FEDERATION OF EURO-ASIAN STOCK EXCHANGES > YEARBOOK 2002/2003 > PAGE 11
participant are updated in real time for risk
monitoring.
Tight coupling
Sell orders submitted to the trading system are
pre-validated and frozen against securities
balances held in the securities depository, before
being sent to the order book for potential trade
matching. Net pay balances are calculated as in
loose coupling. A few markets may even tightly
couple the payments side of a transaction
through the use of real-time gross settlement
(RTGS) systems or other means.
CSD banking status
Settlement of money assets can take place
through a variety of institutions:
Central Bank
CSD as a limited-purpose bank
Commercial bank
Ultimate settlement via the Central Bank is the
lowest-risk approach.
Many CSDs and ICSDs act as a limited-purpose
bank, for example, Euroclear, Clearstream,
Clearnet, and SegaIntersettle. CSD banking
facilities help reduce:
Risks associated with commercial settlement
bank arrangements;
Costs for members by offering an alternative
banking arrangement;
Time differences associated with transfer of
securities and money assets in DVP.
It is expected that a limited number of CSDs will
seek banking status in the immediate future, but
these may include very large organizations
formed by cross-border mergers, particularly in
the European market. Many CSDs are actively
considering taking on banking status. This trend
is likely to grow as CSDs, particularly those in
Europe and those with for-profit status, offer
banking facilities to non-bank members.
Governance-related
Central settlement organizations are usually
monopoly providers, hence their performance
and ownership is of both private and public
interest. The governance and ownership options
for central settlement providers are as follows,
with most falling into the mutually owned
category at present, although some exchange-
owned organizations (Clearnet and HKEx) have
undergone IPOs:
Exchange-owned—the status of the settlement
provider depends on the exchange;
Mutually owned—usually not-for-profit;
Demutualized—tending toward for-profit;
Publicly owned—for-profit objectives to meet
shareholder objectives;
Self-owned—via a bond issue; a rare option but
permits a high level of independence;
A combination of the above.
Cross-border settlement
The Global Straight Through Processing
Association (GSTPA, now a victim of adverse
economic conditions and the resulting shortfalls
in it’s business model) was created to address
Contact Information
the key issues associated with cross-border
trading:
Reduce the unacceptably high settlement failure
rates of 15 to 20 percent via improved workflow
and better system integration;
Reduce trading as well as settlement costs;
Accelerate information flow between participants
and reduce settlement cycles;
Cope with the huge increase in volumes
expected over the next three to five years;
Promote industry standards;
Support industry initiatives for reduced
settlement cycles.
The for-profit competitor OMGEO is the
currently the only Virtual Matching Utility (VMU)
remaining. The solution involves creating a trade-
processing engine that interfaces with
participating members via a virtual private
network (VPN).
Business and technology standards
development
A response from smaller exchange
environments
Smaller exchange environments have an
important function in facilitating capital
intermediation on a regional basis. The
expansionary policies that established larger
exchanges must exercise in order to leverage
their investment in new infrastructures can
undermine the execution of this function. If the
‘center of gravity’ of capital intermediation of a
developing region shifts away from that region,
the funding of economic activity at the most
efficient rate in that region is no longer warranted.
To avoid such threats, smaller exchange
environments are well advise to emphasise their
regionality and seek strong cooperation and even
integration with other exchanges in similar
circumstances in their region. Such cooperation
is likely to start on a front-office level: trading
systems can connect and order books can be
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shared across regions, but the real efficiencies
of such cooperation will only be unlocked if and
when the integration reaches the back-office:
clearing, settlement and depository. This is where
capital efficiency, through ao. cross-
collateralisation, can contribute most to liquidity
and growth of such markets.
Front-office integration is to the benefit of and
extracts benefits from investors outside of the
region: relatively easy access, preferably through
a single access point for the investor will bring
occasional extra liquidity to the markets of the
region.
Back-office integration affects the players in the
region, through achievable greater capital
efficiency, and thus lends the greater support to
the regional capital intermediation function.
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