Shorter Settlement Cycles (SSC) in Europe & the US and their Impact on Asia

Transcription

1 Shorter Settlement Cycles (SSC) in Europe & the US and their Impact on Asia ACG17, Dhaka 20 October 2013 [Sample footer text]

2 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 2

3 Global Settlement Cycles (cash equity trades) 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) * Legend: T+0 or 1 T+2 T+3 >T+3 Source: World Federation of Exchanges * In the process of moving to T+3 3

4 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. 4

5 Audience Vote Question 2: Which market was the first to formally pass a regulation mandating trade matching? Green = US Yellow = Canada Orange = EU 5

6 Trade Matching Evolution Trade Matching (1989 G30) Trade Matching by T+1 (1995 ISSA-G30) Mandatory Trade Matching (ISSA 2000) Trade Date Matching (CSD-R, BCG 2012) Trade Matching by Affirmation Central Trade Matching 6

7 Omgeo service relative to Market Infrastructures (post-trade pre-settlement space) I n s t i t u t i o n a l I n v e s t o r s Investment Manager Omgeo CTM Global or Regional Custodian Order execution central matching, allocation, SSI enrichment, confirmation Settlement Notification Broker/ Dealer Domestic Custodian Trade Settlement Exchange/ OTC/ATS trade execution CCP netting Depository/ ICSD securities settlement Central Bank/ Com l Banks fund settlement Broker/ Dealer 7

8 The Path to SSC 1. US move towards T+1 (pre-2001) 2. NI in Canada (2007) 3. T+2 on the European agenda post-gfc 4. CSD Regulation proposed in March BCG Study sponsored by DTCC and SIFMA (2012) 8

9 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 9

10 Major Causes of Trade Failure Respondents citing inaccurate SSI data as the most significant cause of trade failure in major markets 23% 39% GLOBAL CUSTODIANS & INVESTMENT BANKS SUB-CUSTODIAN BANKS Source: Omgeo, How to Make Settlement More Efficient and Less Risky, May

11 SSC Enablers Transformed foreign buyer processes 9 1 Migration to trade date matching Transformed securities lending processes 8 2 Mandated match to settle Infrastructure for near real-time processing (no batch processing!) 7 3 Cross-industry SSI solution Additional elements: Compress timeframes/ rule changes Increased penalties for fails Retail funding acceleration Access equals delivery for all products Dematerialization of physicals Source: Boston Consulting Group, October

12 Panelists Nagesh Rao Managing Director & CEO, National Securities Depository Ltd. (NSDL), India Margeret Tang Director, PT Kustodian Sentral Efek Indonesia (KSEI) Jim Micklethwaite Director, Capital Markets, Thomas Murray Limited, United Kingdom 12

13 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.

14 Equities Settlement: Key enablers 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

15 Moving to Electronic Payments Nearly 90% of payments by value are electronic. By volume, 52% of payments are still by cheque.

16 SSC Global View Page 16 Page Thomas Murray Ltd.

17 SSC Enablers 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 Page 17 Page Thomas Murray Ltd.

18 INDONESIA CAPITAL MARKETS Settlement Cycle Equities Exchange T + 3 Bonds OTC T + 2 (mostly) Taxation 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

19 Audience Vote Question: Is pre-funding necessary for SSC? Green = Yes Yellow = No Orange = Not Sure 19

20 Audience Vote Question: Is FX settlement a major issue for moving to T+2? Green = Yes Yellow = No Orange = Not Sure 20

21 Audience Vote Question: Is time zone difference a major issue for moving to T+2? Green = Yes Yellow = No Orange = Not Sure 21

22 Audience Vote Question: Can SSC work without regulatory mandate? Green = Yes Yellow = No Orange = Not Sure 22

23 Audience Vote Question: Will mandating penalties for fails promote SSC? Green = Yes Yellow = No Orange = Not Sure 23

24 Audience Vote Question: Will foreign investors shy away from non-t+2 markets? Green = Yes Yellow = No Orange = Not Sure 24

25 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 25

26 So is the Industry Ready? 40% Preparations Being Made for T+2 62% of firms believe they are ready for T+2 30% 10% of firms in Europe do not expect to be ready for at least 2 years 20% 10% 50% of firms are doing nothing to prepare for T+2 0% Investing in technology Investing in staff Modifying processes Educating clients on impact of T+2 Source: Omgeo whitepaper Preparing for T+2 Settlement November