Post-trading services include settlement, comprising the financial market infrastructures for exchanging financial instruments and cash between seller and buyer. A securities settlement system has contractual and operational procedures for handling the stages of the transaction subsequent to the intermediaries’ agreement on the trade, allowing clearing and settlement, i.e. the conclusion of the transaction.
Securities settlement may be either on a gross basis (transaction by transaction) or a net basis (settlement of clearing balances). With the dematerialization of securities, settlement is always by means of book entries on the intermediaries’ accounts with the central securities depository.
Until 2004 the Bank of Italy managed its own securities clearing and settlement system, settling on a net basis. Today, settlement is governed by the 1998 Consolidated Law on Finance, which in Article 69 recognizes the private-law nature of the activity of operating securities settlement systems and assigns the Bank of Italy, in concert with Consob, to establish rules for the operation of settlement services and to authorize their management.
In a regulation dated 30 October 2000 the Bank, in agreement with Consob, authorized Monte Titoli S.p.A. to operate settlement services and approved its “Operational regulations for the Express II settlement services and ancillary activities”. A private corporation, Monte Titoli is subject to the supervision of the Bank of Italy and Consob (Consolidated Law on Finance, Article 77). Monte Titoli is the only Italian corporation authorized by the Bank and Consob to operate securities settlement services, which it does via the “Express II” system. Its “operational rules”, approved by the two regulators, govern the organization and functioning of the services.
Express II combines a clearing or netting system (with two cycles, one of which is overnight) and a gross settlement system. It operates under internationally common rules and standards and has an automated procedure for determining the optimal settlement result given the participants’ holdings of securities and cash.
Transactions executed through the settlement system are final; they cannot be revoked subsequently by the retroactive effect of insolvency procedures. The matter is now governed by Directive 2009/44/EC (amending Directive 1998/26/EC), transposed into Italian law by Legislative Decree 48/2011.
In 2008 the Bank of Italy and Consob saw the need for a single regulatory text, issued as the “consolidated regulation” bringing together the many rules and regulations then in force. The matters covered included: the functioning of the services of central securities depository, collateral and settlement; finality of orders for the transfer of financial instruments; settlement in case of default of a market participant; supervisory instructions concerning post-trading service companies; and guidelines on business continuity and the outsourcing of strategic activities.
The resulting “Rules governing central depositories, settlement services, guarantee systems and related management companies” – adopted jointly on 22 February 2008 by the Bank and Consob and amended in December 2010 and October 2013 – simplified the rules, reduced the number of regulatory provisions and acts, and enhanced coordination between the authorities.
The European Union will soon issue its “CSD Regulation” to rationalize EU securities settlement and central securities depositories. The objective is to create a single European market in securities depositories and securities settlement and to mitigate settlement risk in securities trades.
The Bank of Italy’s oversight tasks include assessment of the Italian securities settlement system’s compliance with international standards, as set out in the ESCB-CESR Recommendations for Securities Settlement Systems and, since April 2012, the CPSS-IOSCO Principles for Financial Market Infrastructures.