Post on 30-Dec-2015
De Nederlandsche Bank Eurosysteem
Exchanges, Clearing & Settlement and
TARGET2 Securities
Richard Derksen
2nd Conference of Macedonian Financial Sector on Payments and
Securities Settlement Systems
Ohrid
30 June 2009
De Nederlandsche Bank
De Nederlandsche Bank Eurosysteem
Agenda
The world of securities and exchanges
Risks in clearing and settlement of securities
What´s going on in Europe?Code of Conduct clearing & settlementMarkets in Financial Instruments Directive (MiFID)
Consequences for central banks
TARGET2 Securities
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Securities chain
trading
clearing
settlement
Agreement to exchange securities for funds
Calculation of obligations
Delivery of securities and payment of funds
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custodian
CSD Issuer
custodian
Agentbank
National Central
Bank
Agentbank
Agentbank
Agentbank
Agentbank
Agentbank
Investor InvestorInvestorInvestorInvestor Investor Investor
Clearing & settlement infrastructure
CCP
Exchanges
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Entities in securities
Issuer/Investor
ICSDs
Custodians
Issue/hold securities
CSDsCentral securities depositories: storehouses for securities and domestic settlement services providers
International central securities depositories: international settlement services providers, CSDs for EurobondsNational and international settlement services providers, typically banks
CCPsCentral counterparties: central providers for clearing services
Exchanges platform for trade in securities
Agent Bank Executes transactions for customers
NCB National Central Bank; provides settlement services, oversight
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Life cycle of securities transactions
Transactions (by a telephone call or system)Entry in a system (buy or sell)ValidationAuthentication & authorisationMatching & confirmation ClearingMoney settlement (usually t+3)Securities settlement (usually t+3)Custody (corporate actions)
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Exchanges, CCPs and CSDs - basic model
EURONEXTTrading
Buyer/Seller
ENL
LCH.Clearnet SA
EUROCLEAR Nederland
Trading Member
DepositoryAdmitted
Institution
ClearingMembersClearing
Securities settlement
DNB / T2Cash settlmn.
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Clearing / CCP
Role: Trade confirmation Netting CCP = central counterpartyIssues: Counterparty credit risk concentrates at CCP. Default
CCP might affect the whole financial system (so… Oversight)
Clearing HouseClearing Member Clearing Member
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Central counterparty
CCP = central counterpartyInterposes itself between buyer and seller of a security Guarantees clearing and settlement towards market
participant Takes over exposure counterparty credit riskNovation: contract between buyer and seller replaced by
contract between buyer and CCP and seller and CCP
Pro: Decrease counterparty credit risk; CCP risk management for clearing member Cost reduction Trade benefits
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CSD: settlement
ENL
EUROCLEAR Nederland
Settlement (ESES)
Depository
DNB / TARGET2
Securities account A
Securities account B
Cash account A
Cash account BDVPRole:• Recording of changes in legal titles resulting from securities
transactions• Exchange trades settle on T+3
Issues:• DVP: delivery versus payment to limit principal risk (Herstatt
risk)• SFD: Finality offers protection against unwinding
Cash account A
Cash account B
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Role:• Maintenance of securities accounts• Facilitating reconciliation with any official register• Facilitating the exercise of securities holders’ rights and
corporate actions
Issues:• Immobilisation and demateralisation• Operational risk
CSD: Depository
Euroclear NederlandCentral Securities Depository (CSD)
Aangesloten InstellingenAangesloten
InstellingenAangesloten InstellingenAangesloten
InstellingenAangesloten InstellingenAdmitted
Institution
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Role of central banks
Services in central bank moneyCash settlement in TARGET2: DVP model 2 (with ESES DVP model 1)
Collateral management for CCPsAnd in the future… TARGET2Securities (Pan- European platform for settlement of trades, 2013)
OversightFinancial stability – limit systemic riskLimit losses of participantsLimit contagion to other marketsEnhance confidence in payment systems
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European developments
Lisbon agenda 2010: European economy has to become stronger to compete with the USA and Japan/China
National markets in Europe have remained isolated, cross border transactions too complex, too costly: there is no integrated European financial market
Importance of clearing and settlement of those trades for smooth functioning of the financial system: inefficiencies have serious consequences
European Union has identified 15 barriers for integration (Giovannini 2001) Technical, market practices (10) Legal and fiscal barriers (5)
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What is the status of integration…
Too high settlement costs
0
5
10
15
20
25
30
35
UnitedStates
EUdomestic
EU cross-border
Min Max Avg.
- EU domestic costs range from
0.35 to 3.43 €;
- … and are higher than US
(+ 0.10 to 2.90 €);
- Cross-border costs higher than
domestic ones (19.5 to 35.0 €).
Source: Oxera, LSE, CEPS
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Integration & consolidation
Financial integration for all market participants:
• Equal access
• Uniformal set of rules
• Treatment in an equal way
Consolidation means a less number of service providers
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Integration models in Europe
CBISSO (IE)
Euroclear
Euroclear (ICSD) CIK (BE)
Euroclear (FR) Euroclear (NL)
Crest (UK)
Horizontal integration
Clearstream
Eurex Clearing
DeutscheBörse
Vertical integration
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Dynamics in the securities market
Market integration, level playing field and harmonisation
Consolidation of exchanges and SSSs in the market goes full speed on
Markets in Financial Instruments Directive Code of Conduct for Clearing and SettlementCESAME Group to lift technical, market
practices Giovannini barriersInternalisation: huge banks settle transactions
internally
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Post trade market in Europe
No central system as in the US, but still very fragmented
Different models: horizontal, vertical, user-owned, demutualised…
High cross border tariffs, (semi) monopolies, low competition
No EU Directive for clearing and settlement… so no European passport for cross-border services
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Post trading infrastructures US
Clearing
Settlement cash
Trading
NSCC
DTC
NYSE NASDAQ
FICC
FED
FEDERAL RESERVE
Settlement securities
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Post trading infrastructures EU
Clearing
Settlement cash
Euronext
Amsterdam + Brussels + Lisbon + Paris
Luxembourg Stock
Exchange
Oslo Bors OM
Nasdaq HEX
GPW
Trading
Clearnet SA LCH
LCH.Clearnet Group ltd
Euronext
Amsterdam + Brussels + Lisbon + Paris
Euroclear
Nederland
CIK Euroclear
France
Crest Co
BOEBdFNBBDNB
London Stock
Exchange
Borsa Italiana
CC&G
Monte Titoli
Banca d´
Italia
Deutsche Borse
Eurex Clearing
Bundesbank
Clearstream
BL
Clearstream
BF
BCL Nordic central banks
VPS
Nordic CSD
Banca d´
Espana
Iberclear
Bolsa y
Merc. Esp.
KDPW
CRBS
Bk of Poland
TARGET2
Settlement securities
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EU initiatives for more efficient securities markets in Europe 1. Code of Conduct
The solution from EU commissioner McCreevy (2006) Selfregulation: Code of Conduct Signed by 60 EU exchanges, CCPs and CSDs in
November 2006 Objective: stimulate competition and decrease
cross-border cost 3 parts
Price transparancy – 1 January 2007 Interoperability – 1 July 2007 (Guideline) Unbundling & account separation – 1 January 2008
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EU initiatives for more efficient securities markets in Europe – 2. MiFID
´Markets in Financial Instruments Directive´, 1 November 2007
MTF: alternative trading platforms next to regulated markets
Best execution moves trading to markets that offer the best price
Art 34 and 46: the right of a market participant to access remotely a foreign
CCP and/or CSDThe right of a regulated market/MTF to choose a particular
CCP/ CSDNo double regulation
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Results until now…
Code of Conduct – around 2 yearsMiFID – nearly 1 yearGuideline on Interoperability – 1 year
Results:New MTFs and in their slipstream… New CCPsAround 90 requests for interoperability (links
between CCPs and CSDs)
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Results till now…
Negative:- Increased fragmentation and complexity- No European passport, so a regulatory mess- Not 1 link realised
Positive:+ Increased competition+ Breaking down monopolies+ Significant reduction in tariffs (in the
Netherlands clearing cost from 0.65 eurocent to 0.05 eurocent per trade)
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Complexity European market increases
EU market =Incumbent
trading, clearing and settlement
+ …
Clearing
Settlement cash
Euronext
Amsterdam + Brussels + Lisbon + Paris
Luxembourg Stock
Exchange
Oslo Bors OM
Nasdaq HEX
GPW
Trading
Clearnet SA LCH
LCH.Clearnet Group ltd
Euronext
Amsterdam + Brussels + Lisbon + Paris
Euroclear Nederland
CIK Euroclear
France
Crest Co
Bank of Englnd
Banq. de
France
NBBDNB
London Stock
Exchange
Borsa Italiana
CC&G
Monte Titoli
Banca d´
Italia
Deutsche Borse
Eurex Clearing
Bundesbank
Clearstream
BL
Clearstream
BF
BCL Nordic central banks
VPS
Nordic CSD
Banca d´
Espana
Iberclear
Bolsa y
Merc. Esp.
KDPW
CRBS
Bk of Poland
TARGET2
Settlement securities
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Complexity European market increases
… MTFs and
new CCPs
Clearing:
New and existing CCPs
Settlement cash
Equiduct Chi-X BATSTrading:
MTFs
EuroCCP LCH.Clearnet SA
Turquoise
Euroclear
Nederland
CIK Euroclear
France
Crest Co
Bank of Englnd
Banq. de
France
NBBDNB
Smartpool Bluenext
EMCF
Monte Titoli
Banca d´
Italia
Bundesbank
Clearstream
BL
Clearstream
BF
BCL Nordic central banks
VPS
Nordic CSD
Banca d´
Espana
Iberclear
Nasdaq OMX
KDPW
Bk of Poland
TARGET2
Settlement securities
Citibank Fortis Bank NederlandSettlement agents
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Consequences for central banks
Services in central bank moneyCash settlement also for MTFs and new CCPs – national silo´s disappear
Collateral management for new CCPs
OversightWhat stability risks come with
New CCPs and their settlement agentsIncreased complexityInteroperabiliteit
Rely on foreign regulators, supervisors and overseers (MiFID art 34 and 46)
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Risks in clearing and settlement of securities
Risks
risk of settlement bank failure
liquidity risk
systemic risk
credit risk:• replacement cost risk• principal risk
custody risklegal risk
operational risk
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Risks
Credit risk:The risk of loss from default by a participant,
as a consequence of its insolvency
Replacement cost risk Principal risk
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Risks
Risk that full value of securities or funds will be lost when either the seller or buyer fails to settle
Can be eliminated by Delivery versus Payment
Principal risk
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Delivery versus Payment (DvP)
Securities cash
NCB
Bank A Bank B
Sell Order Buy Order
CSD
A
B
A
B
1 ^1
2 ^2
3^3
DvP
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DvP in practice
Sell/buy transactionThe CSD blocks the securities in the account
of the seller, followed by sending a payment instruction to the NCB
The central bank transfers the funds from the buyer’s to the seller’s account and sends a confirmation to the CSD
The CSD move the securities from the seller’s to the buyer’s account
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Risks
Risk of loss of unrealised gains
Due to price changes between trade and settlement
Exposure depends on price validility and time gap between trade settlement (i. e. t+3)
Replacement cost risk
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Risks
Failure of bank providing cash accounts for payments Impact particularly severe if all CSDs use the same Approaches to control: use of the central bank money,
limited purpose bank
Risk of failure of a
settlement bank
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Risks
Failure of one institution could cause other institutions to fail
Liquidity and credit problems may disrupt financial markets
Liquidity is dependent on confidence in reliability of SSS
Oversight function central bank
Systemic risk
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Risks
Risk that counterparty will not settle an obligation when due
Costs depend on degree of liquidity
Potential to create systemic problems
Liquidity risk
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Risks
Risks that securities are not adequately protected by the custodians
Either full loss or temporary inability to transfer securities
Segregation of accounts
Custody risk
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Risks
Due to deficiencies in systems and controls, human error or management failure
Due to uncertain legal rules (unenforceability of contracts, bankruptcy laws, delay in recovering funds or securities)
Operational risk
Legal risk
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What is T2S?
An integrated settlement platform of the Eurosystem for the DVP settlement of securities transactions in central bank money within the euro area : - All securities which have to be transferred- Cash needed for settlement
Supports the integration of the securities settlement market infrastructure
Making cross-border transactions domestic ones in the Eurozone
The extension to other currencies will also be possible
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OeKB
Clearstream FFM
Euroclear FR
Iberclear
Monte Titoli
The current initiatives:
Clearstream Lux
Euroclear BE
Euroclear NLNTMA
SCL Bilbao
CSD SA
BOGS
APK
SCL Valencia
SCL BarcelonaInterbols
aSiteme
NBB Clearing
Why (1)?Deutsch Börse Gruppe
Euroclear GroupT2S: a workable solution for DVP cross-border settlement of securities within central bank money
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Why T2S (2)?
The model can offer advantages in terms of efficiency and cost-cutting
provided that a critical mass of CSDs actually join and the system can be developed at reasonable costs
Commitment CSDsCost estimations to be further investigated
It will benefit financial stability (enabling cross border securities settlement in Central Bank Money)
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T2S concerns only settlement in central bank money
Background: Essential concepts
Investor
Investor bank
Custodian bank or ICSD
CSD
central bank money
commercial bank money
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INVESTORCSD
INVESTORCSD
SETTLEMENTSETTLEMENT
TRADINGTRADING
ISSUERCSD
ISSUERCSD
ISSUERISSUER INVESTORINVESTOR
CCPCLEARING
CCPCLEARING
CASHCLEARING
CASHCLEARING
BANK &BROKER
BANK &BROKER
LISTINGLISTING
EXCHANGE
CSD CENTRAL BANK
CLEARINGHOUSE
Traditional roles in securities market
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Securities accounts at the centre
INVESTORCSD
INVESTORCSD
T2SSETTLEMENT
T2SSETTLEMENT
TRADINGTRADING
ISSUERCSD
ISSUERCSD
ISSUERISSUER
INVESTORINVESTOR
CCPCLEARING
CCPCLEARING
CASHSETTLEMENT
CASHSETTLEMENT
BANK &BROKER
BANK &BROKER
LISTINGLISTING
EXCHANGE
CSD
CENTRAL BANK
CLEARINGHOUSE
SECURITIES ACCOUNTS
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How?
CSDs outsource the administration of securities accounts to T2S
Credit institutions transfer cash to T2S, real time DVP is now possible
During or at the end of the day the securities return to the CSDs and the money goes back into the TARGET2 payment system
CSDs retain the remaining functions such as custody and notary functions
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TARGET2
TARGET2 – Securities outside of operating hours
Euroclear (BE, FR, NL)
Securities accounts
Siteme
Securities accounts
BOGS
Securities accounts OeKB
Securities accounts
NBB Clearing
Securities accounts
TARGET2 - Securities
Clearstream
Securities accounts
Monte Titoli
Securities accounts
Iberclear
Securities accounts
APK
Securities accounts
NTMA
Securities accounts
Other CSD’s OeNB, NBB, BBK, BdE, BoF, BdF,BoG, CBFSAI, BdI, BcL, DNB, BdP Securities
accounts
Cash accounts
Euroclear (BE, FR, NL)
Securities accounts
Siteme
Securities accounts
Euroclear (BE, FR, NL)
Securities accounts
Siteme
Securities accounts
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Euroclear (BE, FR, NL) Siteme BOGS
OeKB
NBB ClearingTARGET2 - Securities
Clearstream
Monte Titoli
Iberclear
APK
NTMA
Other CSD’s
OeNB, NBB, BBK, BdE, BoF, BdF,BoG, CBFSAI, BdI, BcL, DNB, BdP
Sub-cash accounts
Securities accounts
TARGET2
TARGET2 – Securities during the operating hours
Cash accounts
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What is T2S?
Where are the benefits coming from 3 sources of cost savings
fee savings: economics of scaleelimination of the cross-border aspect
collateral savings (single pool of collateral) back-office savings (one or few technical interfaces)
Non-quantifiable benefits driver for harmonisation enhanced competition in market infrastructure market liquidity (dynamic effect)
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Uncertainties
Success of T2S depends on the decision of the CSDs to participate (voluntary)
Concentration of risk, monopolisation of settlement Prerequisite of the project: harmonisation of legal
structures and operating rulesRemoval Giovannini barriers, especially
Barriers 4, 6 and 7: T2S may ensure common operating hours and finality rules for domestic and cross border transactions
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The T2S User Requirements
Scope of assetsAll types of securities which CSD’s are settling today (debt
instruments, equities, investment funds, warrants)
Scope of servicesWhole life cycle of a transaction: receiving settlement
instructions, providing matching facilities, verifying availablity of securities and CeBM etc
T2S Four central banks develops the platform: Deutsche
Bundesbank, Banco de Espana, Banque de France, Banca d’Italia
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Legal issues
Legal basis Article 22 Statute ESCB/ECB Enables the Eurosystem to provide facilities to
deliver efficient and sound clearing and payment systems
GovernanceThe infrastructure will be wholly owned by the
Eurosystem(I)CSDs and users are involved during
specification phase
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Impact T2S
Fosters competition among CSDs Reduces intermediary costsReduces collateral needs and costsReduces back-office costs Facilitates cross border business with easier
and cheaper cross-CSD settlement.
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Timetable T2S
July 2008: Decision Governing Council to launch T2S
2009: Specification- and development phasePossibilities External (non-Euro zone) CSD settlement
2010-2012: Building, Testing and Migration phase
2013: Operational phase
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Thank you very much !
Any quu€€stions?stions?