Nicholas Pratt talks to Roger Storm, head of clearing risk and development at Six x-clear about the cost of clearing and settlement and how it relates to fund managers’ overall expenses.
Is it possible to separate the clearing and settlement costs incurred by a fund from other post-trade or trading-related costs? How transparent are these costs?
Clearing and settlement charges for equities and several other instruments are transparently published on the websites of those trade venues; central securities depositaries (CSDs) and central counterparty clearing houses (CCPs) that have signed and supported the European code of conduct for clearing and settlement. Six Securities Services is one of the parties that rigorously adheres to this and this is shown in Six x-clear’s fee structure.
Where the CCP is integrated within an exchange or a CSD, which is still the case for some markets, these costs may be less transparent. But it is important to highlight that CCPs enhance efficiency for financial markets by reducing the number of transactions being settled, which in turn reduces liquidity and financing needs, and reduces the number of trading counterparties to one entity – which, from a risk angle, reduces risk capital requirements.
Is there much demand from fund managers and investors for more reporting of, or more transparency around, these costs?
We think there is more awareness among insurers and fund managers for using clearing and settlement services from qualified CCPs due to the offered transparency of the respective charges. A qualified CCP is one that is recognised by the European Securities and Markets Authority (Esma).
What regulatory issues are impacting costs?
The European Central Securities Depositories Regulation (CSDR) is one of the key regulations adopted in the aftermath of the 2008 financial crisis. CSDR impacts wider financial market infrastructures, including trading venues and CCPs.
For example, it affects the pricing parameters listed above due to the introduction of a new settlement discipline regime. As part of this new regime, mandatory buy-ins and cash penalties will apply in the event of settlement fails.
What is Six x-clear doing to reduce clearing and settlement costs?
We naturally strive continuously to enhance the quality and efficiency of our services by simplifying our IT structure and settlement network, for example. But more importantly, we are working on further broadening our clearing universe. By doing so, we help our members to enhance market liquidity and to reduce liquidity costs. The most important benefit we provide for our clients is a reduction in risk capital that gets tied up. We achieve this by letting our participants reduce their dependence on multiple counterparties to one single CCP.
In addition, Six x-clear employs a real-time risk management model combining market and credit risk. In this model, individual risk positions and margin requirements are calculated and updated in real time throughout the trading day. Risk positions are offset across trading venues and cash products, reducing overall collateral requirements for us and our clients. Today, we are still one of the few CCPs ready to assume some of this risk by contributing our own assets in our defence lines and inter-CCP collateral.
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