Cross Border Settlement and Regional Bond Market Integration

Document Sample
Cross Border Settlement and Regional Bond Market Integration Powered By Docstoc
					The Efficiency of Cross Border
Settlement Systems

           May 29-June 2, 2006
           Shanghai, China

           Noritaka Akamatsu
           The World Bank
   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
   Efficient and secure settlement is critical to promoting
    cross border trading of bonds in the region.
    – 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.
    – 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

   International investors without direct access to
    national CSDs rely on global custodians and their local
    – 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
Trading needs and patterns

   Investors have a need and interest to manage
    exposures to regional risks and currencies.
    – Often seek liquid government securities market where risk-
      adjusted interest rate is attractive and exit is easy to manage
      exchange rate risk.

   OECD experience
    – 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


                    Local            Local            Local
Country             agent            agent            agent
of issue

countries                            Global                                National
                                    custodian             ICSD              CSD

 Non-resident     Non-resident      Non-resident        Non-resident      Non-resident
 counterparty     counterparty      counterparty        counterparty      counterparty

    Direct           Local             Global               ICSD          CSD-to-CSD
    access           agent           custodian

      Source: Cross-Border Securities Settlement, March 1995, CPSS, BIS
Alternative channels of
cross border settlement – 1
   Direct access to local CSD.
    – Non-resident often not permitted.
    – Local money settlement arrangement necessary.
   Use of a local agent (custodian).
    – Often provides pre-matching services and even settlement on
      its own book. But custody risks are involved.
   Use of bilateral links among national CSDs.
    – A national CSD is often exclusively linked to a national stock
      exchange, which limits non-resident investors’ access to non-
      listed 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.
  Bilateral network of national CSD


CSD                             CSD

Alternative Channels – 2
Use of global custodian
   Offer a single entry point for investors in multiple
   Have a network of local agent sub-custodians (some
    of which may be their own branches or subsidiaries).
   Inexpensive service compared to separately
    accessing local custodians and other service
    providers thanks to economies of scale and scope
    despite IT investment required.
   Provide multi-currency banking services and
    management of cash and securities positions.
   Internal settlement over its own book.
    – Can handle settlement of back-to-back trades.
Alternative Channels – 3
Use of ICSD
   Provide a single entry gateway to multiple markets as
    does a global custodian.
   Able to settle internally over its own book with direct
    links to national CSDs.
    – I.e., can handle settlement of back-to-back trades.
    – In Europe, those links were exploited to settle European
      government securities over ICSDs.
   Inexpensive service for core clearing and management
    of cash and securities positions.
   Use existing ICSDs or create a new regional ICSD in
 Regional Custody Architecture - 1


LCD                           LCD

Alternative architectures in
   Networking CSD model.
    – Bilateral links among national CSDs, making each other a
      sub-depository (e.g., European Financial Superhighway by
   Hub and spoke model (ICSD)
    – Euroclear
   Single CSD model (ICSD)
    – 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
Global custodians active in emerging markets
cross-border transactions
–   Bank of New York
–   JP Morgan (including Jardine Fleming)
–   State Street
–   Citibank
–   Deutsche Bank
–   PNB Paribas                   Those in bold Italic have
–   Northern Trust                strong local presence and
–   ABN-AMRO Mellon               client base in Asia.
–   HSBC
–   Morgan Stanley Global Custody
–   MeesPierson
Regional networks of global
custodians – continued
   But there are differences among them. E.g.,
    – State Street: presence in regional hubs only but not in
      each individual country nor does it directly participate in local
    – Citibank: presence in each individual country (i.e., local as
      well as global custodian) and directly participate in local
   Their business strategies differ.
    – State Street: serving for global investors and interested in
      serving as a regional hub for international and intra-regional
    – 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
                         1999   2000   2001
   China (mainland)       5      4      5
    (Hong Kong)            6      7      7
   Indonesia              4      4      5
   Japan                  6      5      9
   Korea                 12      4     10
   Malaysia              10      5      9
   Philippines            5      4      5
   Singapore              6      5      8
   Thailand               9      5      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.

   China                 CGSDTC and CSDCC
   Indonesia             BI-SSSS, KSEI and KPEI
   Japan                 BOJ-Net and JASDEC
   Korea                 KSD
   Malaysia              MCD, SCANS
   Philippines           ROSS, SCCP and PCD
   Singapore             Central Depository Ltd.
   Thailand              Bhatnet 2 and TSD
Risk management

Issues: How to ensure cross border DVP?
   Systemic risks in links among settlement systems.
    – 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. But …
    – 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
   Are continuous linked settlement and CLS Bank
    needed to support the settlement in regional
    – 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
   Is use of CLS Bank possible?
    – CLS Bank does not provide settlement in Asian currencies
      other than Japanese yen.
    – Create a regional CLS bank?? Does it make business
Multi-currency cross-border
fund settlement – continued
If a regional CLS bank should be created,
   Who should own / govern / participate in it (I.e.,
    governance)? Should it be another subsidiary of
    – Global custodians serving for the settlement in regional
    – Local custodians
    – Central banks as well?
   Where should it be located?
    – Center of the regional time zone?
    – In a jurisdiction whose legal framework is acceptable to as
      many participants as possible?
Multi-currency cross-border
fund settlement – continued
   Cross-border DVP is essential.
    – 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?
    – 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
   Conflict of laws and legal risks in defining settlement
    finality and managing cross border collateral.
    – Most government securities in the region are demeterialized
      and recorded as electronic entries.
    – They are registered in domestic registries (central bank
      registries or CSDs), but where are they kept in custody?
    – How can legal finality of settlement of offshore transactions in
      such securities be achieved and ensured?
    – 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
   Definition of settlement intermediaries.
   Legal status of “securities” differ across countries.
   Finality of delivery and payment
   Concept of “bankruptcy”
Capital account liberalization

   Exchange control on capital account transactions

   Role of central banks in implementing the exchange
    control and its implications for cross border securities

   Taxation of cross-border securities transactions.
Business, political and
technical feasibility
   Is it politically feasible to establish a new regional
    ICSD? Does it make business sense?
   Information technology (IT) enables
    – 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 outsource “core clearing” to ICSDs.
   Substantial IT investment is required, and
    communication protocol and messaging standards
    need to be established.
   Requires training of staff.
   Leave various channels of competition open.
   Policy support to encourage competition among
    national CSDs to become a regional ICSD.
    – 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 CSD supported strong clearing banks and the Central Bank.
   A CSD open to direct participation by global custodians
    will have a greater chance to become a regional ICSD.
   A country that is to house a regional ICSD must have a
    liberal capital account.
Links with other initiatives

   Mutual acceptance of regional sovereign bonds as
    collateral for central bank intra-day credit.
   Use of ABC bonds as such collateral?
Thank you