Restructuring Securities Systems Processing - A Blue Print Proposal for Real-time/t+0 Processing

Abstract

Securities settlement is an area, where nobody seems to be content with the current international processing systems, but neither has a proposal for improvement emerged that has attracted common support. This paper describes a possible solution based on an international, harmonised and simplified institutional structure operating in an open real-time network structure. All deals are settled in immediate, t+0, real-time, which means that all assets and funds are delivered immediately and thereby removing settlement risk. Inter-custodian delivery problems of securities will disappear, because only securities available on investors' accounts can be settled, which continuously equals the amount on the omnibus-accounts. This will also take out the risks related to 'naked' short selling, because in most cases investors have to make securities and funds available before trading. This may divide the current market in a spot t+0 and a short term t+3 futures' market. Corporate actions can be organised in coordination and executed in synchronisation through the infrastructure network in which all custodians and registrars/CSDs participate. The paper describes the concrete new methods required (e.g. international custody account number system, ICAN, and DVP-codes for matching) also the probable impact of immediate real-time settlement on trading patterns, liquidity issues and risk containment. These are all areas, where the proposed new infrastructural solutions would bring benefits to the users, mainly faster/immediate delivery, less risks, lower processing costs, more competition and more efficient processing of corporate actions. Custodians' liquidity management will need to focus on the sufficiency of the real-time balance of settlement money, which might be more or less strained compared to the current situation depending on the off-setting patterns of incoming and outgoing settlements during the day. International implementation will require coordination and engagement by key players.