Trade Processing, Clearing and Settlement Services

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Guide to middle office outsourcing solution providers offering fund administration, trade or transaction processing including trade enrichment, trade matching, trade confirmation, clearing and settlement.
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  • Post-trade processes comprise the services that are performed subsequent to the execution of a trade, and include:

• clearing

• settlement, including processes preparing for settlement such as affirmation, confirmation, allocation and matching

• custody and asset servicing

• related activities such as collateralisation

Post-trade services are provided by financial market infrastructures such as Central Counterparties (CCPs) Clearing Houses

and Central Securities Depositories (CSDs), as well as by intermediating banks (including custodians) and brokers.

• post-trade services form an integral part in discharging obligations entered into at trading level

• post-trade service providers process the corporate actions initiated by issuers, for the benefit of investors

Clearing

Following the trade, clearing is the process of managing the actions between trade date and settlement date. Clearing can

be done formally through a CCP clearing house, or informally directly between buyer and seller. CCP clearing is the process

whereby the CCP becomes the buyer to any seller and the seller to any buyer, so the counterparty risk is transferred to the

CCP from the actual parties to the trade.

In the area of clearing, EMIR, the European Market Infrastructure Regulation of 2012, covers clearing obligations, the

regulation of CCPs and obligations to report to Trade Repositories. Level 2 regulation is currently being implemented.

Settlement

Settlement is the step in the post-trade process flow where the buyer receives the purchased securities and the seller receives

the corresponding cash for those securities. Banks and brokers, as investors’ intermediaries, are involved in the process of

settling trades of securities in book entry form, and in providing access to CSDs. In the area of securities settlement, the CSD

Regulation (CSDR) covers inter alia the improvement of securities settlement (including the shortening of the settlement

cycle to T+2) and the regulation of CSDs. In addition, Target2-Securities, T2S, the pan-European settlement project initiated

by the European Central Bank (ECB), will go live from 2015-17.

Custody and asset servicing

These services comprise the safekeeping of assets by intermediary banks, brokers and CSDs on behalf of investors, as well

as carrying out asset servicing functions such as income collection, corporate action processing, tax reclamation and proxy

voting services.

Custody services are defined as ancillary services under the Markets in Financial Instruments Directive 2 / Regulation

(MiFID 2/MiFIR), while the amendment to the Shareholders Rights Directive, proposed by the Commission in April 2014,

inter alia aims at broadening the obligations of intermediaries. Through private sector initiatives, best market practices have

been developed using market standards for corporate actions processing and for general meetings to facilitate the exercise

of rights flowing from securities held – these are currently being implemented in all European markets.

Initiatives in the area of investment funds (mutual funds, unit trusts, exchange traded funds etc.) also have a significant

impact upon post-trade processes. These initiatives include legislation (notably the Undertakings for Collective Investment

in Transferable Securities, UCITS, and the Alternative Investment Fund Managers Directive, AIFMD), as well as private sector

work by the International Securities Services Association (ISSA), the European Fund and Asset Management Association

(EFAMA) and others.

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Celent have reviewed this profile and believe it to be accurate.