csd’s risk management in hft era dr. dai wenhua october 2013 china securities depository and...
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CSD’s Risk Management in HFT Era
www.chinaclear.cn
Dr. DAI Wenhua
October 2013
China Securities Depository and Clearing Corporation Limited
China Securities Depository and Clearing Corporation Limited
Boom and Bust Brought by HFT
Clearing and Settlement Risks Brought by Trading Bust
How to Solve the Problem
Food for Thinking
CONTENTS
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
Boom and Bust Brought by HFT -Boom
HFT Pushes Market Boom—Dark Pools, Flash Order, etc.
Source: TABB Group
China Securities Depository and Clearing Corporation Limited
Main Board
ChiNext
Boom and Bust Brought by HFT -Boom
Favourable Factors for HFT—Modern Science& Technology and Digitalization
Securities industry takes the brunt to be dragged into digitalization by waves of HFT, programming trade, data-based automatic regulation, individual information disclosure(micro-blog, text message, etc ).
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
ChiNext
Boom and Bust Brought by HFT -Boom
Favourable Factors for HFT — Push from Rules and Regulations
• The US Regulation NMS • The EU MiFID
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
Boom and Bust Brought by HFT -Boom
Favourable Factors for HFT—Implications of Regulation NMS and MiFID
Improve market transparency, fairness and liquidity.
Increase market competition and promote exchanges to be allied and company-oriented.
Improve performance and connectivity of technical platforms.
Promote the connections between clearing and settlement platforms.
Encourage the promulgation of unified market standards.
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
Boom and Bust Brought by HFT -Bust
HFT results in trading failures. —Case Studies
Time Incident Impact Loss
Aug.23, 2013 NASDAQ 3 1/2 hours trading shutdown loss of market confidence
Aug.21, 2013 Goldman Sachs Erroneous Options Trades $100 million
Aug.16,2013 China Everbright fat finger incident
a 53 % surge in volume (SHCOMP), up about 5.96% in 2 minutes
$32 million
May 25, 2012 NASDAQ Computer failure in the public debut of Facebook Two-hour halt
$500 million for dealers
May 6, 2010 Wall Street flash crash DJIA plunged by 998 points, down 9.2%, the biggest daily drop
$1 trillion
2005 Japan Mizuho J-Com fat finger error a 301-point fall on the Nikkei 225, down almost 2%
$230 million
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
ChiNext
Boom and Bust Brought by HFT -Bust
New risks emerge from HFT. Unbridled science and technology will jeopardize financial market.
Technology will never be perfect. Unsupervised technology will be dangerously far from perfect and the industry will be confident its technology is safe right up until it isn’t. How many more failures do regulators need to see before they stand up and do something?
——Comment: Unsupervised technology hurts modern markets,
Financial Times ,by RT Leuchtkafer， August 23, 2013
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
Clearing and Settlement Risks Brought by Trading Bust
Risk Transmission Pathway
Participant A
Participant D
Participant B
Participant CCSD/CCP
…
…
…
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
Clearing and Settlement Risks Brought by Trading Bust
• Risk Management for CSD with the Function of CCP
• Risk Management for CSD without the Function of CCP
• Risk Management for DvP and Non-DvP
• Case study (Everbright Fat Finger incident- CCP& non-DvP )
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
How to Solve the Problem
Principles for CSD in CPSS-IOSCO PFMI
Central securities depositories and exchange-of-value settlement systems Principle 11: Central securities depositories A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimize and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilized or dematerialized form for their transfer by book entry. Principle 12: Exchange-of-value settlement systems If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
How to Solve the Problem
PFMI are not Enough.
• Different regulatory principles and conditions of different markets
• Efforts and timetables to implement PFMI can not be unified.
• No risk management mechanisms for CSDs’ new Hi-tech challenges.
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
How to Solve the Problem
CSD’s
Risk Prevention Capability
• DVP• Informationized supervision and risk warning of
unsecured settlement• CCP+CSD central bank bailout mechanism
Regulatory
Authorities
• Strengthen control of trade measures: Regulations and rules for HFT, dark pool, and flash order, etc, license management, fuse mechanism and front-end trade control.
PFMI
Principl
e
• CSDs should coordinate with each other to promote the implementation of PFMI.
China Securities Depository and Clearing Corporation Limited
SME Board
Main Board
Food for Thinking
CSD, with the function of CCP or at least having close connections with CCP, should serve as the firewall against risks as the final link in the securities trading chain.
PFMI are comprehensive and systemic in covering risk management system and various institutions. However, PFMI are not detailed enough for CSDs to tackle the new Hi-tech challenges.
CSDs should strengthen exchanges and cooperation. The establishment of the Fifth Task Force by CDCPL is of great necessity.
Address: No. 17 Taipingqiao Street, Xicheng District, Beijing
Tel： 8610-59378818
Fax： 8610-66210938
Post Code： 100033
China Securities Depository and Clearing
Corporation Limited (CSDC)
www.chinaclear.cn