When Borsa Italiana, the Italian Stock Exchange, introduced a central counterparty (CCP) for its cash markets on 23 May, it was the latest step in a re-engineering of Italy’s post-trade environment aimed at greater integration of the country’s markets with those of Europe.
The ultimate aim of a series of measures, says Massimo Capuano, president and chief executive, Borsa Italiana, is to improve and increase cross-border trading activity in Italy. “It is evident that the post-trading environment is one of the main areas in which we can create value for our stakeholders. We will be able to provide more concrete value through the enlargement of our services,” he says.
The rationalisation of Italy’s financial markets should reinforce the Borsa’s role as Europe’s capital markets consolidate. Without such rationalisation and re-engineering, Borsa Italia could well be marginalised by the larger players in Europe.
Since the exchange acquired Montetitoli, the Italian central securities depository, in December last year the re-engineering programme has accelerated, says Capuano. The acquisition of Montetitoli created a vertical model, whereby the operators of the trading, clearing and settlement environments were consolidated. Deutsche Börse has also pursued a vertical integration model, while the London Stock Exchange favours the horizontal model, where operators remain separate.
Capuano says Italy’s vertical model is not like other such models in Europe: “Our model is not strictly integrated. Our post-trading companies are fully open for the rest of the non-captive markets. We believe we need to be open in the post-trading facilities in order to get more volume for our CCP and clearing and settlement systems. Only in this way can we provide shareholder value.”
One of the goals of the post-trade reorganisation is to give more opportunity for interoperability, says Capuano. “But it has to be in two ways – Borsa Italiana can be open but also the rest of the post-trading services have to be open for interoperability. In our business model we believe we have to be open to the rest of Europe, otherwise cross-border trading will continue to be very expensive. If we can open our post-trading facilities to other services in Europe and give this kind of service through common standards, our systems can be more efficient.”
Rowena Romulo, securities country manager, Citigroup Global Transaction Services in Italy, says: “We are not particularly concerned as to whether a market supports a vertical or horizontal model since this is not the fundamental underlying issue. What is important is that market participants gain access to lower cost/lower risk alternatives and benefit from innovation and higher client servicing that competition generates.”
The introduction of the CCP is characterised by Capuano as providing the low risk environment Romulo and other market participants seek. “The CCP is one of the key elements in the Borsa’s plan to provide more services in a safer environment,” says Capuano.
Romulo agrees: “With the introduction of the central counterparty, we foresee there will be a reduction in counterparty risk and the overall exposure participants have in the market. Intermediaries and broker dealers who trade on the Borsa Italiana’s electronic trading system will have only one counterparty to the trade, allowing our customers to send net settlement instead of gross or trade by trade executions. This will bring down their settlement costs, a benefit that will be seen in the next few months.”
Italy already has a CCP for the derivatives market launched in 2002 and owned by Cassa di Compensazione e Garanzia (CC&G). Organised and managed by MTS, it is one of the first initiatives aimed at non-captive markets. The project, instigated in partnership with the French clearer Clearnet, involved the creation of the clearing system and definition of a specialised guarantee margin calculation model for bonds.
The cash markets CCP is similar to that of the derivatives markets. It will serve the Italian stock markets (MTA, Nuovo Mercato and its related after hours components) guaranteeing all contracts on stocks, convertible bonds, warrants and shares of closed-end real estate and securities funds.
Renato Tarantola, chief executive of CC&G, says the CCP for the cash markets is “a risk management system that is more efficient and open to interoperability with analogous systems that brings our stock markets into line with international best-practice, favouring the growth of liquidity”.
Among the other initiatives being implemented in Italy is the launch in January 2002 of a securities lending and borrowing service by Montetitoli. In May of that year the CSD opened a real-time link with the US CSD, Depository Trust Company. This arrangement enables clients the option of managing their US securities and using the connected tax service.
In March this year, Montetitoli completed the integration testing of the new integrated clearing and settlement platform, Express II, which will be launched in November. A pilot group is now testing the system and in July, the entire system is to be tested ahead of the launch.
The Express II platform will introduce net and gross settlement services. There will be different cycles for settlement of transactions – one at night and one during the day. This will reduce the number of transactions that will be settled and should result in cost effectiveness.
Finality also will now occur at 7.30am on settlement date, rather than the current 12.30pm. This will allow better access to liquidity as securities can be turned around again at the start of the day. And for trades that fail, there will still be the possibility of settling them during the day cycle.
Thomas Zeeb, managing director, Bank of New York in London, says the changes taking place in Italy will position Montetitoli as a provider of straight through execution and settlement services, which will be highly attractive to the country’s institutional investors.
Pricing of services is often an issue raised around vertical integration, with critics suggesting that fees for the various trading, clearing and settlement functions may not be as transparent as when the organisations are separately owned and operated. On the consolidation of the Italian market, Romulo says: “There has been a streamlining of the decision making process as there is now one combined board of the group instead of three. I believe there is more awareness of customer/market participant needs but what I would like to see is more integrated pricing at all levels - from the trading through to the clearing and settlement process. Pricing should be more transparent and unbundled and take into account the needs of participants.”
Capuano argues that pricing is completely transparent, with specific prices being available for the derivatives CCP and also for the cash CCP. He points up that the aim of the re-engineering is to provide a better price for all of the Borsa’s customers. “Our clients should recognise the deficiencies that have existed in the post-trading environment in Italy and view the prices in the light of the major improvements that have been made,” he says.
Zeeb believes that in introducing greater efficiencies, the Italian market will become more attractive to other investors in Europe. “The Italian market has in the past been characterised as difficult, both from a regulatory and processing point of view. Any initiative that makes it somewhat easier would be welcome.”
While it is early days in the integration of the Italian clearing and settlement scene, the possibility that Montetitoli will compete head on with local custodians and depot banks cannot be ignored. Borsa Italiana’s ownership has certainly boosted Montetitoli’s fortunes and the CSD is more responsive and aggressive in its local market. How the local custodians react will determine their fortunes.

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