Transcript Dia 1

De Nederlandsche Bank
Clearing & Settlement and TARGET2Securities
Nynke Doornbos & Michael van
Doeveren
3rd Macedonian Financial Sector
Conference on Payments and
Securities Settlement Systems
29 June 2010
De Nederlandsche Bank
Eurosysteem
Agenda

The world of securities and exchanges

Risks in clearing and settlement of securities

What´s going on in Europe?
 Code of Conduct Clearing & Settlement (selfregulation)
 Markets in Financial Instruments Directive (MiFID)
 European Market Infrastructure Regulation (EMIR)
 Securities Law Directive (SLD)

Consequences for central banks

TARGET2-Securities
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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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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
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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
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services, oversight
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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)

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Exchanges, CCPs and CSDs - basic model
EURONEXT
Trading
LCH.Clearnet SA
Clearing
Trading
Member
Buyer/
Seller
Clearing
Members
EUROCLEAR Nederland
Securities settlement
ENL
Depository
DNB / T2
Cash settlmn.
Admitted
Institution
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Clearing / CCP
Clearing Member
Clearing House
Clearing Member
Role:
 Trade confirmation
 Netting
 CCP = central counterparty
Issues:
 Counterparty credit risk concentrates at CCP. Default
CCP might affect the whole financial system (so…
Oversight)
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Central 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
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CSD: settlement
EUROCLEAR Nederland
Settlement
ENL Depository
DNB / TARGET2
Securities account A
Securities account B
Cash account A
DVP
Cash account B
Role:
• Recording of changes in legal titles resulting from securities
transactions
• Exchange trades settle on T+3
Issues:
• DVP: delivery versus payment to limit principal risk (Herstatt
risk)
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• SFD: Finality offers protection against unwinding
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CSD: Depository
Euroclear Nederland
Central Securities Depository (CSD)
Aangesloten
Aangesloten
Instellingen
Aangesloten
Instellingen
Aangesloten
Instellingen
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
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Role of central banks

Services in central bank money
Cash settlement in TARGET2: DVP
Collateral management for CCPs
TARGET2-Securities (Pan- European platform for
settlement of trades, September 2014)

Oversight
Financial stability – limit systemic risk
Limit losses of participants
Limit contagion to other markets
Enhance confidence in payment systems
De Nederlandsche Bank
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European 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 and operational barriers, market
based(10)
 Legal and fiscal barriers (5)
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What 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 €);
35
30
25
20
15
- Cross-border costs higher than
domestic ones (19.5 to 35.0 €).
10
5
0
United
States
EU
domestic
Min
Source: Oxera, LSE, CEPS
Max
EU crossborder
Avg.
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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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Integration models in Europe
Horizontal integration
Vertical integration
Euroclear (ICSD)
CIK (BE)
Euroclear (FR)
Euroclear (NL)
CBISSO (IE)
Crest (UK)
Euroclear
Deutsche
Börse
Eurex
Clearing
Clearstream
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Dynamics in the securities market








Market integration, level playing field and harmonisation,
regulatory (lessons learned from financial crisis)
Consolidation of exchanges and SSSs in the market goes full
speed on
Code of Conduct for Clearing and Settlement
Markets in Financial Instruments Directive
European Market Infrastructure Regulation
Securities Law Directive
CESAME Group ? to lift technical, market practices Giovannini
barriers
Internalisation: huge banks settle transactions internally
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Post 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

Regulatory measures to be implemented
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Post trading infrastructures US
Trading
Clearing
NYSE
NASD
AQ
NSCC
FICC
DTC
FED
Settlement
securities
Settlement
cash
FEDERAL
RESERVE
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Post trading infrastructures EU
Trading
Euronext
Amsterdam + Brussels
+ Lisbon + Paris
London
Stock
Exchan
ge
Luxem
bourg
Stock
Ex
change
Borsa
Italia
na
Deut
sche
Borse
LCH
CC&G
Eurex
Clea
ring
Crest
Co
Monte
Titoli
Clears
tream
BF
Clears
tream
BL
Bunde
sbank
BCL
Oslo Bors
OM
Nasdaq
HEX
Bolsa
y
Merc.
Esp.
Nordic
CSD
Iber
clear
Nordic central
banks
Banca
d´
Espan
a
GPW
LCH.Clearnet Group ltd
Clearnet SA
Clearing
Settlement
securities
Eurocle
ar
Nederla
nd
CIK
Eurocle
ar
France
Settlement
cash
DNB
NBB
BdF
BOE
Banca
d´
Italia
V
P
S
K
D
P
W
C
R
B
S
Bk of
Poland
TARGET2
De Nederlandsche Bank
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EU 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
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EU initiatives for more efficient
securities markets in Europe –
2. MiFID
´Markets in Financial Instruments Directive´, 1 November 2007
 MTF:
 Best
alternative trading platforms next to regulated markets
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
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Results until now…
Code of Conduct – around 2 years
MiFID – around 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)
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Results till now…
Negative:
- Fragmentation and complexity remains
- 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)
De Nederlandsche Bank
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Consequences for central banks

Services in central bank money
Cash settlement also for MTFs and new CCPs –
national silo´s 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)
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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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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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Role 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 (PanEuropean platform for settlement of trades in
Central Bank Money, 2014)

Oversight
Financial stability – limit systemic risk
Limit losses of participants
Limit contagion to other markets
Enhance confidence in payment systems
De Nederlandsche Bank
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What 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 is an option
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Why (1)?
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
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Why T2S (2)?
The
model offers advantages in terms of
efficiency and cost-cutting
assuming
that a critical mass of CSD’s actually
joins and the system can be developed at
reasonable costs (volume dependent)
Commitment CSDs: MoU 2009, 27 CSD’s
signed, Framework Agreement to be signed.
Cost estimations to be further investigated
Financial
stability
De Nederlandsche Bank
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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
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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
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How?
CSDs outsource the administration of
securities accounts to T2S
 Credit institutions transfer cash to T2S, real
time DVP is now possible
 At the end of the day the securities return to
the CSDs and the money goes back into the
TARGET2 payment system
 functions such as custody and notary
functions remain at the CSD’s (added value
services)

De Nederlandsche Bank
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TARGET2 Securities (during the operating hours)
Euroclear (BE, FR, NL)
Siteme
BOGS
Clearstream
OeKB
NBB Clearing
TARGET2 - Securities
Monte Titoli
dedicatedcash
accounts
Iberclear
Cash
accounts
Securities
accounts
NTMA
Other CSD’s
TARGET2
APK
OeNB, NBB, BBK, BdE, BoF, BdF,
BoG, CBFSAI, BdI, BcL, DNB, BdP
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Uncertainties



Success of T2S depends on the decision of the CSDs
to actually participate (signing Framework
Agreement)
Concentration of risk because of centralisation
(impact)
Prerequisite of the project: harmonisation of legal
structures
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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The T2S User Requirements
(Four central
banks develop the platform: Deutsche Bundesbank, Banco de Espana, Banque de France,
Banca d’Italia)
Scope of assets
All types of securities which CSD’s 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
De Nederlandsche Bank
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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
De Nederlandsche Bank
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Impact 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.

De Nederlandsche Bank
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Timetable T2S
July 2008: Decision Governing Council to
launch T2S
 2009-2010: Specification- and development
phase
 2010-2013: Building, Testing and Migration
phase
 September 2014: Operational phase (start of
implementation in three waves)

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