Shorter Settlement Cycles (SSC) in Europe & the US and ... · Shorter Settlement Cycles (SSC) in...
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A DTCC Company [Sample footer text]
Shorter Settlement Cycles (SSC) in Europe & the US and their Impact on Asia
ACG17, Dhaka
20 October 2013
2 ACG17 | Dhaka | October 2013 A DTCC Company
Audience Vote
Question 1:
How many markets are
currently on T+2 or shorter?
Green = less than 10
Yellow = 10 to 15
Orange = more than 15
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Global Settlement Cycles (cash equity trades)
Legend:
T+3
>T+3
T+0 or 1
T+2
Exceptions to T+3:
Israel (T+0)
Chile (T+0)
Saudi Arabia (T+0)
China (T+1)
Germany (T+2)
Turkey (T+2)
Egypt (T+2)
Jordan (T+2)
Taiwan (T+2)
Hong Kong (T+2)
India (T+2)
Russia (T+2, from T+0)
S. Korea (T+2)
So. Africa (T+5) *
Source: World Federation of Exchanges
* In the process of moving to T+3
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SSC and Trade Matching
ISSA Recommendations 2000
Recommendation 5: The major risks in
Securities Settlement Systems should be
mitigated by five key measures:
i. the implementation of real delivery versus
payment
ii. the adoption of a trade date plus one
settlement cycle in a form that does not
increase operational risk
iii. the minimisation of funding and liquidity
constraints by enabling stock lending and
borrowing, broad based cross
collateralisation, the use of repos and
netting as appropriate
iv. the enforcement of scrip-less settlement
v. the establishment of mandatory trade
matching and settlement performance
measure
Group of Thirty (1989)
Recommendation 2: By 1992 indirect
market participants (such as institutional
investors or any trading counterparties that
are not broker/dealers) should be members
of a trade comparison system that achieves
positive affirmation of trade details.
Recommendation 1: By 1990, all
comparisons of trades between direct market
participants (i.e., brokers, broker/dealers,
and other exchange members) should be
accomplished by T+1.
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Audience Vote
Question 2:
Which market was the first to
formally pass a regulation
mandating trade matching?
Green = US
Yellow = Canada
Orange = EU
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Trade Matching Evolution
Central Trade Matching Trade Matching by Affirmation
Trade Matching (1989 G30)
Trade
Matching by
T+1 (1995
ISSA-G30)
Mandatory
Trade
Matching
(ISSA 2000)
Trade Date
Matching
(CSD-R,
BCG 2012)
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Exchange/
OTC/ATS trade execution
CCP netting
Depository/
ICSD securities settlement
Central Bank/
Com’l Banks fund settlement
Broker/
Dealer
Investment
Manager
I
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Global or
Regional
Custodian
Domestic
Custodian
Omgeo
CTM
Broker/
Dealer
Order
execution
Trade
Settlement
Omgeo service relative to Market Infrastructures (post-trade pre-settlement space)
central
matching,
allocation, SSI
enrichment,
confirmation
Settlement
Notification
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The Path to SSC
US move towards T+1 (pre-2001) 1.
NI 24-101 in Canada (2007) 2.
T+2 on the European agenda post-GFC 3.
BCG Study sponsored by DTCC and SIFMA (2012) 5.
CSD Regulation proposed in March 2012 4.
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Audience Vote
Question 3: Is automated institutional trade matching
(buy side vs. counterparty broker-dealer) already prevalent in your market, whether by virtue of
regulation or convention?
Green = Yes
Yellow = No
Orange = uncertain/unknown
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Major Causes of Trade Failure
Respondents citing inaccurate SSI data as the most significant
cause of trade failure in major markets
23%
39%
Source: Omgeo, “How to Make Settlement More Efficient and Less Risky,” May 2012.
SUB-CUSTODIAN BANKS
GLOBAL CUSTODIANS &
INVESTMENT BANKS
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SSC Enablers
Source: Boston Consulting Group, October 2012
1
2
3
9
7
6 4 5
8
Migration to trade date matching
Mandated match to settle
Cross-industry
SSI solution
Dematerialization of physicals
“Access equals delivery”
for all products
Compress timeframes/
rule changes
Infrastructure for near
real-time processing
(no batch processing!)
Transformed securities
lending processes
Transformed foreign buyer processes
Additional elements:
Increased penalties for fails
Retail funding acceleration
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Panelists
Jim Micklethwaite
Director, Capital Markets,
Thomas Murray Limited,
United Kingdom
Nagesh Rao
Managing Director & CEO,
National Securities
Depository Ltd. (NSDL), India
Margeret Tang
Director,
PT Kustodian
Sentral Efek
Indonesia (KSEI)
Equities Settlement: Key enablers
For institutional trades, Custodian code is entered at trade entry
Settlement obligation shifts to custodian upon confirmation
If not confirmed, settlement obligation rests with broker
STP for all institutional trades
Broker contract notes delivered mandatorily using one of three STP
providers (uses SWIFT format)
NSDL was the first STP provider. Requested by SEBI to set up the
platform to support T+2.
Auction (Buy-in) process for failed deliveries
After pay-out on T+2
No physicals handled in clearing house
Limited Physical segment exists in theory. Zero volumes.
Foreign buyer process
Need local depository account (client level accounts held in India)
Use local custodians. Typically work round the clock.
Choice of STP platforms between local brokers, foreign buyers and
local custodians. No standardisation of formats. Typically sequential
matching.
Typically hold liquidity in India. Few operate on trade by trade funding.
FX settlement available on cash, tom and spot basis. Inter bank FX
settled through clearing house as CCP.
Electronic payments
RTGS for bulk payments [min only Rs. 2 lakhs (USD 3,272 Approx)]. 9am
to 4.30 pm.
NEFT for retail (Hourly batched net settlement. 8am to 7pm)
Retail tends to have trading accounts or use internet trading
Equities Settlement: Key enablers
Moving to Electronic Payments
Nearly 90% of payments by value
are electronic.
By volume, 52% of payments are still
by cheque.
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SSC Global View
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Boston Consulting Group – SSC Enablers
1. Migration to Trade Date Matching
2. Mandated Match to Settle
3. Cross-Industry Standing Settlement Instruction Solution
4. Dematerialisation of Physicals
5. “Access Equals Delivery” rule
6. Compressing timeframes
7. Real-Time Processing
8. Transformed Securities Lending Process
9. Transformed Foreign Buyer Process
10. Increased Penalties for fails
11. Retail Funding Acceleration
SSC Enablers
Equities Sale Transaction 0.1% of Gross Sale Proceeds
Cash Dividend/Bonus Shares 20% or Treaty Rate of Gross
Dividend/Gross Bonus Amount
Bonds Interest Coupon 20% or Treaty Rate of Gross Interest
Amount
Capital Gain (Sell Price/Redemption
Price—Purchase Price)
20% or Treaty Rate of the Capital Gain
Settlement Cycle
Equities Exchange T + 3
Bonds OTC T + 2 (mostly)
Taxation
INDONESIA CAPITAL MARKETS
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Audience Vote
Question: Is pre-funding necessary for
SSC?
Green = Yes
Yellow = No
Orange = Not Sure
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Audience Vote
Question: Is FX settlement a major issue for moving to T+2?
Green = Yes
Yellow = No
Orange = Not Sure
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Audience Vote
Question: Is time zone difference a major issue for moving
to T+2?
Green = Yes
Yellow = No
Orange = Not Sure
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Audience Vote
Question: Can SSC work without regulatory mandate?
Green = Yes
Yellow = No
Orange = Not Sure
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Audience Vote
Question: Will mandating penalties for
fails promote SSC?
Green = Yes
Yellow = No
Orange = Not Sure
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Audience Vote
Question: Will foreign investors shy away
from non-T+2 markets?
Green = Yes
Yellow = No
Orange = Not Sure
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Audience Vote
Question: In terms of preparation for T+2,
which of the following is the industry’s top focus?
Green = Investing in technology
Yellow = Investing in staff
Orange = Modifying processes
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So is the Industry Ready?
Source: Omgeo whitepaper “Preparing for T+2 Settlement” November 2012
62% of firms believe they
are “ready” for T+2
10% of firms in Europe do
not expect to be ready for
at least 2 years
50% of firms are doing
nothing to prepare for
T+2 0%
10%
20%
30%
40%
Investing intechnology
Investing instaff
Modifyingprocesses
Educatingclients onimpact of
T+2
Preparations Being Made for T+2