The development of the Croatian market has greatly benefited from the launch of the Central Depositor...
The CDA is a new institution that brings the Croatian market more on par with western developed financial markets.
The essential advantage of the CDA is to lower settlement risk which, in turn, brings additional security of transactions and attracts new investors. This is good news for the Croatian market and the growth in emerging market securities trading.
In practical terms, by having the CDA up and running the share process is automated and electronic. The registration processes are also equal for all the companies and, therefore, easier to comply with compared to the previous situation. It is also expected that, over time, the settlement period will be shortened to T+3 and possibly even lower.
Prior to Croatia having a central depository, brokers and dealers had created informal clearing and settlement procedures that did not provide the level of efficiency or protection to investors that has become the accepted norm in many markets.
Investors bore additional risk because settlement was not standardised, allowing the possibility of incomplete or failed trades while ownerships verified and transferred. By automating and simplifying the processes of registration, the system will allow custodians to broaden value-added services to clients. For example, it is anticipated that securities lending services, which are not yet available in the Croatian market, will become so throughout 2000.
The speed of reform in the Croatian market has been impressive. The CDA was founded as a joint stock company regulated by CROSEC in April 1997. It is now the sole agency in Croatia responsible for clearing, settlement and depository functions. Zagrebacka Banka, as the main custodian in Croatia, is a founder member of the CDA and a member of the CDA's clearing and settlement system.
The institutional development of the CDA is being led by a team from Barents Group, while the work in the area of the development of depository, clearing and settlement systems, designed especially for the Croatian capital markets environment is being performed by Millennium Information Technologies.
The CDA has also retained the services of a senior policy advisor from GNA Consulting Group, Canada, to assist the management board in the co-ordination and overseeing of these projects. The objective of these projects is to enable the CDA to implement international best practices for clearing and settlement organisations, as defined in a recent study conducted by the International Federation of Stock Exchanges.
The CDA started operating on 19 July 1999, providing electronic clearing, settlement and depository services at first for just three shares. However, from the outset it has been constantly broadening its list of securities. There are now 31 shares included in clearance and settlement services as of 12 May and there are plans for all securities traded on the Croatian market to enter the CDA system in the near future.
The CDA offers two types of settlement to its members. Trade-for-trade settlement and contractual settlement. Regardless of the settlement process being used, the principle of DVP is maintained for all settlements.
In the trade-for-trade settlement environment, each trade is individually cleared and settled directly between the original counterparties to the trade. The CDA acts as an intermediary in the exchange of securities for money on settlement date but does not guarantee the settlement. In the event that the selling broker fails to deliver securities on the settlement date, the CDA will not pay the funds received from the buying broker.
In the contractual settlement, the original broker-to-broker trade is replaced through a process called 'novation' with a new settlement contract between the counterparties and the CDA, which guarantees the settlement of trades. Trade is settled on a net basis for both securities and funds.
In the event of members failing to fulfil their obligation, the CDA will initiate a buy-in process for market participants with a short security position or a sell-out process for market participants with debit cash balance.
Members of the CDA's contractual settlement system are required to contribute to a 'guarantee fund'. This fund is used by the CDA to satisfy a loss or a liability caused by a market participant's failure to fulfil their obligations.
The level of contribution to the guarantee fund by a participant will be commensurate with the risk that they impose on the market. This level of risk will be valued on a daily basis using a methodology developed by the CDA. In effect, the contribution to the guarantee fund will be set at the level of the settlement cap determined for each investor.
For institutional investors, the CDA has prepared the institutional delivery (ID) system. This service is specially designed to facilitate the clearing and settlement of trades between brokers and custodian banks. The purpose of the ID system is to allow both parties to agree on the terms of trade to be made and then exchange the securities, either free or against payment.
The CDA provides services to investors who have been approved as members (see box below).
Settlement is on a rolling settlement basis on T+4 for shares listed on the Zagreb Stock Exchange that are also included in the central depository. For all other shares that are not included in the central depository, the settlement is T+5. The settlement period is different for Croatian Ministry of Finance T-bills (T+2) and National Bank of Croatia T-bills (on TD).
To conform to Group Thirty (G-30) standards, there are plans to reduce this settlement period to T+3. Regardless of the settlement process being used, the CDA will ensure that the principle of DVP is maintained for all settlements.
It will maintain a direct electronic link with the curren
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