Conflicts of Perception

One of the largest changes in European markets for a long time happened this month, and nobody really noticed. For those unaware, Europe shifted its settlement cycle to T+2 in anticipation of requirements in the Central Securities Depository Regulation (CSD Reg), standardizing and harmonizing the cycle from its previous T+2/T+3 blend.

And what happened? Nothing. No reports of abnormal settlement fails ─ if anything, volumes were higher than normal, too ─ no major screw-ups. Not a dicky bird.

All of which is good, right? It shows that people can work together effectively when they need to, and it gives a bit of a boost to the beleagured European Commission, which hasn't had the rosiest reputation for stable financial overhaul over the past decade. Given the hubbub in the US about T+2, too, with the Depository Trust and Clearing Corporation (DTCC) taking the lead (albeit through committee), it's encouraging that it can work as well as it does among EU states. Except for Spain, of course, which isn't tackling it until 2015.

On a related market-structure note, regular readers of Sell-Side Technology may be interested to give Dan DeFrancesco's feature on the consolidated audit trail a read, along with his accompanying analysis piece looking at how fair it really is that Finra can be both a contestant in and arbiter of the bidding process.

The regulator protests that Chinese walls keep it all separate, and there's no reason to doubt that ─ the US Securities and Exchange Commission, after all, hasn't been shy about fining Finra in the past, so it's in its best interests to keep them separated. But as with so many other areas, in finance, it's the perception that can be the killer, rather than the reality.

Just look at the row over central counterparties (CCPs), and the systemic risk they supposedly present, if you believe JPMorgan and a (fair) few others. Nobody is saying they're perfect, but there are elements of hyperbole that go into this, such as recent stories in Waters' stablemate Risk that have Fed officials criticize the secondment of traders to a CCP in the event of a bank default, so as to hedge positions quickly. It can never work, they say in one breath, then point out that this happened at LCH.Clearnet during the Lehman collapse with the other.

The point is that for such a deeply intellectual field as investment banking, it's strange that so much is driven by how people see things on the surface, and how often this perception obfuscates the beneficial role that market elements such as CCPs can introduce. Yes, there are cogent arguments for CCPs transitioning to not-for-profit status, but the more hysterical sides of the debate are a little overwrought.