Regulation of Securities Settlement: Process and Issues

The regulation of securities settlement is an essential step in the transaction process on financial markets. It is the final phase of a transaction, where the buyer pays for the purchased securities and the seller delivers the securities in exchange for payment. This process, also known as \\"settlement-delivery,\\" ensures that stock market transactions are finalized securely. Since the introduction of the settlement-delivery system in France by Law No. 66-537 of July 24, 1966, the regulation of securities settlement has become a cornerstone of financial market stability. This article explores the securities settlement process, the actors involved, and the issues associated with this crucial step.

What is securities settlement?

Securities settlement is the process by which purchased financial securities are transferred from the seller to the buyer, and the corresponding payment is transferred from the buyer to the seller. This process typically takes place a few days after the initial transaction, following the \\"T+2\\" rule, which means settlement occurs two business days after the transaction.

Example of securities settlement

Let's say an investor buys 1,000 shares of a listed company on Monday, January 1, 2024. According to the T+2 rule, securities settlement should take place on Wednesday, January 3, 2024. On the settlement day, the investor sees the shares credited to their securities account, while the purchase amount is debited from their bank account. The seller, on the other hand, receives the payment in their bank account and the shares are debited from their securities account.

Actors in securities settlement

The securities settlement process involves several key actors:

• Clearing houses: They act as intermediaries to ensure that the obligations of both parties are met. In France, LCH SA is one of the main clearing houses.
• Central depositories: They ensure the safekeeping of securities and the transfer of values between participants' accounts. Euroclear France is the central depository in France.
• Financial intermediaries: Banks and brokers acting on behalf of investors, facilitating the transfer of funds and securities.

Issues in securities settlement

Securities settlement is crucial for financial market stability. An unsettled settlement can lead to systemic risks, especially in the event of a counterparty default. To minimize these risks, regulators, such as the French Financial Markets Authority (AMF), impose strict rules on settlement-delivery. For example, the European directive CSDR (Central Securities Depositories Regulation), which came into effect in September 2020, aims to enhance the security and efficiency of settlement-delivery by imposing penalties for transactions not settled on time.

Conclusion

Securities settlement is an essential step to ensure the finality of transactions on financial markets. It ensures that securities and funds are exchanged securely, thereby reducing counterparty risks. Understanding this process is crucial for investors, financial intermediaries, and regulators, who must all work together to maintain trust and stability in the markets.