Transcript Cross Border Settlement and Regional Bond Market Integration

Cross Border Settlement and
Regional Bond Market Integration
November 4-6, 2005
Shanghai, China
Noritaka Akamatsu
The World Bank
Contents
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Background
Alternative channels of cross border settlement
Existing networks of global custodians in the region,
Institutional networks and system linkages among existing
clearing houses and CSDs in the region,
Risk management issues,
Legal and regulatory infrastructure for ownership security
and settlement finality,
Multi-currency fund settlement arrangements,
Business, political and technical feasibility of a regional
clearing house.
Capital account liberalization requirements,
Strategy
Background
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Efficient and secure settlement is critical to promoting
cross border trading of bonds in the region.
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Unless the settlement is possible, secure and efficient, investors
will not trade across national borders.
How can a trade between, e.g., a Korean investor and a Thai
counterpart in Malaysian bonds kept in custody in Hong Kong be
settled?
National CSDs are now being linked up. But their
settlement modes differ because each of them is
designed to serve for domestic needs.
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Banking services are weak and different DVP modes prevail in
different national markets.
Bilateral links have not been a popular channel of cross-border
settlement except when it involves an ICSD.
Background - continued
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International investors without direct access to national
CSDs rely on global custodians and their local agents.
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Liquidity pressure on local agents as repos (a popular
instruments in cross border trading) and/or back-to-back
transactions grow.
Any room for use of an ICSD or creation of a regional
CSD?
Trading needs and patterns
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Investors have a need and interest to manage exposures
to regional risks and currencies.
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Often seek liquid government securities market where riskadjusted interest rate is attractive and exit is easy to manage
exchange rate risk.
OECD experience
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Government securities repos and back-to-back trades by dealers
and market makers have grown rapidly.
Those created a pressure on intermediaries in the settlement
chain (e.g., local agent sub-custodians).
Alternative channels
National
CSD
Country
of issue
Local
agent
Other
countries
Local
agent
Global
custodian
Non-resident
counterparty
Non-resident
counterparty
Non-resident
counterparty
Direct
access
Local
agent
Global
custodian
Local
agent
ICSD
National
CSD
Non-resident
counterparty
Non-resident
counterparty
ICSD
Source: Cross-Border Securities Settlement, March 1995, CPSS, BIS
CSD-to-CSD
Alternative channels of
cross border settlement – 1
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Direct access to local CSD.
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Use of a local agent (custodian).
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Non-resident often not permitted.
Local money settlement arrangement necessary.
Often provides pre-matching services and even settlement on
its own book. But custody risks are involved.
Use of bilateral links among national CSDs.
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A national CSD is often exclusively linked to a national stock
exchange, which limits non-resident investors’ access to nonlisted securities.
Links are created primarily to allow domestic parties to trade in
foreign securities rather than to trade across the border.
Banking and cash management services are weak, and different
DVP models prevail.
Alternative Channels – 2
Use of global custodian
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Offer a single entry point for investors in multiple markets.
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Have a network of local agent sub-custodians (some of
which may be their own branches or subsidiaries).
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Inexpensive service compared to separately accessing
local custodians and other service providers thanks to
economies of scale and scope despite IT investment
required.
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Provide multi-currency banking services and management
of cash and securities positions.
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Internal settlement over its own book.
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Can handle settlement of back-to-back trades.
Alternative Channels – 3
Use of ICSD
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Provide a single entry gateway to multiple markets as
does a global custodian.
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Able to settle internally over its own book with direct
links to national CSDs.
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I.e., can handle settlement of back-to-back trades.
In Europe, those links were exploited to settle European
government securities over ICSDs.
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Inexpensive service for core clearing and management of
cash and securities positions.
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Use existing ICSDs or create a new regional ICSD in
Asia??
Alternative architectures in
Europe
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Networking CSD model.
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Hub and spoke model (ICSD)
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Bilateral links among national CSDs, making each other a subdepository (e.g., European Financial Superhighway by ECSDA)
Euroclear
Single CSD model (ICSD)
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Creation of Clearstream by merger between Deutsche Borse
clearing house and Cedel.
Controlling ownership of Clearstream by Deutsche Borse may be
an impediment.
Regional networks of global
custodians
Global custodians active in emerging markets
cross-border transactions
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Bank of New York
JP Morgan (including Jardine Fleming)
State Street
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Citibank
Deutsche Bank
PNB Paribas
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Northern Trust
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Those in bold Italic have
strong local presence and
client base in Asia.
ABN-AMRO Mellon
HSBC
Morgan Stanley Global Custody
MeesPierson
Regional networks of global
custodians - continued
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But there are differences among them. E.g.,
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State Street: presence in regional hubs only but not in each
individual country nor does it directly participate in local CSDs.
Citibank: presence in each individual country (i.e., local as well
as global custodian) and directly participate in local CSDs.
Their business strategies differ.
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State Street: serving for global investors and interested in
serving as a regional hub for international and intra-regional
settlement.
Citibank: not interested in being a regional hub because it
directly participate in local CSDs and can directly serve local
clients (i.e., able to internalize regional settlement).
Agent sub-custodians
in East Asia
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China (mainland)
(Hong Kong)
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Thailand
1999
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12
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2000
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2001
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9 .
Q.How many of them are branches or subsidiaries of
global custodians?
Networks & linkages among
clearing houses and CSDs
Clearing houses and CSDs in the region.
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China
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Thailand
CGSDTC and CSDCC
BI-SSSS, KSEI and KPEI
BOJ-Net and JASDEC
KSD
MCD, SCANS
ROSS, SCCP and PCD
Central Depository Ltd.
Bhatnet 2 and TSD
Risk management
Issues: How to ensure cross border DVP?
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Systemic risks in links among settlement systems.
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Local sub-custodians under pressure to receive and redeliver
securities on the same day.
How to settle back-to-back trades?
Links have been being built among CSDs and between
CSDs and ICSDs.
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Local CSDs built to meet local needs only.
Different modes of DVP even when they are said to be achieved
over electronic books.
Multi-currency cross-border
fund settlement
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Are continuous linked settlement and CLS Bank needed
to support the settlement in regional currencies?
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CLS bank has an account with each central bank in the region.
Participating banks have an account with sub-accounts for
different currencies at CLS bank (as well as accounts at the
central bank).
Participating bank pays to CLS bank account at the central bank
by use of RTGS system, or instructs its nostro agent to pay to
CLS bank account at the central bank of the agent’s economy.
Is use of CLS Bank possible?
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CLS Bank does not provide settlement in Asian currencies other
than Japanese yen.
Create a regional CLS bank?? Does it make business sense??
Multi-currency cross border
fund settlement - continued
If a regional CLS bank should be created,
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Who should own / govern / participate in it (I.e.,
governance)? Should it be another subsidiary of CLSS?
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Global custodians serving for the settlement in regional
currencies.
Local custodians
Central banks as well?
Where should it be located?
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Center of the regional time zone?
In a jurisdiction whose legal framework is acceptable to as many
participants as possible?
Multi-currency fund settlement
- continued
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Cross-border DVP is essential.
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National CSD must achieve DVP domestically in order to enable
cross-border DVP.
DVP settlement instructions must be sent to the central bank and
custodian.
How to ensure settlement finality?
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Between banks and between a bank and CLS bank at each
central bank.
Under what law? Law of the jurisdiction in which CLS bank is
located? Laws of the jurisdictions of the central banks involved in
each transaction? English law?
Legal & Regulatory Infrastructure
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Conflict of laws and legal risks in defining settlement
finality and managing cross border collateral.
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Most government securities in the region are demeterialized and
recorded as electronic entries.
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They are registered in domestic registries (central bank registries
or CSDs), but where are they kept in custody?
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How can legal finality of settlement of offshore transactions in
such securities be achieved and ensured?
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Need a common legal basis to which all the jurisdictions and
market participants in them can agree?
Article 9(2) of EU Settlement Finality Directive
Legal & Regulatory Infrastructure
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Definition of settlement intermediaries.
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Legal status of “securities” differ across countries.
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Finality of delivery and payment
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Concept of “bankruptcy”
Capital account liberalization
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Exchange control on capital account transactions
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Role of central banks in implementing the exchange
control and its implications for cross border securities
trading.
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Taxation of cross-border securities transactions.
Business, political and technical
feasibility
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Is it politically feasible to establish a new regional ICSD?
Does it make business sense?
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Information technology (IT) enables
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Building bilateral links among national CSDs
Building bilateral links between ICSDs and national CSDs.
Global custodians to provide sophisticated customer services
for institutional investors, alluring them to outsource not only
backoffice but also some midoffice functions while global
custodians themselves to outsource “core clearing” to ICSDs.
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Substantial IT investment is required, and
communication protocol and messaging standards need
to be established.
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Requires training of staff.
Strategy
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Make various channels of competition open.
Policy support to encourage competition among national
CSDs to become a regional ICSD.
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Coordinate to ensure system connectivity.
A CSD owned by and serving for a national stock exchange will
be out and can only be a spoke?
A CSD serving for government securities has competitive
advantage from economies of scale and scope?
A CSD operated by the central bank cannot compete for profit
and beyond the national border?
A national CSD open to direct participation by global
custodians may become a regional ICSD?
A country that is to house a regional ICSD must have a
liberal capital account.
Links with other initiatives
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Mutual acceptance of regional sovereign bonds as
collateral for central bank intra-day credit.
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Use of ABC bonds as such collateral?