exchanges, clearing, settlement and target2 securities michael van doeveren richard derksen
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De Nederlandsche Bank. Exchanges, Clearing, Settlement and TARGET2 Securities Michael van Doeveren Richard Derksen Financial Sector of Macedonia Conference on Payments and Securities Settlement Systems Ohrid 24 June 2008. Agenda. The world of securities and exchanges - PowerPoint PPT PresentationTRANSCRIPT
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De Nederlandsche Bank Eurosysteem
Exchanges, Clearing, Settlement and TARGET2 Securities
Michael van Doeveren Richard Derksen
Financial Sector of Macedonia Conference on Payments and Securities Settlement Systems
Ohrid 24 June 2008
De Nederlandsche Bank
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De Nederlandsche Bank Eurosysteem
Agenda
The world of securities and exchanges
Risks in clearing and settlement of securities
TARGET2 Securities and CCBM2
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De Nederlandsche Bank Eurosysteem
Securities chain
trading
clearing
settlement
Agreement to exchange securities for funds
Calculation of obligations
Delivery of securities and payment of funds
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De Nederlandsche Bank Eurosysteem
custodian
CSD Issuer
custodian
Agentbank
National Central
Bank
Agentbank
Agentbank
Agentbank
Agentbank
Agentbank
Investor InvestorInvestorInvestorInvestor Investor Investor
Clearing & settlement infrastructure
CCP
Exchanges
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De Nederlandsche Bank Eurosysteem
Entities in securities
Issuer/Investor
ICSDs
Custodians
Issue/hold securities
CSDsCentral securities depositories: storehouses for securities and domestic settlement services providers
International central securities depositories: international settlement services providers, CSDs for EurobondsNational and international settlement services providers, typically banks
CCPsCentral counterparties: central providers for clearing services
Exchanges platform for trade in securities
Agent Bank Executes transactions for customers
NCB National Central Bank; provides settlement services, oversight
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De Nederlandsche Bank Eurosysteem
Life cycle of securities transactions
Transactions (by a telephone call or system)Entry in a system (buy or sell)ValidationAuthentication & authorisationMatching & confirmation ClearingMoney settlement (usually t+3)Securities settlement (usually t+3)Custody (corporate actions)
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De Nederlandsche Bank Eurosysteem
Risks in clearing and settlement of securities
Risks
risk of settlement bank failure
liquidity risk
systemic risk
credit risk:• replacement cost risk• principal risk
custody risklegal risk
operational risk
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De Nederlandsche Bank Eurosysteem
Risks
Credit risk:The risk of loss from default by a participant,
as a consequence of its insolvency
Replacement cost risk Principal risk
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De Nederlandsche Bank Eurosysteem
Risks
Risk that full value of securities or funds will be lost when either the seller or buyer fails to settle
Can be eliminated by Delivery versus Payment
Principal risk
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De Nederlandsche Bank Eurosysteem
Delivery versus Payment (DvP)
Securities cash
NCB
Bank A Bank B
Sell Order Buy Order
CSD
A
B
A
B
1 ^1
2 ^2
3^3
DvP
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De Nederlandsche Bank Eurosysteem
DvP in practice
Sell/buy transactionThe CSD blocks the securities in the account
of the seller, followed by sending a payment instruction to the NCB
The central bank transfers the funds from the buyer’s to the seller’s account and sends a confirmation to the CSD
The CSD move the securities from the seller’s to the buyer’s account
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De Nederlandsche Bank Eurosysteem
Risks
Failure of bank providing cash accounts for payments Impact particularly severe if all CSDs use the same Approaches to control: use of the central bank money,
limited purpose bank
Risk of failure of a
settlement bank
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De Nederlandsche Bank Eurosysteem
Risks
Failure of one institution could cause other institutions to fail
Liquidity and credit problems may disrupt financial markets
Liquidity is dependent on confidence in reliability of SSS
Oversight function central bank
Systemic risk
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De Nederlandsche Bank Eurosysteem
European developments
Lisbon agenda 2000: European economy has to become stronger to compete with the USA and Japan/China
Shortage: there is no integrated European financial market
European Union has identified 15 barriers for integration (Giovannini 2001)Technical, market practices (10)Legal and fiscal barriers (5)
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De Nederlandsche Bank Eurosysteem
Inefficiencies European market
0
5
10
15
20
25
30
35
Co
st p
er t
ran
sact
ion
[E
UR
]
UnitedStates
EU domestic EU cross-border
Min Max Avg.
Huge difference in costs of securities transactions:
Domestic costs vary
within the EU
In average higher than in
the USA
EU cross-border costs
are much higher than
domestic costs in the
USA
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De Nederlandsche Bank Eurosysteem
Securities landscape
Brokertecao,
Amsterdam
Paris Brussels
Lisbon LIFFE
SWXLSE Virt-xDeutsche
BorseEurex Stockholm
Copen-hagen
Oslo
Spanish Exchanges MTS
Borsa Italian
a
CLEARNET LCH X-Clear EUREX Clearing AG Non-CCP market Iberclear CCG
EuroclearBank
EuroclearNederland
EuroclearFrance
CIK
Interbolsa
CREST SISClearstream
Banking FFt AG VPC VP A/S
VPS
SCLVMonte Titoli
CommercialBank Money
BundesbankBanco
d’EspanaBanca D’Italia
OTC-trades e.g. Repos, Swaps
CeBMCeBM via DNB,BdF,BNB,Banco de Port,Bank of Engl.
CSD’s
ICSD
Iceland
Iceland CSD
Exchanges
Clearing
Custody/Settlem.
Money
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De Nederlandsche Bank Eurosysteem
Integration & consolidation
Financial integration for all market participants:
• Equal access
• Uniformal set of rules
• Treatment in an equal way
Consolidation means a less number of service providers
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De Nederlandsche Bank Eurosysteem
Integration models in Europe
CBISSO (IE)
Euroclear
Euroclear (ICSD) CIK (BE)
Sicovam (FR) Euroclear (NL)
Crest (UK)
Horizontal integration
Clearstream
Eurex Clearing
DeutscheBörse
Vertical integration
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De Nederlandsche Bank Eurosysteem
Dynamics in the securities market
Market integration, level playing field and harmonisation
Consolidation of exchanges and SSSs in the market goes full speed on
Markets in Financial Instruments Directive Code of Conduct for Clearing and SettlementCESAME Group to lift technical, market
practices Giovannini barriersInternalisation: huge banks settle transactions
internally
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De Nederlandsche Bank Eurosysteem
Risks
Risk of loss of unrealised gains
Due to price changes between trade and settlement
Exposure depends on price validility and time gap between trade settlement (e.i. t+3)
Replacement cost risk
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De Nederlandsche Bank Eurosysteem
Risks
Risk that counterparty will not settle an obligation when due
Costs depend on degree of liquidity
Potential to create systemic problems
Liquidity risk
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De Nederlandsche Bank Eurosysteem
Risks
Risks that securities are not adequately protected by the custodians
Either full loss or temporary inability to transfer securities
Segregation of accounts
Custody risk
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De Nederlandsche Bank Eurosysteem
Risks
Due to deficiencies in systems and controls, human error or management failure
Due to uncertain legal rules (unenforceability of contracts, bankruptcy laws, delay in recovering funds or securities)
Operational risk
Legal risk
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De Nederlandsche Bank Eurosysteem
TARGET2 Securities
An integrated platform of the Eurosystem for the DVP settlement of securities transactions in central bank money within the euro area
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De Nederlandsche Bank Eurosysteem
OeKB
Clearstream FFM
Euroclear FR
Iberclear
Monte Titoli
The current initiatives:
Clearstream Lux
Euroclear BE
Euroclear NLNTMA
SCL Bilbao
CSD SA
BOGS
APK
SCL Valencia
SCL BarcelonaInterbols
aSiteme
NBB Clearing
Why?Deutsch Börse Gruppe
Euroclear Group T2S: a workable solution for DVP cross-border settlement of securities within central bank money
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De Nederlandsche Bank Eurosysteem
Why?
The model can offer advantages in terms of efficiency and cost-cutting, provided that a critical mass of CSDs actually joins and the system can be developed at reasonable cost.
It would benefit financial stability
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De Nederlandsche Bank Eurosysteem
T2S concerns only settlement in central bank money
Background: Essential concepts
Investor
Investor bank
Custodian bank or ICSD
CSD
central bank money
commercial bank money
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De Nederlandsche Bank Eurosysteem
INVESTORCSD
INVESTORCSD
SETTLEMENTSETTLEMENT
TRADINGTRADING
ISSUERCSD
ISSUERCSD
ISSUERISSUER INVESTORINVESTOR
CCPCLEARING
CCPCLEARING
CASHCLEARING
CASHCLEARING
BANK &BROKER
BANK &BROKER
LISTINGLISTING
EXCHANGE
CSD CENTRAL BANK
CLEARINGHOUSE
Traditional roles in securities market
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De Nederlandsche Bank Eurosysteem
Securities accounts at the centre
INVESTORCSD
INVESTORCSD
T2SSETTLEMENT
T2SSETTLEMENT
TRADINGTRADING
ISSUERCSD
ISSUERCSD
ISSUERISSUER
INVESTORINVESTOR
CCPCLEARING
CCPCLEARING
CASHSETTLEMENT
CASHSETTLEMENT
BANK &BROKER
BANK &BROKER
LISTINGLISTING
EXCHANGE
CSD
CENTRAL BANK
CLEARINGHOUSE
SECURITIES ACCOUNTS
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De Nederlandsche Bank Eurosysteem
How?
The CSDs outsource the administration of securities accounts to the Eurosystem, which then manages the securities and associated cash accounts on the platform.
At the end of the day the money goes back into the TARGET2 payment system, and the securities return to the CSDs
Only securities settlement, CSDs keep the custody and notary functions
Based on DVP
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De Nederlandsche Bank Eurosysteem
TARGET2 Securities (during the operating hours)
Euroclear (BE, FR, NL) Siteme BOGS OeKB
NBB Clearing
TARGET2 - Securities
Clearstream
Monte Titoli
Iberclear
APK
NTMA
Other CSD’s
OeNB, NBB, BBK, BdE, BoF, BdF,BoG, CBFSAI, BdI, BcL, DNB, BdP
Sub-cash accounts
Securities accounts
TARGET2
Cash accounts
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De Nederlandsche Bank Eurosysteem
Potential obstacles
Dependence on the decision of the CSDs to participate (voluntary)
Concentration of risk, monopolisation of settlement Prerequisite of the project: harmonisation of legal
structures and operating rules Removal Giovannini barriers, especially
Barriers 4, 6 and 7: T2S may ensure common operating hours and finality rules for domestic and cross border transactions
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De Nederlandsche Bank Eurosysteem
TARGET2 Securities
TARGET2 Securities is a workable solution for the long term
Market consultation and user requirements is going on
Governing Council of the ECB will take a decision on the implementation of T2S in March 2008
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De Nederlandsche Bank Eurosysteem
CCBM2
Currently, banks hold collateral at several locations, it is exchanged through the Correspondent Central Bank Model
CCBM2 is a common platform for central banks that integrates both domestic and cross-border collateral management