Modernizing Spain's Post-Trade Infrastructure
A decade now in the making, Spain’s capital market reforms are finally coming into fruition.
In this edition of our “Where Can We Take You” series, Marcello Topa, Global Head of Advocacy for Investor Services at Citi, talks to Manuel Pineda, Southern Europe Custody Head, Investor Services, Citi, about how Spain is harmonizing its capital markets with the rest of Europe, and Citi’s role in the process.
Marcello Topa |
Manuel Pineda |
Spain has been reforming its capital markets for almost 10 years now. What has changed?
Pineda: It has been an exceptionally busy time for us in Spain lately! Over the last ten years, regulators have rolled out three major market reform initiatives. Everything kickstarted in 2016 when the first reform (Reforma 1) established a Central Counterparty Clearing House (CCP) – BME Clear – together with a new equity settlement system – ARCO – to overhaul the country’s incumbent securities registration system. Previously, Iberclear, the Spanish Central Securities Depository (CSD) used a Registry Reference System (RRS) to identify and track securities transactions from the point of trade execution right through to settlement,1 but it was operationally very complex. One of the biggest changes under Reforma 1 was the roll out of a segregated account structure at the CSD level, giving clients enhanced functionality and cutoffs, and reducing the risk of asset co-mingling – a change that Citi was actively pushing for at the time.
Citi enhanced its operating model during the implementation of Reforma 1, as the country’s equity market was undergoing a transformation. Citi understood the benefits of the new on-exchange model and offered tailor made solutions for clients helping their back offices navigate the changes accordingly. We also advocated for the introduction of the Financial Intermediary Account (SIFA) for broker dealers. The SIFA helps international, non-resident broker dealers with the management of registration names. It did this by allowing the accountholder to clear and settle on-exchange trades in their own registration name and settle the client-side trade in the counterparty’s registration name, without having to re-register the shares.
This was followed shortly afterwards in 2017 by the second reform (Reforma 2). In anticipation of the roll out of Target2Securities (T2S), a pan-European platform facilitating securities settlement in Central Bank money, Reforma 2 harmonized Spain’s fixed income settlement system by incorporating it into ARCO alongside equities, before then migrating it onto T2S.2 These changes enabled Spain to align itself more closely with the rest of Europe on T2S.
More recently, we have seen the introduction of the third reform (Reforma 3). What does this entail for the Spanish market.
Pineda: Reforma 3 started to take shape in 2021, and like the previous two reforms, it is part of Spain’s ongoing efforts to harmonize local market practices with those in Europe. Most significantly, Reforma 3 abolishes the Post Trading Information (PTI) system. This means CSDs no longer need to use the PIT as an information system and the requirement to link registration management with the settlement process is removed.3
Additional initiatives to ensure closer Spanish alignment with T2S markets are also in flight, and Citi together with the local FMIs and regulators is playing an active role in their development and roll out. Notable changes here include updates to the Party 2 field, i.e. the European standard for matching criteria. Under the changes, Spain’s use of Party 2 (buy/sell) will now follow the T2S standard, so client information – instead of the registration name – will be entered into the Swift instruction fields. This will help avoid settlement mismatches between counterparties. In addition, firms will also be required to use T2S trade types, i.e. TRAD, to further facilitate harmonization between Spain and the rest of Europe. As there will be no linking and end of day sweeps, SIFAs will no longer be used either, and will instead become regular standard accounts.
The law also includes a legal change of great importance for our clients. The market now recognizes that even though holdings are registered in the name of the global custodian, they belong to the underlying clients (global custodian role recognition). In other words, the rules explicitly recognize custody of securities through a chain of intermediaries.4 The person who appears legitimate in the entries in the accounting record will be presumed to be the legitimate owner of the securities and, consequently, may require the issuing entity to provide the benefits to which the negotiable security entitles it.
Citi has been instrumental in driving these changes and supporting clients along the way. What exactly have you done?
Pineda: As a leading custodian in Spain, we have been incredibly active in both driving these reforms forward and supporting our clients with the changes. We have collaborated with regulators, investors and stakeholders over the last decade to ensure a responsible and reasonable outcome which benefits everyone and keeps disruption to a minimum. This has been done through active participation in industry working groups and one-on-one meetings with the various stakeholders.
In the lead-up to Reforma 3, we provided our clients with extensive support, which was highly tailored according to individual needs and requirements. This meant we spent a lot of time educating clients about what the changes would mean for their businesses, often through webinars and bespoke training sessions. We also helped clients leverage automation to optimize their processes and reduce manual intervention ahead of the changes.
Reforma 3 has facilitated a lot of market-wide efficiencies, as has Citi. What are you seeing exactly?
Pineda: The implementation of Reforma 3 has been a great success. For instance, in Spain, we have seen a notable improvement in overall settlement efficiency, with rates increasing from 95.96% to 96.14%5 post-reform.
Having helped clients understand what the new rules meant and delivered on automation, the strategic benefits are becoming increasingly clear. Immediately after its implementation in Spain, we saw an 85% reduction in manual touchpoints thanks to clients’ operations being streamlined. Client satisfaction levels are also rising, evidenced by the 54% decrease in client inquiries, demonstrating their growing comfort and better understanding of the new processes.
Our presence and deep pool of subject matter experts across Southern Europe means we are strategically well-positioned to support clients with market changes in Spain, and elsewhere.
5 Source: Citi
With Reforma 3, the process introduced by this new account will be maintained, although we will see how the requirements will be simplified, so it can be said that the SIFA account disappears to give way to an individual account that will keep the spirit of the SIFA account.
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