The Spanish custody market has undertaken a number of initiatives to improve harmonisation and efficiency, and now, with plans to eliminate further market-level specificities, the market moves closer to full post-trade harmonisation with other EU markets
The Spanish financial services market has undergone a series of initiatives in recent years, which has seen the country become a leading provider of services to global custodians and broker dealers. The industry in Spain is now working towards full harmonisation with the rest of the EU markets.
Legislation enacted by the Spanish parliament in 2011 introduced modifications to the Securities Market Law to align market practice in Spain with the same practice in other leading European securities markets.
Many of Spain’s major reforms kicked off in 2016; the Spanish Market Reform was created to prepare the Spanish equity post-trade market infrastructure for migration to the Target-2 Securities (T2S) platform, a European securities settlement engine which aims to offer centralised delivery-versus-payment settlement in central bank funds across all European securities markets.
The reform brought about changes to post-trade procedures, including settlement processing, settlement cycle and registration processing.
Moreover, with the reform in 2016, the Spanish stock exchange (BME Group) introduced a central counterparty called BME Clearing, to provide credit risk management and clearing services for equities, financial and electricity derivatives and public debt repos.
Spain’s market particularly benefited from the elimination of the old Registration Reference (RR) system in 2016. Market participants say this system made it difficult for custodians to fully control the post trading system. As the RR system was unique (and not used in other countries in the world), the biggest issue was that the system was strange and complicated for non-resident investments.
Post Trade Information (PTI) was created in May 2016 and acted as an instrumental tool in removing the RR system.
PTI established an obligation for participant financial intermediaries in the Spanish system to report information to the central securities depository (CSD), providing a database through which regulators could trace trades from execution through to settlement. But due to this fact, it created a reporting obligation specific to the Spanish market that did not align with standard market practice in other EU jurisdictions.
Spanish specificities
For Spain to achieve full harmonisation, the removal of these market-level specificities is crucial.
In 2017, the Spanish market migrated to T2S. Iberclear’s CEO Jesús Benito says that, since then, the Spanish post trading system has been working without any major incident or problem, providing a good level of harmonisation with international market standards.
Additionally, more than five years after the introduction of PTI, Benito affirms “[the system] is working smoothly and giving valuable information to brokers, clearing members and custodians in our market”.
While settlement in T2S has not been impacted by PTI, Benito notes that the main issue that affects the PTI is that it is another national specificity. Supervisors in the country also argue that, due to new regulations in the EU, they can already obtain the information that they need without obtaining it from the PTI.
Consequently, the public authorities have proposed to eliminate the PTI in order to further harmonise the Spanish system with the other EU markets, and adapt the Spanish regulatory framework to the most recent European legislation. In this context, the Ministry of Economic Affairs and Digital Transformation published a number of legislative measures on 30 April 2021.
This included the Securities Market and Investment Services draft law and the Draft Royal Decree on Financial Instruments, Admission to Negotiation, Registry of Negotiable Securities and Market Infrastructures.
The objective of both these provisions is to improve the technical rules which control the finance system, adapting the national regulation to EU rules and introducing domestic reform to improve the competitiveness of the Spanish stock market.
Paloma Pedrola, managing director, Societe Generale Securities Services (SGSS) in Spain, explains that the aim is to carry out harmonisation of the post trading process with the rest of the European markets — thereby eliminating some of the specificities of the Spanish market, such as the PTI.
These reformed rules are currently under discussion, pending their final approval. So far, there is limited visibility as far as the scope and timing of the reform is concerned.
Pedrola suggests change is already palpable. For example, the 2020 Activities Plan of the National Securities Market Commission (CNMV) included a request to the CSD to revise, under the review of the information system, a specific fee in place for settlements of ‘re-registration transactions’, and this change has already been effected in July.
With this backdrop, custodians in Spain are excited about the changes and developments that are ongoing in the country, which could see it become fully harmonised with its European counterparts and attract more investors.
Spanish trends
With development ongoing in Spain, the country’s custody market stands in good stead next to its European peers. However, due to its specificities the Spanish market is somewhat complex.
Focusing on the particular obligations around settlement and custody in Spain, the market has specific processes concerning registration and traceability which differentiate it from other European markets.
Pedrola comments: “The maintenance of the second tier registry, along with the requirement for market members and settlement entities to report the registration of trades and corporate events to the PTI, are the main issues which stand out.”
“Despite the additional workflows involved in the registration processes, which are certainly unpopular with non-resident investors, the additional rules do not seem to have a negative effect on the Spanish settlement rate,” says Pedrola.
In terms of bringing greater efficiency to the Spanish market, the draft legislation is likely to mean the removal or reduction of some of these specific processes, which will have a positive impact in bringing Spain into line with its European peers.
Collaboration is key
As Spain has experienced a great evolution with the Spanish Market Reform in 2016, collaboration between custodian and clients and different financial infrastructures is key.
“Collaboration between the different custodians, but above all with infrastructures, is vital in a market like Spain,” says Reto Faber, Europe, Middle East and Africa (EMEA), head of direct clearing and custody at Citi.
“We have always maintained a good relationship with infrastructures and regulators, who consult us when planning changes in the market, especially in the asset servicing area given Citi’s experience in event harmonisation issues. Likewise, there are several examples in which Citi has worked with the infrastructures to introduce changes in this direction.”
Citi actively promotes and initiates market changes through regular meetings with Iberclear and participation in their working groups and committees, Risk Committee, Technical Committee and recently created working groups Corporate Actions and Settlement and Users/Senior Group.
Faber adds: “Regarding collaboration with our clients, we believe that in order to provide an excellent service we have to listen to their suggestions, answer their questions and of course when necessary escalate their proposals with the market and infrastructures.”
Similarly, Pedrola also highlights the importance of collaboration in Spain. He states: “It is absolutely critical to be close to our clients and market infrastructures in order to define a framework within which our business can develop and respond to the new requirements for digitalisation and sustainable investment. A three way collaboration, sharing our different visions and necessities, is the only way to achieve an optimum design.”
SGSS has worked on the Spanish market reforms closely with the CSD, which Pedrola says “has come to count on, and has expressed appreciation for, our in-depth testing and validation of the new processes which have been implemented over these years”.
Challenges and opportunities
The evolution of the Spanish market has not come without its challenges for custodians.
According to Pedrola, custodians in Spain are faced with the challenge of servicing business adapted to environmental, social and governance (ESG) and digitisation, alongside the need to refine processes, systems and procedures in line with the significant amount of external regulations currently on the table.
It is widely agreed that the Central Securities Depositories Regulation (CSDR), the Shareholder Rights Directive II, the Financial Transactions Tax, Consolidation of T2/T2S, Eurosystem Collateral Management System, and now an imminent Spanish market reform make up part of the regulatory burden.
“The challenge is to carry out these projects successfully within their allotted timeframes, while also investing in innovative technology,” explains Pedrola.
Despite this, however, industry participants believe that there are many opportunities for business expansion as Spain’s custody market continues to evolve.
Benito notes: “BME Clearing and Iberclear as part of BME have been fully integrated in SIX Group since June 2021. We are intensively working with our Swiss colleagues to further expand our common service portfolio. We believe that there are promising and attractive opportunities in fields such as clearing, international custody and securities services.”
SIX Group received approval from Spanish authorities to acquire BME Group in March 2020, which has brought both parties a step closer to a combination that would see them become the third-largest European financial market infrastructure group.
The transaction was made to strengthen both the Spanish and Swiss ecosystems and bring new capabilities to BME and SIX participants, while also attracting new global capital pools to Spain. For example, BME is able to benefit from SIX’s knowledge of the entire value chain and from SIX’s experience in financial information and distributed ledger technology (DLT), as well as its global reach. The transaction also allows BME to create a stronger platform to compete and innovate in the global financial market infrastructure sector.
Additionally, SIX has the SIX Digital Exchange (SDX), at the forefront of its DLT offerings in the financial infrastructure sector.
“We feel very confident that with our common service, SIX-BME will be very positive for the Spanish post-trading space,” Benito concludes.
With lots of opportunities in store, if Spain can continue to harmonise its infrastructure and offer processing efficiency and high standards of asset safety in protecting the investor’s assets, then the future for the Spanish market should remain bright. Experts believe this will attract further cross-border and domestic investment flows and provide a boost to securities markets and, ultimately, the economy.
