News of the successful launch of pan-European settlement platform Target2 Securities might be barely cold, but Euroclear, owner of the world’s largest international securities depository and several European depositories, is already taking as stab at creating new revenue streams.
Based on technology developed in conjunction with London’s Merit Software, Euroclear has just launched a central matching service which will allow financial firms to electronically verify their receivable and deliverable claims on income and dividend payments with each other by inputting details into the same third-party platform. Any discrepancies will be immediately tied to a specific corporate action income or dividend payment and flagged to both counterparties to be investigated and resolved. The new SetClaim service will be limited in scope to payment claims generated from settlement and securities lending transactions which occur outside the Euroclear depository system as Euroclear’s Autorecon eliminates the need for any such claims.
Adapted from Merit’s Claim Manager, SetClaim will interface with Claim Manager enabling Merit’s current clients to integrate the automated matching of all claims with counterparties to their existing workflow. Claim Manager helps banks manage their in-house claims processes, including interfaces to various systems such as general ledgers or payment gateways. Euroclear has exclusive rights to market SetClaim.
With their bread and butter earnings from settlement services either gone or soon to be gone as the result of T2S, European depositories have to come up with new sources of income to compete more effectively with each other and custodian banks. As Scott acknowledges, the new SetClaim service is just the first in a series of initiatives to automate otherwise manually intensive procedures as is typically the case managing claims. Euroclear’s depositories in France, Belgium, the Netherlands and Finland will go live on the T2S platform, which consolidates settlement onto a single platform, in 2016 and 2017. The T2S platform went live on June 22 with the first wave of users –Bank of Greece settlement system, SIX Securities Service of Switzerland, and the depositories of Romania and Malta– on board. At the last minute Italy’s Monte Titoli postponed its integration until August due to what it says was a lack of sufficient pre-testing.
Operations specialists at global banks contacted by FinOps Report wonder whether Euroclear will be able to nab enough volume to make SetClaim profitable. Given Euroclear’s track record in failed launches of services unrelated to its core function of settling domestic and cross-border fixed-income and equities transactions and other post-trade functions, such worry is understandable.
So what has changed? Scott says that Euroclear learned its lesson the hard way and is no longer taking the “build it and they will come” approach. “We had received considerable interest from participants and others for a payment claims management service before planning and are confident that there is sufficient demand,” he explains. The new service will be available to participants of international securities depository Euroclear Bank. one of Euroclear’s national depositories, or a non-participant in any of them. Scott could not immediately identify any potential users or cite the number of interested parties who helped Euroclear design SetClaim, but says Euroclear will periodically name early adopters by year-end.
Claims often arise due to discrepancies in amounts paid and amounts owed for payments related to corporate action events. Processing corporate events is typically fraught with error and potential liability. All a firm has to do is delay notifying a customer about a corporate event, provide incorrect information or not make the payment and voila the injured party will have to be compensated.
But that’s not the only time a mistake can be made. Too often income, dividend and other corporate action payments might not be credited to the correct counterparty should a corporate action event take place between the time a trade is executed and the time it is settled between the buyer and seller. The same applies when securities are lent from an institutional investor to a borrower — typically a broker-dealer or hedge fund.
In the case of settling a securities transaction, the buyer of securities will be entitled to an income payment made between the time the trade was executed and the time the buyer receives the securities on settlement date; that’s two days later. When it comes to securities out on loan, the lender is entitled to the income payment even though the ownership of securities has temporarily been transferred to the borrower. When the rightful counterparty doesn’t receive its income payment or receives the wrong payment, it will have to file a claim with the other counterparty.
Although Euroclear’s new SetClaim service does have some similarities with reconciliation applications, it differs in a critical way. Because reconciliation platforms are in-house applications, they may reconcile internal records with each other or data provided by a counterparty but don’t allow hands-on access by an external party. Not so with Euroclear’s platform which is a multilateral matching service requiring both counterparties to participate.
“SetClaim isn’t a substitute for an in-house reconciliation system but reduces reconciliation breaks,” explains Scott, who compares the service to Omgeo’s Central Trade Manager. The CTM allows fund managers and broker-dealers to match trade details on the platform before settling the transaction.
Euroclear may lay claim to the first matching service for managing payment claims, but that may be only part of the history being made with SetClaim. It may also be the harbinger of a host of future innovative services launched by depositories trying to make up the settlement revenues lost to T2S. Only time will tell which of them will attract enough users to succeed.