shorter settlement cycles (ssc) in europe & the us and ... · shorter settlement cycles (ssc)...

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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


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


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.


Audience Vote

Question 2:

Which market was the first to

formally pass a regulation

mandating trade matching?

Green = US

Yellow = Canada

Orange = EU


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)


Exchange/

OTC/ATS trade execution

CCP netting

Depository/

ICSD securities settlement

Central Bank/

Com’l Banks fund settlement

Broker/

Dealer

Investment

Manager

I

n

s

t

i

t

u

t

i

o

n

a

l

I

n

v

e

s

t

o

r

s

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


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.


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


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


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


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.

© 2013 Thomas Murray Ltd.

SSC Global View

© 2013 Thomas Murray Ltd.

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


Audience Vote

Question: Is pre-funding necessary for

SSC?

Green = Yes

Yellow = No

Orange = Not Sure


Audience Vote

Question: Is FX settlement a major issue for moving to T+2?

Green = Yes

Yellow = No

Orange = Not Sure


Audience Vote

Question: Is time zone difference a major issue for moving

to T+2?

Green = Yes

Yellow = No

Orange = Not Sure


Audience Vote

Question: Can SSC work without regulatory mandate?

Green = Yes

Yellow = No

Orange = Not Sure


Audience Vote

Question: Will mandating penalties for

fails promote SSC?

Green = Yes

Yellow = No

Orange = Not Sure


Audience Vote

Question: Will foreign investors shy away

from non-T+2 markets?

Green = Yes

Yellow = No

Orange = Not Sure


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


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

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