Title: Exchanges, Clearing
1 - Exchanges, Clearing Settlement and
- TARGET2 Securities
- Richard Derksen
-
- 2nd Conference of Macedonian Financial Sector on
Payments and - Securities Settlement Systems
- Ohrid
- 30 June 2009
2Agenda
- The world of securities and exchanges
- Risks in clearing and settlement of securities
- Whats going on in Europe?
- Code of Conduct clearing settlement
- Markets in Financial Instruments Directive
(MiFID) - Consequences for central banks
- TARGET2 Securities
3Securities chain
Agreement to exchange securities for funds
trading
Calculation of obligations
clearing
Delivery of securities and payment of funds
settlement
4Clearing settlement infrastructure
Exchanges
CCP
National Central Bank
CSD
Issuer
custodian
custodian
Agent bank
Agent bank
Agent bank
Agent bank
Agent bank
Agent bank
Investor
Investor
Investor
Investor
Investor
Investor
Investor
5Entities in securities
Issue/hold securities
Issuer/Investor
Central securities depositories storehouses for
securities and domestic settlement services
providers
CSDs
International central securities depositories
international settlement services providers, CSDs
for Eurobonds
ICSDs
National and international settlement services
providers, typically banks
Custodians
platform for trade in securities
Exchanges
Central counterparties central providers for
clearing services
CCPs
Executes transactions for customers
Agent Bank
National Central Bank provides settlement
services, oversight
NCB
6Life cycle of securities transactions
- Transactions (by a telephone call or system)
- Entry in a system (buy or sell)
- Validation
- Authentication authorisation
- Matching confirmation
- Clearing
- Money settlement (usually t3)
- Securities settlement (usually t3)
- Custody (corporate actions)
7Exchanges, CCPs and CSDs - basic model
Buyer/ Seller
EURONEXT
Trading Member
Trading
Clearing Members
LCH.Clearnet SA
Clearing
EUROCLEAR Nederland
Securities settlement
ENL
Admitted
DNB / T2
Depository
Cash settlmn.
Institution
8 Clearing / CCP
Clearing Member
Clearing Member
Clearing House
- Role
- Trade confirmation
- Netting
- CCP central counterparty
- Issues
- Counterparty credit risk concentrates at CCP.
Default CCP might affect the whole financial
system (so Oversight)
9Central counterparty
- CCP central counterparty
- Interposes itself between buyer and seller of a
security - Guarantees clearing and settlement towards market
participant - Takes over exposure counterparty credit risk
- Novation contract between buyer and seller
replaced by contract between buyer and CCP and
seller and CCP - Pro
- Decrease counterparty credit risk
- CCP risk management for clearing member
- Cost reduction
- Trade benefits
10CSD settlement
EUROCLEAR Nederland
Depository
DNB / TARGET2
ENL
Settlement (ESES)
Securities account A Securities account B
Cash account A Cash account B
Cash account A Cash account B
DVP
- Role
- Recording of changes in legal titles resulting
from securities transactions - Exchange trades settle on T3
- Issues
- DVP delivery versus payment to limit principal
risk (Herstatt risk) - SFD Finality offers protection against unwinding
11CSD Depository
Aangesloten
Aangesloten
Instellingen
Aangesloten
Euroclear Nederland
Instellingen
Aangesloten
Instellingen
Central Securities Depository (CSD)
Aangesloten
Instellingen
Admitted
Instellingen
Institution
- Role
- Maintenance of securities accounts
- Facilitating reconciliation with any official
register - Facilitating the exercise of securities holders
rights and corporate actions - Issues
- Immobilisation and demateralisation
- Operational risk
12Role of central banks
- Services in central bank money
- Cash settlement in TARGET2 DVP model 2 (with
ESES DVP model 1) - Collateral management for CCPs
- And in the future TARGET2Securities (Pan-
European platform for settlement of trades, 2013) - Oversight
- Financial stability limit systemic risk
- Limit losses of participants
- Limit contagion to other markets
- Enhance confidence in payment systems
13European developments
- Lisbon agenda 2010 European economy has to
become stronger to compete with the USA and
Japan/China - National markets in Europe have remained
isolated, cross border transactions too complex,
too costly there is no integrated European
financial market - Importance of clearing and settlement of those
trades for smooth functioning of the financial
system inefficiencies have serious consequences - European Union has identified 15 barriers for
integration (Giovannini 2001) - Technical, market practices (10)
- Legal and fiscal barriers (5)
14What is the status of integration
- Too high settlement costs
-
- - EU domestic costs range from
- 0.35 to 3.43
- - and are higher than US
- ( 0.10 to 2.90 )
- - Cross-border costs higher than
- domestic ones (19.5 to 35.0 ).
-
Source Oxera, LSE, CEPS
15Integration 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
16Integration models in Europe
Horizontal integration
Euroclear (ICSD)
CIK (BE)
Euroclear (FR)
Euroclear (NL)
Crest (UK)
CBISSO (IE)
Euroclear
17Dynamics 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 Settlement
- CESAME Group to lift technical, market practices
Giovannini barriers - Internalisation huge banks settle transactions
internally
18Post trade market in Europe
- No central system as in the US, but still very
fragmented - Different models horizontal, vertical,
user-owned, demutualised - High cross border tariffs, (semi) monopolies, low
competition - No EU Directive for clearing and settlement
- so no European passport for cross-border
services
19Post trading infrastructures US
20Post trading infrastructures EU
21EU initiatives for more efficient securities
markets in Europe 1. Code of Conduct
- The solution from EU commissioner McCreevy (2006)
- Selfregulation Code of Conduct
- Signed by 60 EU exchanges, CCPs and CSDs in
November 2006 - Objective stimulate competition and decrease
cross-border cost - 3 parts
- Price transparancy 1 January 2007
- Interoperability 1 July 2007 (Guideline)
- Unbundling account separation 1 January 2008
22EU initiatives for more efficient securities
markets in Europe 2. MiFID
- Markets in Financial Instruments Directive, 1
November 2007 - MTF alternative trading platforms next to
regulated markets - Best execution moves trading to markets that
offer the best price - Art 34 and 46
- the right of a market participant to access
remotely a foreign CCP and/or CSD - The right of a regulated market/MTF to choose a
particular CCP/ CSD - No double regulation
23Results until now
- Code of Conduct around 2 years
- MiFID nearly 1 year
- Guideline on Interoperability 1 year
- Results
- New MTFs and in their slipstream
- New CCPs
- Around 90 requests for interoperability (links
between CCPs and CSDs)
24Results till now
- Negative
- Increased fragmentation and complexity
- No European passport, so a regulatory mess
- Not 1 link realised
- Positive
- Increased competition
- Breaking down monopolies
- Significant reduction in tariffs (in the
Netherlands clearing cost from 0.65 eurocent to
0.05 eurocent per trade)
25Complexity European market increases
- EU market
- Incumbent trading, clearing and settlement
26Complexity European market increases
MTFs and new CCPs
27Consequences for central banks
- Services in central bank money
- Cash settlement also for MTFs and new CCPs
national silos disappear - Collateral management for new CCPs
- Oversight
- What stability risks come with
- New CCPs and their settlement agents
- Increased complexity
- Interoperabiliteit
- Rely on foreign regulators, supervisors and
overseers (MiFID art 34 and 46)
28Risks in clearing and settlement of securities
liquidity risk
- credit risk
- replacement cost risk
- principal risk
custody risk
Risks
legal risk
operational risk
risk of settlement bank failure
systemic risk
29Risks
Credit risk The risk of loss from default by a
participant, as a consequence of its insolvency
Replacement cost risk
Principal risk
30Risks
Principal risk
- 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
31Delivery versus Payment (DvP)
DvP
32DvP in practice
- Sell/buy transaction
- The 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
buyers to the sellers account and sends a
confirmation to the CSD - The CSD move the securities from the sellers to
the buyers account
33Risks
Replacement cost risk
- 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 (i. e. t3)
34Risks
Risk of failure of a settlement bank
- 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
35Risks
Systemic risk
- 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
36Risks
Liquidity risk
- Risk that counterparty will not settle an
obligation when due - Costs depend on degree of liquidity
- Potential to create systemic problems
37Risks
Custody risk
- Risks that securities are not adequately
protected by the custodians - Either full loss or temporary inability to
transfer securities - Segregation of accounts
38Risks
Operational risk
- Due to deficiencies in systems and controls,
human error or management failure
Legal risk
- Due to uncertain legal rules (unenforceability of
contracts, bankruptcy laws, delay in recovering
funds or securities)
39What is T2S?
- An integrated settlement platform of the
Eurosystem for the DVP settlement of securities
transactions in central bank money within the
euro area - All securities which have to be
transferred- Cash needed for settlement - Supports the integration of the securities
settlement market infrastructure - Making cross-border transactions domestic ones in
the Eurozone - The extension to other currencies will also be
possible
40Why (1)?
The current initiatives
Deutsch Börse Gruppe
T2S a workable solution for DVP cross-border
settlement of securities within central bank money
Euroclear Group
APK
Euroclear NL
Clearstream FFM
Euroclear BE
NTMA
Clearstream Lux
NBB Clearing
OeKB
Euroclear FR
Monte Titoli
SCL Bilbao
BOGS
SCL Barcelona
Interbolsa
Iberclear
CSD SA
Siteme
SCL Valencia
41Why T2S (2)?
- The model can offer advantages in terms of
efficiency and cost-cutting - provided that a critical mass of CSDs actually
join and the system can be developed at
reasonable costs - Commitment CSDs
- Cost estimations to be further investigated
- It will benefit financial stability (enabling
cross border securities settlement in Central
Bank Money)
42 Background Essential concepts
T2S concerns only settlement in central bank money
commercial bank money
43Traditional roles in securities market
44Securities accounts at the centre
45How?
- CSDs outsource the administration of securities
accounts to T2S - Credit institutions transfer cash to T2S, real
time DVP is now possible - During or at the end of the day the securities
return to the CSDs and the money goes back into
the TARGET2 payment system - CSDs retain the remaining functions such as
custody and notary functions
46TARGET2 Securities outside of operating hours
BOGS
Euroclear (BE, FR, NL)
Siteme
Securities accounts
Securities accounts
Securities accounts
OeKB
Securities accounts
Clearstream
Securities accounts
TARGET2 - Securities
NBB Clearing
Securities accounts
Monte Titoli
Securities accounts
TARGET2
NTMA
Cash accounts
Iberclear
Securities accounts
Securities accounts
Other CSDs
APK
OeNB, NBB, BBK, BdE, BoF, BdF,BoG, CBFSAI, BdI,
BcL, DNB, BdP
Securities accounts
Securities accounts
47TARGET2 Securities during the operating hours
Euroclear (BE, FR, NL)
Siteme
BOGS
OeKB
Clearstream
TARGET2 - Securities
NBB Clearing
Sub-cash accounts
Securities accounts
Monte Titoli
TARGET2
NTMA
Cash accounts
Iberclear
Other CSDs
OeNB, NBB, BBK, BdE, BoF, BdF,BoG, CBFSAI, BdI,
BcL, DNB, BdP
APK
48What is T2S?
Where are the benefits coming from
- 3 sources of cost savings
- fee savings
- economics of scale
- elimination of the cross-border aspect
- collateral savings (single pool of collateral)
- back-office savings (one or few technical
interfaces) - Non-quantifiable benefits
- driver for harmonisation
- enhanced competition in market infrastructure
- market liquidity (dynamic effect)
49Uncertainties
- Success of T2S depends 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
50The T2S User Requirements
- Scope of assets
- All types of securities which CSDs are settling
today (debt instruments, equities, investment
funds, warrants) - Scope of services
- Whole life cycle of a transaction receiving
settlement instructions, providing matching
facilities, verifying availablity of securities
and CeBM etc - T2S
- Four central banks develops the platform
Deutsche Bundesbank, Banco de Espana, Banque de
France, Banca dItalia
51Legal issues
- Legal basis Article 22 Statute ESCB/ECB
- Enables the Eurosystem to provide facilities to
deliver efficient and sound clearing and payment
systems - Governance
- The infrastructure will be wholly owned by the
Eurosystem - (I)CSDs and users are involved during
specification phase
52Impact T2S
- Fosters competition among CSDs
- Reduces intermediary costs
- Reduces collateral needs and costs
- Reduces back-office costs
- Facilitates cross border business with easier and
cheaper cross-CSD settlement.
53Timetable T2S
- July 2008 Decision Governing Council to launch
T2S - 2009 Specification- and development phase
- Possibilities External (non-Euro zone) CSD
settlement - 2010-2012 Building, Testing and Migration phase
- 2013 Operational phase
54 Thank you very much ! Any qustions?