Wednesday, December 15, 2021
Yesterday in reading the minutes from the FOMC’s November 2021 meeting, I noticed that once again (see previous post), some participants expressed concern about “the risk of a sudden reduction in the liquidity of collateral used at central counterparty clearing and settlement systems.” (p.9) I’ve been wanting to read Dermot Turing’s Clearing and Settlement (3rd ed.) since receiving a review copy (for which I’m very grateful!). So, given comments about clearinghouses in recent FOMC meeting minutes, I thought this would be a great time to get started! Robust clearinghouses remain critical to global financial market stability.
Until 2014, Dermot Turing was a partner at Clifford Chance, specializing in “financial sector regulation, particularly the problems associated with failed banks, and financial market infrastructure.” He’s also the nephew of famed computer scientist Alan Turing and has written books about his uncle (here) and historical works about computing (for example, here ). I’ve read several of Turing’s articles related to financial market infrastructures (for example, here and here) and have always learned a lot. So, I’ve decided to start reading through Clearing and Settlement (the book) and to invite interested BLPB readers to come along with me! The book is divided into three parts. I’ll share some comments on Part I (Processes) today and Parts II (Regulation) and III (Risk and Operations) in subsequent posts.
Before arriving at Part I, the book provides a number of helpful tables, some examples include a Table of Cases, Table of Statutes, and a Table of Abbreviations. I had to chuckle in seeing this last one as I’m often asked to create a table of acronyms for my financial market infrastructure articles! As Turing states “Acronyms Abound.” As this sentence illustrates, Turing’s writing is concise, clear, and accessible. On the first page of Part I, he provides one of the best analogies for the clearing and settlement process that I’ve seen by using an example we’re all familiar with: online shopping. We know that these transactions are only complete when the package arrives (after postage and packaging, of course!) and “the payment is in the bank.” (p.3). He explains to the reader that “This book is about the ‘postage and packaging’ of financial transactions.” (p.3) Or as the Foreward to the book’s first edition explains “It is the first piece of work tackling all legal and regulatory aspects of post-trading and, as such, it represents a valuable contribution.”
Turing’s profound interest in history is apparent from the beginning of Part I, entitled “Clearing and Settlement in Historical Perspective.” Indeed, one of my favorite things about the book so far is its deep historical perspective. For me, one of the most helpful aspects of Part I has been its painstaking attention in providing definitions of post-trade processes. As Turing notes, “ ‘Clearing’ is the most over-used and least-understood term in post-trade services.” (p.7) As we lawyers know, definitions are fundamental! Part I reviews the steps in the post-trade process (trade matching and confirmation, clearing, and settlement). Throughout Part I, Turing also uses helpful case studies, diagrams, and illustrative examples.
Another feature of the book that I really appreciate - and think isn’t adequately captured in its title - is its incredibly comprehensive coverage of the post-trade world. The depth with which Turing covers what I’ll call the “post-trade ecosystem” is astonishing. When I say “covers,” I mean that he provides an overview of the ecosystem, describing and explaining in detail various aspects, and discusses relevant legal considerations. Example aspects that he covers include: trading structures, portfolio compression services, all kinds of payment systems, central and commercial bank money, central securities depositories, trade repositories, ownership of cash, ownership of securities, securities as collateral, different types of securities accounts, finality of payments, rehypothecation, and even a bit on distributed ledger technology! Reading the book has significantly augmented my knowledge of this entire area! It has also broadened my familiarity with U.K and EU law in this area as Turing focuses on the relevant law in these jurisdictions.
We’ll have to wait until January 5, 2022, to see if the FOMC minutes from this week’s meeting again mention participant concerns about the liquidity risk of clearinghouse collateral. However, interested readers will only need to wait until next Wednesday for Part II of this post!