For most investors, buying and selling securities is a routine electronic process that happens in the background with little thought given to how trades are actually settled. Yet until relatively recently, many of the financial instruments that underpin government borrowing and bank funding existed as physical pieces of paper, carried through the streets of London in briefcases by messengers entrusted with millions of pounds' worth of securities. It seems almost unimaginable today, but it took one of the largest financial thefts in British history to accelerate the transition from this surprisingly old-fashioned system to the highly secure electronic settlement infrastructure that now sits at the heart of the UK's financial markets.
In the context of securities, CREST stands for Certificateless Registry for Electronic Share Transfer. Operated by Euroclear, CREST serves as the central depository for UK and Irish financial markets. As an electronic system, it handles daily peaks of more than 200,000 instructions and can process up to one million transactions daily during high-volatility trading periods.
At Titan Wealth in the Channel Islands, we make use of CREST every day, whether our traders are buying or selling Treasury bills on behalf of execution-only trading clients or our cash management team is buying or selling certificates of deposit as part of their discretionary cash management mandates.
Previous weekly notes by the cash management team have served to highlight the attractions of Treasury bills and certificates of deposit. Both of these types of financial instruments have long histories tracing back their roots well before the digital age and well before decimalisation, so it is remarkable that they still exist and remain an integral part of the UK’s financial system, helping seamlessly to fund bank lending and government borrowing.
Originally, these instruments would have been similar to cheques – effectively a pro-forma document issued by the Government in the case of Treasury bills or issued by banks in the case of certificates of deposit. The reason for labouring this point is that these financial instruments were physical pieces of paper and settlement of trades literally involved the physical delivery by messengers from the seller to the buyer and vice versa upon maturity.
The security arrangements for this daily multi-million-pound activity were, in today’s terms, surprisingly light touch, surviving two world wars and the transition from centuries-old pounds, shillings and pence into the era of decimalisation on 15th February 1971. Even in the 1980s traders from the discount houses used to attend daily funding meetings at the Bank of England wearing top hats whilst the banks’ messengers made their daily delivery rounds with millions of pounds’ worth of Treasury bills and certificates of deposit in sturdy leather briefcases, sometimes secured with a chain by the more security-conscious among them.
However, an event on 2nd May 1990 was the catalyst for a rapid change from physical delivery to the bulletproof dematerialised electronic settlement system now known as CREST.
The event was the highest value theft ever carried out by a street robber in a single incident. This took place in London when a messenger called John Goddard was robbed of his briefcase by an unknown man who threatened him with a knife. The briefcase contained £292 million (then US$385million) in bearer bonds, including certificates of deposit and Bank of England Treasury bills, which he was transporting for his employer, Sheppards Money Brokers.
On that spring morning in 1990, Goddard was doing his usual rounds, delivering bonds at a handful of building societies and brokerages before heading back to his office on Gresham Street. His route took him down Nicholas Lane, one of the old city's many narrow alleyways, where he was confronted by a man armed with a knife. Goddard, who as a matter of policy was never told the value of what he was carrying, surrendered the briefcase and the mugger jogged away, quickly blending in with the morning rush-hour crowds.
At first the authorities thought this was just an opportunistic theft and that the high value of these bearer securities would deter the thief from trying to cash in on the windfall and that the securities would be disposed of or destroyed and simply vanish, never to appear again. However, it turned out to be part of a sophisticated criminal operation as the securities did indeed begin to surface when conspirators tried to offer the securities for sale in the US. Arrests were made and an informant agreed to help the authorities to bring the perpetrators to justice. Unfortunately, the informant was murdered, the trail went cold and no-one was ever brought to face justice. Reassuringly, £290 million of the securities were eventually recovered with the remaining £2 million expiring and becoming worthless.
This sorry tale, however, has a happy conclusion in that Treasury bills and certificates of deposit are no longer issued physically and are instead issued electronically and settled in the highly secure system known as CREST.
Of course, there are times when even CREST settlement is delayed by a few minutes from time to time, generating a flurry of emails from stressed back-office teams just trying to do their jobs, but these days the tension must be considerably less than back in the so-called “good old days” when your messenger may dally in a coffee house chatting with his mates or, worse still, come face-to-face with criminal intent.
With state-of-the-art systems at the heart of Titan Wealth’s operations, we know which era we prefer!
Whilst on the subject of paper money, and to end on a somewhat light-hearted note, you may be aware that the Bank of England will soon be issuing new banknotes using nature, with a particular focus on wildlife, as the theme for their next series of designs. There is an opportunity to influence the chosen designs as the Bank of England is seeking the views of the public in a consultation which is open until 3rd July. If you’re interested in taking part, here is the link.
