33656287 Custody Project

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CUSTODY OVERVIEW


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WHAT THEY DO ??WHAT THEY DO ??


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Introduction Contd.


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Introduction to CSDHigh trading volumes can cause delayed

settlement transactions & thus liquidityproblems

Physical certificates increase probability of

fraud & forgeryThus CSDs were set up to immobilize

securities for the whole market

Shifted the focus from physical safekeeping

to the provision of information oncustomers transactions and securitiesholdings


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Contd.Economies of Scale where services

efficiently delivered by a central serviceprovider

Services provided were:

income collection from issuersdistribution to securities holders

notification of corporate actions and taxreporting

collection services for national authoritiescentralized securities lending service


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Contd.CSD was best placed to match demand with

supply

Little or no Customization provided to client


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TRANSFORMATION OF CUSTODYTRANSFORMATION OF CUSTODYIN ELECTRONIC AGEIN ELECTRONIC AGE


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Services Provided byCustodian


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Services Provided by CustodianContd.


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WHOM THEY SERVE ?WHOM THEY SERVE ?

INTERMEDIARYNTERMEDIARY

RETAIL PRIVATE BANKING CORPORATIONS INVESTMENT FIRMS INSTITUTIONAL

INVESTORS

GLOBAL

CUSTODIANS BROKERS ASSET MANAGERS


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Demand for Custody Services(Clients).


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Investor Clients Contd.


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Investor Clients Contd.


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Intermediaries Contd.


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CUSTODY SCENARIO IN INDIACUSTODY SCENARIO IN INDIA


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MARKET REGULATIONSMARKET REGULATIONS

Post 1992, NEAT was introduced (whichoperated on a strict price/time priority) toreduce information asymmetry & Hightransaction cost

At investor level, listed companies had toincrease the frequency of their accountannouncements

To ensure transferability of securities with

speed, accuracy and security, theDepositories Act was passed in 1996


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Regulations Contd.

This provided for the establishment ofsecurities depositories and allowedsecurities to be dematerialized & NSDLwas launched

Other measures to reduce Transaction Costa movement toward electronic trading and

settlement

streamlining of procedures with respect to

clearance of new issues


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MARKET REGULATIONSMARKET REGULATIONS


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EQUITY REFORMS RESULTSEQUITY REFORMS RESULTS

Modernization of market with increasedefficiency

Trading has become more transparent

Eliminate risks of bad delivery and

counterfeit shares due to depositoryavailable

The two depositories that are in operationnow ensure faster, cleaner and cheaper

settlement


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DEBT MARKET REGULATIONSDEBT MARKET REGULATIONS

Classified into three segments: G-sec market

PSU bond market

Corporate bond market

Focus of debt market reforms on G-sec

Establishment of primary market for G-sec

Strengthening of legal, regulatory and

payments infrastructure contributed todevelopment of secondary market


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DEBT MARKET REGULATIONSDEBT MARKET REGULATIONSCONTD.CONTD.

Reforms Auction of Treasury Bills with varying

maturities

Entry of FIIs to Primary & Secondary Market

Introduction of DVP system to acceleratesettlement, enhance transparency,eliminate risk

Promotion of G-sec by RBI by providingliquidity support

Active inter bank Repo market developmentto boost liquidity


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Regulatory Issues

Regulators:a)SEBI

b)RBI

c)Department of Company Affairs

d)Department of Economic Affairs

SEBI's mandate includes ensuring investorprotection; promoting orderly growth of

security market


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Regulatory Issues Contd.

RBI is responsible for primary issues ofGovernment Securities

Also includes the regulation of all contractsin G- sec, gold related securities, money

market securitiesSEBI is mandated to regulate the trading of

these securities on recognized stockexchanges in line with the guidelines

issued by RBI


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REGULATORY AUTHORITIESREGULATORY AUTHORITIES

Regulator Role

SEBI Ensuring investor protectionPromoting growth of security

market

RBI Primary issue of G-sec

Regulation of all contracts in G-sec, gold related securities,money market securities


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OVERVIEW OF NSDLOVERVIEW OF NSDL

Depository Act 1996 passed to ensuretransferability of securities with speed,accuracy and security

NSDL launched allowing securities to bedematerialized

Aims at synchronizing settlement of trade andtransfer of securities irrespective of

geographical locationsEliminates ills associated with paper-based

securities system such as delay in transfer,bad delivery, theft and forgery


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NSDL OVERVIEW CONTD..NSDL OVERVIEW CONTD..


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Functions of DepositoryDematerialization

Account Transfer

Transfer RegistrationCorporate Actions

Linkages with clearing system


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NSDL ELECTRONIC LINKAGESNSDL ELECTRONIC LINKAGES


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CLEARING CORPORATIONSCLEARING CORPORATIONS

Financial Settlements are guaranteed byCCIl

Settlement guarantee fund ensuressettlement of trades irrespective of default

by trading membersEliminates counter party risk; thus boosts

investor confidence


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ROLE OF NSE AND CLEARINGROLE OF NSE AND CLEARINGHOUSESHOUSES

The transaction in secondary market pass through3 distinct phasesTrading: Stock exchange

Clearing: Clearing Corporation determines the

fund & security obligation of trading membersand ensures the trade is settled throughexchange of obligations

Settlement

Clearing corporation, clearing members,custodians, clearing banks, depositories areinvolved in the process of clearing


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ROLE OF NSE AND CLEARINGROLE OF NSE AND CLEARINGHOUSES CONTD..HOUSES CONTD..

Clearing Corporation: responsible for posttrade activities like risk management &clearing and settlement of trades executedon a stock exchange

Clearing Members: responsible for settlingtheir obligations as determined by theNSCCL by making the funds/ securitiesavailable on settlement day to the clearing

bank/ depositories


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ROLE OF NSE AND CLEARINGROLE OF NSE AND CLEARINGHOUSES CONTD..HOUSES CONTD..

Custodians: settle trades on behalf oftrading members; is required to confirmwhether he is going to settle that trade ornot

Cl i d S ttl t


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Clearing and SettlementProcess


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CLEARING AND SETTLEMENTCLEARING AND SETTLEMENT

N S E

C L E A R IN G B A N K

C U S T O D IA N S

D E P O S IT O R IE S N S C C L

radeDetails

&otificationaffirmation

Obligatio& payn advicefsecurities

nstructions toake funds

vailable-y pay in time

nstructions toake securities

vailable by-ay in time

-ay in ofsecurities -ay in offunds

-ay out ofsecurities -ay out offunds

InformthroughDPInformCustodia


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RISKS INVOLVEDRISKS INVOLVED

Counter Party RiskCounter Party Risk

Country RiskCountry Risk

Cash RiskCash Risk

Market RiskMarket Risk

Operational RiskOperational Risk

Settlement RiskSettlement Risk

Systemic RiskSystemic Risk

Transfer RiskTransfer Risk

Business RiskBusiness Risk


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Risks in Custody


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Risks in Custody Contd.


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Risks in Custody Contd.


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OUTSOURCINGOUTSOURCINGWHY? Constant threat of tighter

margins Consolidation of industry players

WHAT? Fund Accounting and

AdministrationTrade Matching and

Confirmation

Back & Middle Office

OUTCOME ? Increased Profitability due to foll.

Additional services providedCash Management

Securities Lending

Compliance Monitoring

Risk Management


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Outsourcing

Safe-keeping of assets and Tradesettlements are now considered plainvanilla services

constant threat of tighter margins ontraditional products and consolidation ofindustry players

These competitive factors have led banks tooffer new value-added services such ascash management

securities lendingcompliance monitoringrisk managementproxy voting and corporate actions.


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Outsourcing Contd.

So far these diversification strategies haveworked & increased the profitability ofbanks

The latest value-added offering is back and

middle office outsourcing which custodianshave identified as a business withsubstantial growth prospects

UT UR IN REVENUE


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UT UR IN REVENUEPOTENTIALPOTENTIAL

SBi

llions


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Outsourcing Contd.


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Outsourcing Contd.

Fund Accounting & Fund Administrationservices are outsourced

Fund accounting:security pricing

general ledger bookkeepingNAV calculation

data distribution,

Reconciliation and daily, monthly and ad hoc

reporting


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Outsourcing Contd.

Fund administration:statutory reporting

tax compliance

performance measurement

Middle office outsourcing covers tradematching and confirmation which involvesestablishing links between brokers andcustodians

Can also cover cash flow forecasting andcash position reporting


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Outsourcing Contd.

Middle office outsourcing has been driven bythe shift to shorter settlement cycles

Unwilling to invest in new technology thatwill improve straight through processing;

fund managers choose to outsource tradematching and confirmation to a third party


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