Europe Mulls Tighter Rules On Segregated Accounts

Terry Flanagan

The European Union lawmaker charged with pushing legislation on central securities depositories (CSDs) through parliament has said that last month’s global proposals on fully segregated accounts do not go far enough.

Highlighting the case of New York-based broker-dealer MF Global, which collapsed in October last year after a $6.3 billion trade—partly funded by customer accounts—on European sovereign debt went badly wrong and subsequently exposed an estimated $1.6 billion shortfall in customer funds, Kay Swinburne, a Conservative MEP and member of the European parliament’s economic and monetary affairs committee, believes that the EU should take the lead on the matter. MF Global customers on both sides of the Atlantic still await full repayment of their assets as the case rumbles on in court.

“At a bare minimum, fully segregated accounts should be offered, at cost, to those who would like the extra safety,” Kay Swinburne, who is the European parliament’s rapporteur for the CSD legislation, told a conference in London hosted by European banking lobby AFME this week. The European Commission announced plans to overhaul the settlement of share and bond trades across the region in March.

She added: “I am really glad that the latest internationally agreed standards, published by CPSS [Committee on Payment and Settlement Systems]-Iosco [International Organization of Securities Commissions] last month, clearly recommend that CSDs should ‘segregate participants securities from those of other participants through the provision of separate accounts’. It is my belief that the European Commission’s method of defining individual segregation with words like ‘distinguish’ simply does not go far enough. ‘Distinguishing in records and accounts’ leaves too much room for interpretation at the expense of the end client.”

Last month, the Basel-based Bank for International Settlements (BIS), an intergovernmental organization of central banks, proposed “new and more demanding standards for payment, clearing and settlement systems”–the post-trade plumbing that underpins most trading activities. The BIS’s CPSS and the technical committee of Iosco, which includes national regulators like the UK’s Financial Services Authority and the US Securities and Exchange Commission, have been charged with the task by BIS and have been reviewing the standards since 2010 following increased uncertainty in financial markets that have highlighted the importance of market infrastructures.

CPSS-Iosco wants its members to begin implementing the new standards immediately, with full implementation by the end of this year, in line with the G20 group of nations’ timeline to introduce far-reaching reforms to better regulate the $700 trillion global OTC derivatives market.

The new CPSS-Iosco principles relate to the financial resources and risk management procedures financial market infrastructures uses to cope with the default of participants; the mitigation of operational risk; the links and other interdependencies between financial market infrastructures through which operational and financial risks can spread; achieving the segregation and portability of customer positions and collateral; tiered participation; and general business risk.

“With these new principles, authorities have a good basis on which to ensure a safe and stable financial infrastructure,” said Paul Tucker, deputy governor for financial stability at the Bank of England and chairman of CPSS. “It is essential that authorities adopt the principles, and financial market infrastructures observe them, as soon as possible.”

One of the problems the EU faces is adopting a harmonized approach to that suits all 27 nations of the bloc.

“I was pleased to see that the vast majority of the CPSS-Iosco standards are in fact reflected in the Commission’s proposal—the fact that the EU is looking to integrate 27 different, hugely divergent, systems already must help when they sit in international fora like Iosco,” said Swinburne.

The Commission’s proposals on the settlement of trades first needs the support of the European parliament and the countries of the 27-nation bloc before it can become law. Any new law is expected to hit the statute books some time in 2014.

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