have been able
to unbundle our pricing to offer a
transparent fee structure that shows
clients what they are paying for
specific processes. This gives customers more flexibility to choose the
services they want.
The landscape today is quite complex –
some customers want to hold an account
at the CSD themselves. However, they
want us to provide some of the additional
services, such as corporate actions
processing and income processing, in
order to reduce the burden on their back
offices – and we are doing that.
Historically, it has been very difficult to
see how an infrastructure could develop
that would address the European
Commission’s desire for greater
efficiency, while balancing the
commercial needs of the entity building
the infrastructure.
However, the ECB has become a
strong driver for market efficiency,
innovation and harmonisation and T2S is
proof of that. There is a realisation that
we need to keep an open mind about
the trade-off between commercial
innovation and EU-run processes. There
is a great opportunity for the private
sector to provide services that
complement the public sectors efforts
to help to further improve efficiency
and bring greater results to clients
across Europe. ■