Markets in exchange-traded funds, ETFs, could benefit a lot from the upcoming CSDR regulation, which introduces fines against the settlement failures that hamper the market, a panel of stakeholders at the PostTrade 360° Web Summit agreed.
[We expect to be able to complement this article, within a few days, with a video recording of the panel.]
“We do see it as an opportunity. With CSDR coming up we have been approached by ETF market makers and issuers, as well as platforms, to find a solution how to address the low settlement efficiency for ETFs at the moment,” said Jan Treuren, head of product management with EuroCCP, in an afternoon session of the PostTrade 360° Web Summit on Wednesday.
He shared panel with Fabian Rijaarsdam, head of business development at Flow Traders, and Ben Sturgeon, equity derivatives product manager with Tradeweb – under moderation by Marc Knowles of Alpha FMC.
Jan Treuren sees a list of reasons for the poor settlement rates: fragmentation over different exchanges and CSDs, the labour intensity and error risks of the primary markets’ creation-redemption process etc. More netting and better efficiency is what he sees as the opportunity.
Buy-siders must choose their paths
The other panelists generally seemed to agree.
Not least Fabian Rijaarsdam emphasised a need to encourage buy-side actors to set their strategies, for example in the secondary market. Ultimately he expects different ways for buy-side participants to clear – priced differently to different client types.
“The rules will be more standardised. Ultimately, the extent to how we can price in the risk of each trade will depend on how the buy side is set up,” said Fabian Rijaarsdam.
“You can think of it as tiers. Everything that is completely CCP cleared will benefit from all the efficiencies and less settlement risk, and that will come back in the spread, so that is where we will have the tightest spreads going forward.”
Those who stay with bilateral OTC settlement could suffer under the penalties and buy-ins of CSDR, though.
“I would like to urge the buy-side to really think about how they are set up.”
“It has changed dramatically”
Ben Sturgeon pointed to the speed of change in how the processes have developed in the last years.
“When you think of the RFQ flow or ETF flow it used to be fully OTC. Now we have the bulk of trades happening on MTFs so they are fully transparent for pre- and post-trade. Once we introduce the CCP we will have a fully cleared model. So though it’s an OTC flow, it has changed dramatically from what it was, say, five years ago. It will end up on-venue and cleared, so there is a real change in how this bilateral trading is happening,” he said.
Our coverage of the PostTrade 360° Web Summit is gathered here.
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