Improving Securities Settlement Systems: a

Selection of Practical Issues October 2003

Catiana García Kilroy

A Selection of Practical Issues

1. Who is in control?

2. The illusion that settlement and custody are risk free

3. The temptation of taking international reccomendations as commandments

1. Who is in control of SSS?(design and ownership)

• The Central Bank vs. the private sector

• The banking sector vs. the exchange

1. Who is in control of SSS?

The Central Bank vs. the private sectorIssues:• Broader outlook on financial system development and stability• Neutral infrastructure approach (horizontal vs. vertical

integration)• Natural coordination with liquidity and payment systems aspects• Arbitrage between interest groups (guarantees succes of project

e.g. Taurus project in U.K.)

BUT:• Development of added value services or non public sector

services (private debt and equities, regional expansion)• Update in technology and services (budgetary and

administrative restrictions)

1. Who is in control of SSS?

The banking sector vs. the exchange Issues:• Custody services naturally belong to the banking sector• Need to develop interbank bilateral markets (money

markets and public debt wholesale markets)

BUT

• Potential conflict of interest in the process of disentermediation of the financial system

1. Who is in control of SSS?

Possible solutions:

• Strong role of the Central Bank in the design and development of the system

• Separation of development from later ownership and management of the system

• Governance scheme that allows participation of securities regulator and Central Bank in strategic decisions

2. The illusion that settlement and custody are risk free

The risks of not having an adequate SSS are not perceived by the financial sector, and therefore the public sector agenda finds:

• Reluctante to make the necesary investments in the project (human and financial ressources)

• Preference for multilateral systems for large value transactions to avoid liquidity cost

• Reluctance to finance guarantee funds for multilateral settlement

• Reluctance to capitalize Central Depositaries• Reluctance to change back-office operational procedures for

custody and securities transacions• Lack of capital for custodial services

2. The illusion that settlement and custody are risk free

Solutions:

• Central Bank and Securities Regulator leadership

• Persuasion of:- implicit costs of current situation- relevance of new “business

paradigm”

3. The temptation of taking international reccomendations as

Commandments• Should be approached with broader view and

within the larger strategy of:- developing domestic wholesale debt markets - developing domestic liquidity markets- developing conectivity with regional and international markets

• Hierarchy of reccomendations and building block approach- the risk of decontextualised and “literal interpretations” (e.g, the G-30 reccomendations, the “RTGS ilusion”) - the priority of bilateral wholesale securities settlement - the risk of confusing operational and financial soundness with technological sophistication of SSS

Conclusions

1. The leadership of the Public Sector is needed in SSS construction to assure:- compliance with global domestic financial sector reform- consensus among different interest groups- sound risk management policies

2. A coherent building block approach can only be achieved through:- a clear vision of current issues and reform strategy of local financial sector- a thorough understanding of international reccomendations- the leadership of financial sector experts with support of IT experts