As the brave new world of 24-hour trading, amalgamated global exchanges and ever greater retail parti...
Post-1987, the Group of 30 countries called for an overhaul of settlement systems and made nine key recommendations, including one calling for "effective and fully developed" central securities depositories (CSDs). Ten years on, a report by consultants Thomas Murray highlights just how much this aspect of the investment industry has changed.
The number of CSDs has leapt from 28 to 102, with another 20 planned in the next couple of years. A trend of co-operation is also gathering pace and on average, CSDs comply with around six or seven of the recommendations, demonstrating an increasingly consistent, professional approach.
More CSDs have established links with Cedelbank than Euroclear, according to the report. At present 30% have established links with Cedelbank with another 17% planning to do so, while 28% have links with Euroclear with 12% planning future ties. SWIFT messaging formats are becoming the standard in the global securities industry, with 42% of 69 CSDs polled subscribing and 12% planning to. Of those who are not members, 13% can participate in SWIFT traffic.
Of a sample of 87 CSDs, 50% are part of the central bank or stock exchange, and have no separate legal status, 15% are independent non-profit-making organisations and 15% are privately owned. Foreign ownership is allowed in only 20% of a sample of 74 CSDs. Most of these are in emerging markets, and seek foreign investment in their market infrastructure.
The eurozone ECSDA and Central and Eastern European CSDs are leading the way in establishing direct or indirect participant linkages with other local market CSDs, but 41 out of 85 depositories questioned offer cross border securities deposit and settlement services. Swifter, more accurate services are being built with straight through processing and dematerialisation of securities, where ownership records exist only as data. Some 40% of CSDs are fully dematerialised, 31% are immobilised (where physical securities are deposited and retained in a CSD so transactions are done by book entry rather than physical movement) and 16% can hold securities in both forms. End-of-the-day processing is the most common cycle used. About a third of CSDs claim to operate real time gross settlement, but few achieve it in the strictest sense where cash moves simultaneously with securities.
The most common settlement process operated (used by 21% of a sample of 72 CSDs) is gross settlement of securities followed by net settlement. But 19% use simultaneous net settlement of securities and funds transfer and 17% (including all those who use Euroclear and Cedelbank) use gross simultaneous settlement and funds transfer.
The industry has been transformed in 10 short years. Where do we go from here? With the introduction of the euro and the Y2K challenge, most CSDs have had enough to contend with this year. But a move to settlement at T+1 or even T+0 from the current T+3 standard is inevitable, as is a sharper focus on risk minimisation and asset safety. With co-operation among CSDs in Europe already strong, the region has a head start.
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