Transcript Wholesale vs Retail Safekeeping Models

Wholesale vs Retail
Safekeeping Models
AMEDA Leadership Forum
Alexandria, Egypt, 27-29th April
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© 2009 Thomas Mur
Retail M
CSD and
Central
Registrar
Beneficial
owner
Beneficial
owner
Beneficial
owner
Beneficial
owner
Foreign
nominee
Beneficial
owner
Beneficial
owner
Foreign
nominee
Beneficial
owner
• All domestic accounts held at the first level
• Each beneficial owner has their own account at the CSD
• The CSD acts as central registrar – the notary that grants legal title. (Other registration functions can be carried out by third
party registrars e.g. Calling AGMs, paying dividends etc.
• Genuine nominee accounts only allowed for foreign participants
• Also known as the Direct Holding model
• Structure results in millions of accounts at the CSD
• No intermediaries required. Participants act as Account Operators to maintain details across millions of accounts
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© 2009 Thomas Mur
Wholesale M
Settlement
Depository
Intermediary
Intermediary
Beneficial
owner
Nominee
Intermediary
Nominee
Intermediary
Beneficial
owner
Beneficial
owner
Foreign
nominee
• No restriction on the number of levels
• Beneficial owner is the one at the bottom of the chain
• Intermediaries are licensed depositories that often act via “nominee accounts”. These are omnibus accounts that allow
efficient settlement but offer lower levels of protection
• Also known as the Indirect Holding model
• Typically only several hundred accounts at the CSD
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© 2009 Thomas Mur
Advantages of the Retail m
• Allows CSD to act as central registrar giving leverage to provide added value
services (e.g. asset servicing, tax, issuer services, portfolio valuations)
• Ownership is very clear – no reliance on intermediaries records. No long holding
chains.
• Equivalent of designated segregation
• Eliminates any legal uncertainties re: nominee status, omnibus accounting
• Effectively registration on settlement rather than books close registration
• Market behaviour more transparent for regulatory surveillance
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© 2009 Thomas Mur
Disadvantages of the Retail m
• It is a domestic model only. It does not work for cross border business. Foreign
institutions want to operate via nominee accounts.
• Netting at the beneficial owner level may require a more sophisticated netting
algorithm or netting efficiency is diminished.
• The wholesale model is more efficient across the interface between the
custodians and the CSD in that custodians operate omnibus accounts and only
limited reconciliations are required.
• Retail model potentially allows CSD to dis-intermediate custodians. It therefore
requires very good corporate governance to succeed.
• Does not allow the intermediary to internalise settlements and therefore offer a
cheaper solution.
• Increases operational risk within the CSD.
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© 2009 Thomas Mur
Advantages of the Wholesale m
• Embeds role of intermediary and discourages custodian disintermediation
• More operationally efficient for custodians/ easier for sub-custodians to provide
a good service
• More efficient across the interface between the custodians and the CSD e.g.
reconciliations, makes for timelier reporting
• Cheaper for participants and their clients (accounts and settlements)
• Facilitates higher netting efficiency
• Allows for internalisation of settlement (reduces settlement costs)
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© 2009 Thomas Mur
Disadvantages of the Wholesale M
•
Voting (split/partial voting or re-registration required)
•
Significant shareholding declarations
•
Corporate actions – especially those requiring physical documents
•
Taxation – requires separate omnibus account for each tax status
•
Lack of securities segregation
•
Legal uncertainties on holding of intangibles by intermediaries or nominee concept
•
Loss-sharing/liens in an omnibus structure
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© 2009 Thomas Mur
Exam
Wholesale
USA
France
Belgium
UK (Mixed)
S Africa
Italy (with restrictions)
Retail
Sweden
Norway
Greece
Turkey
India
China
Brazil
Saudi Arabia
Limited Levels
Spain
Romania
Kazakhstan
Russia
• There is no prescribed best market practice in terms of the wholesale or retail model
• Unidroit should resolve the issues around the wholesale model.
• Limited levels are not best market practice in Thomas Murray’s view, they represent a compromise.
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© 2009 Thomas Mur