New Spanish market reform: The active and constructive participation of Societe Generale Securities Services Madrid
The Spanish settlement process is on the cusp of another reform, underpinned by the latest Securities Law which removes the post trade interface.
This reform will be the third in recent years for Spain, following the major reform of 2016 which introduced the figure of the Central Clearing Counterparty to the market and eliminated the “RR” (Registry References) associated to every purchase, with its huge administrative burden, and which prepared the market for the entry into force of T2S in 2017 (the second reform).
Despite the updates to the market processes which the first reform and T2S forged, the Spanish settlement system has determinedly maintained its rules about registration: While eliminating the RR on the one hand, on the other it introduced new specifics to the process. These specifics were all designed to fulfil the legislative need for tracking ownership through the registration of shares at all the stages of the trading, clearing and settlement chain. The tool put in place for the control of registration from purchase through to settlement, was the PTI (Post Trade Interface) which facilitates the recording of registration and tracks it in the case of share transfers.
The latest draft Securities Law in Spain was approved by the Council of Ministers in June this year and is expected to be passed early next year. Most significantly for the trading and post trading activity, the changes projected include the removal of the PTI. According to the draft law, the Spanish clearing and settlement procedure should be brought into line with other European markets, eliminating the local specifics which the PTI supports.
The future setup to comply with the new law has been under discussion, since November 2021, in the Market’s Technical Group for Reform 3 (GTR3). The group, chaired by Iberclear, is composed of 11 Iberclear participants and of the CNMV1, FOGAIN (the Investors Compensation Scheme), the Spanish Banking Association and BME (Bolsas Y Mercados Espanoles). Societe Generale Securities Services (SGSS) Madrid has been an active and constructive participant and has made dynamic contributions to all the discussions.
The remit of the GTR3 was to analyse the operational impacts of removing the PTI and seek solutions for the settlement process in its absence. The group sought to achieve a consensus across all the affected parties. The expectation was that changes agreed and implemented for this reform should factor in future potential regulatory changes such as a move to a T+1 settlement cycle, without the need for further significant updates further down the line.
The deliberations, over nine committee meetings which have taken place, were kept confidential until now, when Iberclear has published a report summarising the proposals which have emerged from the GTR3.
The adaptation period for the implementation of the law is two years, and Iberclear hopes not to need to extend the process for the full period allowed. None of the changes to procedures are yet finalised or official, and all processes must still be detailed and announced by market regulators. However, based on the information available to us, SGSS Madrid would like to share the following considerations about the future processes in our market:
Impacts on processes
With the elimination of the PTI, Iberclear and CNMV lose their responsibility for supervision of the registration flow – the tool for their doing so being removed. Registration will no longer be supervised through the settlement process but will be under custodian responsibility on the custodian’s books.
Therefore, whilst registration constraints will be broadly eliminated, we must bear in mind that “second tier” registration is maintained. Recording of registration will be the responsibility of the custodians in their second-tier register. In fact, custodians currently have this same duty. This means that the accounts on the custodian’s books are still considered as reflecting ownership, despite the nominee concept being recognised. However, the regulatory proposals under the draft law will provide legal certainty for the recording of securities in the second-tier register in the name of the client of the participating entity, which may or may not coincide with the shareholder of the securities in a chain of custody.
Issuers of securities need to receive information regarding the identification of their shareholders. As a result, it has been agreed that Iberclear will continue to provide issuers with such a daily file and the participants will continue to provide the same to Iberclear (as is done currently). To this end, Iberclear participants will continue to present a daily HTITU03 report to Iberclear for all nominative stock.
The types of accounts to be used by our clients will vary in some cases.
The account setup currently known as SFI (Special Financial Intermediary) is used by broker dealers to facilitate the transfer of their purchases to the beneficiary, and to receive shares from the beneficiary to settle their sales. It is currently in place with very specific rules and, indeed, penalties, to ensure the correct registration of such trades. This account model will be directly impacted by the Reform 3.
Without the PTI, the traceability of operations and the links which form part of the SFI process become inviable. It is considered that the SFI account type, the end-of-day sweep process and the OAUX specific trade type will be eliminated. Existing SFIs will be able to continue to operate under individual Third-Party accounts.
Clients who are financial intermediary clients (in the broad use of that description, not the specific Spanish SFI use), who hold assets under nominee names will be able to use a Third-Party individual account (individual account for third parties). The current multiple sub accounts which many of our clients have for technical purposes - an account per registration name - will no longer be required.
Corporate clients would hold Individual accounts or use SGSS Madrid’s Third-Party account.
If the customer of a client who uses their nominee name on SGSS Madrid’s books requires to have their own identity recognised (e.g. for certification of ownership, or for major shareholding), we would have to segregate that customer onto either an individual account or onto SGSS Madrid’s third party account – it could not be maintained on the third party individual account.
Matching field standards in T2S can be brought into line with other markets in relation particularly to Party2, to indicate the client of the CSD participant, while currently market practice in Spain uses it to indicate the registration. Iberclear expects to modify the conversion of ISO15022 messaging to ISO20022 and adapt its formats. The fields relating to the Iberclear participant’s client (BUYR/SELL, DECU/RECU, DEI1/REI1) should be used exclusively for this purpose. The field will not have to match, and indeed we expect mismatching of trades.
It is hoped that a market practice will be agreed on among market participants so that counterparties will be unambiguously aware of the information that is included in the Party2 matching field.
Trade types in instructions will be simplified and standardised. One potential impact of this is in the clients’ responsibility for reporting the Financial Transactions Tax when a trade could be subject to it (as trade type will no longer serve as an indicator).
A Task Force to examine in depth the Party2 and trade type topics, with one representative from each entity on the GTR3, has just been created and will start work.
Market trades, cleared via CCPs, executions (trade type “NETT”) will no longer be recorded. This will have an impact on our clients who do not instruct market trades. As we progress with the reform, it will be decided whether they would start to instruct (in that case by net or by total sell and total buy, by each order, with different registrations...?). In the absence of instructions, there would be no possibility to use different registrations as settlement would be as received from CCP (currently by net of buys and sells) and we would have no registration details.
It is too soon to know whether our considerations about future processes, laid out above, reflect the definitive setup put in place under the Reform 3, although all the information so far points in this direction. Work continues within the market committees and task force to iron out a future procedure which will work smoothly. Iberclear will, in due course, update its written published procedures to set out the final version for the market reform.
If the proposals of the GTR3 are respected, the switch, when it comes, to new procedures and the elimination of the PTI will be as a Big Bang, with no parallel run period. Equally, it should not happen until every market participant is ready and prepared.
The reform will harmonise and simplify procedures with a positive impact on the efficiency of the market and lays the groundwork for a future move to T+1 settlement.
SGSS Madrid is at your disposal with news and milestones regarding this significant project.
1CNMV: Comisión Nacional del Mercado de Valores, or Spanish National Securities Market Commission