Transcript GENERAL FRAMEWORK DNB-CEF WORKSHOP ON PAYMENT …

Exchanges, Clearing, Settlement and
TARGET2 Securities
De Nederlandsche Bank
Michael van Doeveren
Richard Derksen
Financial Sector of Macedonia Conference
on Payments and Securities Settlement
Systems
Ohrid
24 June 2008
De Nederlandsche Bank
Eurosysteem
Agenda

The world of securities and exchanges

Risks in clearing and settlement of securities

TARGET2 Securities and CCBM2
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
De Nederlandsche Bank
Eurosysteem
Clearing & settlement infrastructure
Exchanges
CCP
National
Central
Bank
CSD
custodian
Agent
bank
Investor
Investor
Agent
bank
Investor
Agent
bank
Investor
Agent
bank
Investor
Issuer
custodian
Agent
bank
Investor
Agent
bank
Investor
De Nederlandsche Bank
Eurosysteem
Entities in securities
Issuer/Investor
CSDs
ICSDs
Custodians
Exchanges
CCPs
Agent Bank
NCB
Issue/hold securities
Central securities depositories: storehouses for
securities and domestic settlement services providers
International central securities depositories:
international settlement services providers, CSDs for
Eurobonds
National and international settlement services
providers, typically banks
platform for trade in securities
Central counterparties: central providers for
clearing services
Executes transactions for customers
National Central Bank; provides settlement
De Nederlandsche Bank
services, oversight
Eurosysteem
Life 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 t+3)
 Securities settlement (usually t+3)
 Custody (corporate actions)

De Nederlandsche Bank
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Risks in clearing and settlement of
securities
credit risk:
• replacement cost risk
• principal risk
legal risk
liquidity risk
custody risk
Risks
operational risk
risk of settlement bank failure
systemic risk
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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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Risks
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
De Nederlandsche Bank
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Delivery versus Payment (DvP)
Securities
2
cash
A
^
2
A
DvP
CSD
B
3
1
Bank A
Sell Order
NCB
B
^
3
^
1
Bank B
Buy Order
De Nederlandsche Bank
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DvP 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
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

De Nederlandsche Bank
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Risks
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
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Risks
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
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)

De Nederlandsche Bank
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Inefficiencies European market
Cost per transaction [EUR]
Huge difference in costs of securities transactions:
 Domestic costs vary
35
30
within the EU
25
 In average higher than in
20
the USA
15
 EU cross-border costs
10
5
are much higher than
0
United
States
Min
EU domestic
Max
Avg.
EU crossborder
domestic costs in the
USA
De Nederlandsche Bank
Eurosysteem
Securities landscape
Exchan
ges
Brokertec
ao,
Amsterdam
Paris
Brussels
Lisbon
Clearing
Custody/
Settlem.
LIFFE
LCH
Euroclear
Bank
Euroclear
Nederland
Euroclear
France
CIK
Virt-x
Deutsche
Borse
Eurex
Stockholm
Copenhagen
Oslo
Iceland
Spanish
Exchanges
Borsa
Italiana
Iberclear
CCG
SCLV
Monte
Titoli
MTS
OTC-trades
e.g. Repos, Swaps
CLEARNET
Interbolsa
SWX
LSE
CREST
X-Clear
EUREX Clearing AG
SIS
Clearstream
Banking FFt AG
Non-CCP market
VPC
VP A/S
VPS
Iceland
CSD
CSD’s
ICSD
Money
Commercial
Bank Money
De Nederlandsche Bank
CeBM via DNB,BdF,BNB,Banco de Port,Bank of Engl.
Bundesbank
CeBM
Banco
d’Espana
Banca
Eurosysteem
D’Italia
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
De Nederlandsche Bank
Eurosysteem
Integration models in Europe
Horizontal integration
Vertical integration
Euroclear (ICSD)
CIK (BE)
Sicovam (FR)
Euroclear (NL)
CBISSO (IE)
Crest (UK)
Euroclear
Deutsche
Börse
Eurex
Clearing
Clearstream
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 Settlement
 CESAME Group to lift technical, market
practices Giovannini barriers
 Internalisation: huge banks settle transactions
internally

De Nederlandsche Bank
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Risks
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 (e.i. t+3)
De Nederlandsche Bank
Eurosysteem
Risks
Liquidity risk



Risk that counterparty will not settle
an obligation when due
Costs depend on degree of liquidity
Potential to create systemic problems
De Nederlandsche Bank
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Risks
Custody risk



Risks that securities are not adequately
protected by the custodians
Either full loss or temporary inability to
transfer securities
Segregation of accounts
De Nederlandsche Bank
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Risks
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)
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
De Nederlandsche Bank
Eurosysteem
Why?
The current initiatives:
T2S: a workable solution for DVP
cross-border settlement of
securities within central bank
APK
money
Deutsch Börse Gruppe
Euroclear Group
Euroclear NL
NTMA
Euroclear BE
NBB Clearing
Clearstream FFM
Clearstream Lux
OeKB
Euroclear FR
SCL Bilbao
Interbolsa
Siteme
SCL Barcelona
Iberclear
SCL Valencia
Monte
Titoli
BOGS
CSD SA
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
De Nederlandsche Bank
Eurosysteem
Background: Essential concepts
T2S concerns only settlement in central bank money
CSD
Custodian bank
or ICSD
central bank money
commercial bank money
Investor bank
Investor
De Nederlandsche Bank
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Traditional roles in securities market
EXCHANGE
LISTING
TRADING
CLEARING
CCP
HOUSE CLEARING
CENTRAL BANK
CSD
SETTLEMENT
ISSUER
ISSUER
CSD
INVESTOR
CSD
CASH
CLEARING
BANK &
BROKER
INVESTOR
De Nederlandsche Bank
Eurosysteem
Securities accounts at the centre
EXCHANGE
LISTING
TRADING
CLEARING
CCP
HOUSE CLEARING
CENTRAL BANK
T2S
SETTLEMENT
CASH
SETTLEMENT
SECURITIES ACCOUNTS
BANK &
BROKER
CSD
ISSUER
ISSUER
CSD
INVESTOR
CSD
INVESTOR
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
De Nederlandsche Bank
Eurosysteem
TARGET2 Securities (during the operating hours)
Euroclear (BE, FR, NL)
Siteme
BOGS
Clearstream
OeKB
NBB Clearing
TARGET2 - Securities
Monte Titoli
Sub-cash
accounts
Iberclear
Cash
accounts
Securities
accounts
NTMA
Other CSD’s
TARGET2
APK
OeNB, NBB, BBK, BdE, BoF, BdF,
BoG, CBFSAI, BdI, BcL, DNB, BdP
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
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

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

De Nederlandsche Bank
Eurosysteem