Same-day settlement - the three little words every Euro-CP dealer wants to hear. But as the market surges into 2001 it has yet to become a reality. Automated settlement is the one thing that could rapidly increase efficiency and open the market up to new investors. But just how far away is it? Most dealers express frustration at the deadlock situation, but are positive that there will be results before the year is out. Scott Hindmarch, head of product management, Euro-CP at Lehman Brothers, says: "Progress is starting to look positive. But it doesn't look like happening overnight. IssueLink has definitely brought improvements. We all want same-day settlement - it's just a question of how soon and which clearer recognizes the growth potential inherent in the market." Louise Mason, head of Euro-CP origination at Credit Suisse First Boston, is hopeful that a decision will be made in the middle of the year. She says: "We are getting there. We did make progress in 2000, but we hope that this year we'll get the final result we're after. I don't think it will happen in the first half of the year, but I'm optimistic it will happen before the end of 2001." At the moment the settlement process takes an average of two to three days since trades have to be physically registered and assigned an ISIN code by the clearing house. Automated settlement would make the process quicker by providing instant codes for each transaction. Capital Net, publishers of MTNWeek, with its web-based IssueLink should bring same-day settlement closer. It speeds up the transmission of ISIN codes. Dealers agree it will make a significant difference. But even when it's rolled out to clients there is another step before automatic settlement is possible. John Ford, head of Euro-CP at Deutsche Bank, says: "IssueLink has helped in speeding up the transmission of codes, but code creation remains a problem. I gather that Euroclear is working on a good solution that should be introduced mid-year." Ford is also chairman of the Euro-CP Association and has campaigned for many years for same-day settlement. This has involved lobbying the clearing houses, Clearstream and Euroclear, and getting support from issuers and investors. Convincing the clearing houses just what a difference same-day settlement would make is important in the campaign. And Ford at Deutsche Bank has no doubt that it would open up the market significantly. He says: "The lack of same-day settlement is hindering the market. When interest rate views become bearish we lose outstandings to the deposit and tri-party repo market. There are also classes of investors such as securities lenders and money funds that work on an overnight and same-day settlement basis." Dealers agree that you only have to look at the overnight market in Europe to see the number of investors Euro-CP issuers are missing out on. And it's not just more European investors who would come to the market if same-day settlement was possible. Sally Vernon-Evans, director and product manager, Euro-CP sales, at Barclays Capital (Barclays) says: "Many investors go to US CP because there is same-day settlement there - you can buy up until 5pm on the day and have your trade go through. If this were possible in Euro-CP then I think yes, the market could seriously open up to new investors - particularly US investors who previously have only bought US CP for that reason." But it's not just the clearing houses that are stalling. Colin Withers, head of Euro-CP at Citibank, suggests that some issuers could be wary of the rising costs of such a service. "Same-day settlement is a strange subject. If issuers want it to happen they have to put pressure on the clearing houses. But they know that if the service is available then the clearing houses will put their fees up so then issuers have to pay more for the service. I think that's why some issuers haven't been keen to rush the process through," he says. A further hindrance to progress is general market apathy. Vernon-Evans at Barclays says: "I'd like to think we could have same-day settlement this year - but someone would have to put their hands up and take responsibility for really getting it organized. I'm not sure many investors or issuers are totally committed to seeing automated settlement in Euro-CP yet." Withers, at Citibank, echoes this sentiment. He adds: "In the age of e-commerce we all know it's perfectly possible. Everyone is saying yes, let's sort it out, but there is a general inertia about the market. If investors and issuers were telling me they wanted it then I would be shouting at the paying agencies to get something done." The responsibility for same-day settlement will lie with the paying agencies and clearing houses. And, when it does finally become a reality the pressure will be on to make sure they can react quickly and avoid errors. Wayne Bartlett is an executive director at Goldman Sachs. He is the chairman of the ECP operations working group and has been closely involved with IssueLink. He says: "Market participants are working hard to eliminate the operational barriers which hinder same-day settlement. With initiatives such as European PIMS and IssueLink currently underway it should be possible to make real progress during 2001."
February 09, 2001
