Spain: Custody & Settlement

A EUROMONEY SURVEY - MARCH 1996

SETTLEMENT

There are three different securities settlement operations in Spain: the Bank of Spain's Central de Anotaciones for public debt, Espaclear for corporate debt and the stock market's Servicio de Compensacion y Liquidacion de Valores (SCL) for share settlement.

Share settlement

The creation of the Servicio de Compensacion y Liquidacion de Valores, the settlement and registration system in Spain which began operating in December 1992, means that the country now has a paperless, computerized, centralized and fully fungible electronic system for registration and settlement of all shares quoted on the Spanish stock exchanges. The system has simplified settlement procedures in Spain and reduced the normal settlement period to only five working days (T+5). This has meant large cost reductions and increased efficiency. Previously, settlement could take up to 15 working days. Because the system is centralized and has simultaneous delivery-versus-payment, the risk for foreign investors is considerably reduced.

The SCL is owned by the banks and stock exchanges. Within the SCL, all Spanish banks hold securities accounts on behalf of their clients. The SCL monitors its members' accounts, lodging not only its own portfolio but also the positions held in favour of third parties.

The SCL is responsible for:

* settlement and clearing of securities and cash sums for stockmarket transactions

* repurchasing of securities

* keeping account records of securities

* provision of data to issuer companies.

Once transactions have been effected on the market, the stock exchanges inform the SCL on the same trade day of the volume of securities and their prices. This must be broken down into itemized transactions specifying ownership and the participant responsible for settling it (which can differ from the broker that negotiated the trade). This type of settlement is called the rapport system. Transactions are settled via rapport on a delivery-versus-payment basis directly between the local custodian, committed to T+5, and the SCL.

Market members have a set period between T and T+2 to communicate the detailed information to the stock exchange where the trade took place. Days T and T+1 are considered normal with T+2 being reserved for exceptional trades or for those of non-residents. In order to meet the deadline, non-residents must send instruction to market members as soon as possible. Market members should respond on T or T+1 with the identity of the holder and of the party to settle the trade. The parties asked to handle settlement have one day from notification to refuse. If they do refuse, settlement is handled by the market member. Sales settlement requires the seller proving possession of the stock being sold. Once proof of sale is completed, each party involved is notified on how much they will receive or how much they will pay.

On the fifth day after trading, the necessary amount is settled and the transaction entered in the relevant records including the SCL. Fund movement takes place between the accounts that the parties have in the Bank of Spain. (Cash settlement is always via the Bank of Spain. Those participants that do not hold a direct account with the bank must arrange settlement through some other participant.)

A second type of trade involves non-rapport transactions which settle through the Traspaso system (a pseudo delivery-versus-payment system). These deals are often settled by the foreign broker's bank rather than the investors' agent bank. The average fail rate is 10% because the lack of a real delivery-versus-payment system makes it difficult to guarantee a settlement date.

Transfers between participants

Participants may transfer securities between their SCL accounts with no need to execute trades, provided they maintain the same ownership registration of the securities.

Spanish legislation does not recognize nominees. Investors must sell and simultaneously buy-back through the exchange if they wish to re-register stock.

Buy-in and short sales

When stock sold is not delivered to the central securities depository within the T+5 deadline, the sale is considered to have failed but given an extra six days for justification and settlement. After these six days the SCL will repurchase (buy-in) the stock sold in the market. When a buy-in occurs the stock is bought back at the highest price recorded on the day with a 3% penalty on the gross amount of the transaction. When the cost of the repurchase is higher than the original sales proceeds, the difference is payable to the SCL by the client of the delivering party at fault. When the cost of repurchase is lower than the original, the SCL will keep the difference to ensure no profit can be had from selling short. Members of the SCL cannot cover a transaction with bought stock when the settlement date coincides or is after the date of the sale.

Developments

There is a move towards total real-time processing which will eventually reduce settlement time to T+3 (probably within 18 months). There is some resistance from the major suppliers of clearing facilities in Spain who may be concerned with late settlement costs. Those institutions providing custody without clearing are pushing for the shorter settlement period.

Espaclear

Espaclear is the settlement and clearing system of the Association of Financial Intermediaries' Market. It is owned by the SCL. Although some companies prefer to issue via the Espaclear system because it is cheaper than SCL, 97% of trades are settled through SCL.

Settlement of public debt instruments

Settlement can be domestic or through Euroclear or Cedel. Through Euroclear or Cedel, settlement can take three days. If the bonds are being transferred from either clearing organization to the Bank of Spain, an extra day is required.

In the domestic system, settlement is via computerized book-entry through the Bank of Spain. It can be the same day, the next trade day or two trade days after trade date. Interbank dealing normally trades for settlement on the same day, while other domestic transactions will trade for same day settlement or the next day. Non-residents mainly trade for settlement either next day or two days later. In all cases, settlement is on the basis of delivery against payments. There is another settlement system, the Camara de Compensacion, through which non-residents may settle bonds but it is less widely used because of its complex nature.
  Page 1 of 2  Next | Single Page