Securities Settlement Research Articles

Central Clearing Counterparties in the Financial Accounts of the United States

The March 7, 2024, release of the Z.1 Financial Accounts of the United States (the Accounts) introduced a new supplementary table, Central Clearing Counterparties (table L.132.c), which separately reports financial assets and liabilities of central clearing counterparties (CCPs). CCPs in the Accounts are financial intermediaries that support the functioning of financial markets by taking on counterparty credit risk and providing clearing and settlement of securities and derivatives.

중일전쟁 준비를 위한 일본의 만주지역 치안숙정과 군비강화

The 1933 Tanggu Armistice Agreement reduced military conflict between China and Japan. However, Japan resumed its invasion of China in 1935 with the separation of Hebei. As a result, tension between China and Japan reached its peak again. Accordingly, Japan tried to prepare for a war with China by strengthening security and arms against Manchuria. In particular, China-China relations deteriorated rapidly toward the end of 1936. And in June 1937, just before the outbreak of the Sino-Japanese War, Japanese Kwandong Army and Soviet Army clashed in northeastern China. Since then, Japan has carried out a military reorganization in northeastern China and also carried out reforms to the Manchurian Army. The reform was mainly centered on the integration of the military and police central organization. In addition, in the late 1936, Japan spent a lot of money to reorganize the armaments of Manchuria, and the weapons possession situation of Manchurian troops more than doubled compared to before.
 In addition, since 1936, Japan has conducted a security settlement in Manchuria to respond to the all-out war. The main contents are based on the security plan of the Manchurian army and the Foreign Ministry police. In particular, this security policy includes ideological work, which promoted a basic ideological exhibition that recognizes the excellence of nationalism in life while promoting the principles of people's lives. At the same time, an exhibition of wartime thought was held to strengthen the ideological general mobilization system in the urgent environment before the war. As such, Japan has already been strengthening security and arms against Manchuria as a preparatory step for invading China since the middle of 1936. Because of this preparation, it was possible to start a war without a declaration of war when the Lugouqiao incident occurred.

The role of blockchain technology in advancing sustainable energy with security settlement: enhancing security and efficiency in China’s security market

Blockchain technology has the potential to revolutionize securities settlement systems, offering an efficient, reliable, and cost-effective alternative to traditional methods. Its features, including distributed data authenticity, programmability, and scalability, can enhance security and efficiency in China’s securities market, while promoting a sustainable energy future. However, to fully leverage the benefits of blockchain in securities registration and settlement, it is crucial to address algorithmic loopholes and operational risks associated with smart contracts. Establishing blockchain technical standards and rules is also necessary to ensure smooth system operation. Furthermore, given the uncertainty of the final settlement time point, adherence to decentralization principles and the incorporation of embedded technology for supervision are essential. Legislative measures are required to regulate smart contracts and mitigate systemic risk effectively. This will ensure a stable settlement time expectation and enable fair allocation of legal responsibility among the involved parties. Additionally, other regulatory approaches should be implemented to provide effective supervision and adapt to the rapid development of blockchain. By addressing challenges and risks, blockchain’s full potential can be realized, enabling a sustainable energy future, while enhancing security and efficiency in China’s securities market.

Review of the EU post-trade legislation: Draft regulation to amend CSDR and regulation on a DLT pilot regime for markets infrastructures

This paper aims to examine the two most recent EU initiatives to update the existing regulatory framework for central securities depositories (CSDs). First, it analyses and evaluates the draft regulation released on 16th March, 2022, which amends the existing CSDs Regulation (CSDR) of 2014, including simplifying the passporting process and enhancing cooperation among competent and relevant authorities. It also establishes a more targeted scope for the CSDR's settlement discipline regime. The proposed simplification measures indeed appear timely, but it remains to be seen whether they will increase competition and improve settlement efficiency. Secondly, it assesses the challenges of the existing EU legal framework for digitalising post-trade activities. It concludes that the existing framework does not permit the full tokenisation of the settlement of token securities, and thus it requires adaptation. Against this backdrop, the paper fully supports the stepwise regulatory approach followed by the EU. The recently adopted regulation creating a pilot regime to test Distributed Ledger Technology (DLT) market infrastructures and allow them to be exempted from some existing requirements temporarily will help identify possible medium-term options for a suitable legal framework. Meanwhile, users should remain alert to the fact that exemptions remain proportionate and are conducive to improving CSDs' efficiency.

Economics of blockchain-based securities settlement

We undertake economic modeling of the behavior of participants in blockchain-based securities settlement implemented through hashed timelock contracts (HTLCs). HTLCs have been noted to have the problem of failure when one of the participants attempted to void the transaction by making a late signature. We propose that the premium should be paid by a structurally favorable participant and show that failure due to late signatures rarely occurs according to the utilities of the participants after the introduction of the premium theoretically. Then we conduct quantitative analysis using KRX bond settlement data and show that the proposed method provides better settlement results than the benchmark model. In particular, our results help regulator or policy makers consider fintechs in their regulatory and policy decisions without significantly departing from their original framework.

Shortening the settlement cycle: Why Europe should not wait too long to introduce T + 1

The amount of time required for the settlement of securities is a long-running issue for European capital markets. Twenty years ago, the Giovannini Group looked at the large number of securities settlement systems that existed in Europe (and still do). In 2014, based on the Group's proposals for improving the settlement cycle, the EU moved from T + 3 (trade date plus three business days) to T + 2 (trade date plus two business days), with the US following a few years later in 2017. The US is now ready to shorten its settlement cycle further to T + 1 by March 2024. Although there are benefits from such a move (eg capital and liquidity efficiencies, lower margin requirements, risk reduction, increase scale and speed of processing, lower costs, investor protection), there are also challenges (eg cross-border transactions, securities lending market, operational challenges). This paper discusses what Europe would do. Will it follow the US or not? And if yes, when? Before answering these questions, the EU should: i) address the significant problems caused by the diversity and fragmentation of the EU's capital markets and market infrastructures, ii) collect views from all different stakeholders (eg central securities depositories, buy and sell side, regulators, central counterparty clearing houses and other types of market infrastructure) and iii) conduct a feasibility study on a move from T + 2 to T + 1. Given that such an endeavour will take time, the EU should kick off the discussion immediately.

Germany

Clearstream Banking Frankfurt (CBF) is a highly interconnected financial market infrastructure that provides a critical service for German financial markets and beyond. CBF is the central securities depository (CSD) in Germany providing mainly custody and settlement services, having received its license pursuant to Art. 16 of the CSDR on January 21, 2020 allowing it to perform core CSD services as well as non-banking ancillary services. It is also the operator of two securities settlement systems (SSS). In addition, CBF was authorized on August 24, 2021 to provide banking-type ancillary services as envisaged under Art. 54 CSDR.

Advancing the settlement model of the US securities markets

In a securities settlement cycle, one of the greatest factors affecting market risk — including counterparty risk, credit risk and default risk — continues to be time. One of the areas of exposure remaining in the settlement system today is the risk of a sudden event that could affect the transfer of cash or ownership of securities from trade execution through trade settlement. The current standard cycle for settling equity trades in the US is trade date plus two business days (T+2); however, industry consensus is growing that accelerating this settlement cycle to one day or less will better serve market participants by reducing costs and mitigating risk. While shortening a settlement cycle sounds simple enough, the execution is more complex. Equity clearance and settlement is part of a large ecosystem of global financial markets, interconnected processes and linked systems. Accelerating the US cash market settlement cycle will have both upstream and downstream impacts on other parts of the market structure, such as derivatives, securities lending, financing, foreign clients and foreign exchange and collateral management. Settlement is one of the most powerful and critical processes of The Depository Trust & Clearing Corporation (DTCC), and as the backbone of the US financial services industry, DTCC clears and settles hundreds of billions of dollars in equities transactions every day. This paper suggests that the industry’s primary goal must be to create efficiencies without introducing additional risk to markets. DTCC is actively working with its industry partners towards a path to accelerated settlement of T+1 and beyond by taking a careful, methodical approach to examine all issues and potential impacts for the entire US equities market.

Central securities depositories and reform of the settlement process

The organisation and regulation of the European securities clearing and settlement business is again up for reform. The present dispersed European landscape calls for more integration as part of the formation of a European capital market, as proposed by the European Commission. These reforms would result in legislative changes, some of which are analysed in this paper, having raised active interest in the financial world: a new technique of dealing with settlement finality, proposing a mandatory buy-in tool as an effective instrument against settlement fails, and an analysis of settlement internalisation, which has risen to levels that, according to the Commission, might ‘undermine confidence in the CSD function’ and in the markets. On the two topics of settlement finality and settlement fails, data has now become available and is included. The third item analyses the use of distributed ledger technology (DLT) in the settlement infrastructure. As part of its work stream on digital finance, the Commission has published a proposal — as a ‘pilot project’ — for a regulation dealing with the main items that have to be adapted upon the introduction of DLT in the existing securities settlement system (SSS) and multilateral trading facility (MTF) segments of the market. For central securities depository (CSD) using DLT, the existing regulation would remain applicable, but the operations would be exempted from numerous requirements applicable today. The impact on the markets will have to be closely monitored, hence the Commission’s ‘pilot project’. The European Central Bank (ECB) has already formulated its position of cautious optimism.

Applicability of Blockchain Technology in Securities Settlement

Technological advancements are often adopted to financial markets to improve their operations and safety. Blockchain technology has been recognized as one of the potential technologies to be utilized in capital markets. The goal of this article is to evaluate the applicability of using the blockchain technology in securities settlement process. First, the theoretical background of blockchain technology is reviewed and the current financial market infrastructure is examined. Then Central Securities Depositories Regulation and the current securities settlement processes are examined. Blockchain applicability framework designed by Gourisetti, Mylrea and Patangia is applied to assess the blockchain technology’s applicability to securities settlement. The results suggest that blockchain technology can be applied to securities settlement, and the used blockchain type should be a private blockchain with Proof-of-Authority consensus mechanism. A blockchain architecture model, based on a model provided by Zhuang, Chen, Shae and Shyu, and potential node structure for securities settlement are developed, taking into account the existing literature on blockchain technology, financial markets, and Central Securities Depositories Regulation. The proposed blockchain architecture model and node structure are then evaluated against scholar expected benefits and drawbacks of using blockchain for securities settlement and cross-border settlement efficiency. The evaluation reveals that the proposed blockchain technology model can potentially improve some of the current securities settlement issues, such as costly reconciliation and difficult cross-border securities settlement. At the same time, using blockchain technology in securities settlement would be challenging because the practical implementation time would be long and would require market-wide commitment. The main artefacts of this article are the proposed blockchain architecture model and node structure that would allow securities settlement processes to be executed using blockchain technology.

IMPACT OF FAILURE OF A CENTRAL SECURITIES DEPOSITORY PARTICIPANT ON FINALITY AND IRREVOCABILITY OF SETTLEMENT OF SECURITIES

In view of the current global meltdown and the recession in South Africa, the question arises whether the legal framework pertaining to finality of settlement of securities is sufficiently robust to cope with failure of a central securities participant. This article examines this question and highlights some of the problems that exist with regard to uncompleted contracts in the Strate (Share Transactions Totally Electronic) environment. The authors conclude with certain recommendations to overcome the identified problems.

Atomic cross-chain settlement model for central banks digital currency

Current securities settlement systems employ various strategies to manage risks in settlement effectively. However, exchanging and verifying information between the market participants and intermediaries is time consuming.In addition, the back office and coordination costs are very high. To address such challenges, blockchain technology has attracted the attention of researchers due to its potential as a new settlement system. In this study, we propose a blockchain-based settlement system using cross-chain atomic swaps that can be implemented for the central banks digital currency (CBDC). The proposed model adds an administrator ledger to the system to remove settlement failure and improve efficiency in market management. Along with our settlement system, we also propose a new lattice-based sequential aggregate signature scheme generally known for its advantage on resisting future quantum attacks. Proof-of-concept experiments with the proposed system were conducted to analyze the effect of numerous variables in the blockchain ecosystem on the settlement system.

Prospects and limitations in the modernization of securities settlement operations in Ukraine

The article points to the critically insufficient compliance of Ukraine's stock market infrastructure with the relevant international recommendations, first of all in the segment of securities settlements. The author states that despite the creation of market infrastructure in Ukraine and the possibility to avoid problems related to the evolutionary errors, the market participants face numerous difficulties, such as risks in legal empowerment and in the activities of key infrastructure actors, limited competition, excessive transaction costs, ongoing defragmentation of the system of depository accounting, as well as inconvenience and limitations of the existing risk management systems. The study on the evolution of securities settlement models in Ukraine revealed that the radical reform of infrastructure in 2013 led to contradictory consequences, in particular, the abuse by the settlement bank and the central counterparty of its monopolistic positions, active participation of this monopolist in high-profile market abuse, stagnation in clearing and settlement technologies, and a slowdown in the development of the derivatives market. It was found that, despite lengthy discussions, the updated legislation in the field of organized capital markets, which is designed to implement a number of EU laws and should enter into force in 2021, does not really rectify the problems in the existing infrastructure, in particular due to a rather dubious proposed procedure of securities settlement and conservation for a few more years of the monopoly in the field of settlement and clearing services. It is substantiated that Ukraine has constructive practical experience and skills that can allow to implement the best international standards for building a system of cash settlements in "central bank money", organically integrated into Ukrainian payment system and able to adapt to European payment systems.

Перспективи та обмеження модернізації розрахунків в операціях із цінними паперами в Україні

The article points to the critically insufficient compliance of Ukraine’s stock market infrastructure with the relevant international recommendations, first of all in the segment of securities settlements. The author states that despite the creation of market infrastructure in Ukraine and the possibility to avoid problems related to the evolutionary errors, the market participants face numerous difficulties, such as risks in legal empowerment and in the activities of key infrastructure actors, limited competition, excessive transaction costs, ongoing defragmentation of the system of depository accounting, as well as inconvenience and limitations of the existing risk management systems. The study on the evolution of securities settlement models in Ukraine revealed that the radical reform of infrastructure in 2013 led to contradictory consequences, in particular, the abuse by the settlement bank and the central counterparty of its monopolistic positions, active participation of this monopolist in high-profile market abuse, stagnation in clearing and settlement technologies, and a slowdown in the development of the derivatives market. It was found that, despite lengthy discussions, the updated legislation in the field of organized capital markets, which is designed to implement a number of EU laws and should enter into force in 2021, does not really rectify the problems in the existing infrastructure, in particular due to a rather dubious proposed procedure of securities setrtlement and conservation for a few more years of the monopoly in the field of settlement and clearing services. It is substantiated that Ukraine has constructive practical experience and skills that can allow to implement the best international standards for building a system of cash settlements in "central bank funds", organically integrated into Ukrainian payment system and able to adapt to European payment systems.

The Effect of a Closing auction on Market Quality and Market Efficiency in the Stock Exchange of Hong Kong

Hong Kong introduced the Closing Auction Session (CAS) to the HKEX securities market in 2016. Under the CAS, trading is extended by an extra 8-10 minutes after the daily trading session ends at 16:00 to determine the closing price for the day. Trading under the CAS is in the form of a single price auction, at which buyers and sellers submit orders so that the trading system determines a market clearing closing price for each security and orders are executed at that price. CAS was introduced in three phases, covering constituent stocks of Hang Seng Composite LargeCap and MidCap Index since July 25, 2016, constituent stocks of Hang Seng Composite SmallCap Index since July 26, 2017, and all equities, funds, and leveraged and inverse products since October 8, 2019. The introduction of CAS is to meet the needs of some investors, such as index fund managers, who need to trade at the closing price. This study investigates the effect of CAS on market liquidity and price efficiency, two major aspects of financial market quality, to see whether it may safeguard against extreme price volatility and improves price efficiency. The analysis is conducted based on Hang Seng LargeCap and Midcap stocks after the introduction of CAS in July 2016. Since its inception, the trading volume for LargeCap and MidCap stocks transacted during the CAS has experienced steady growth, with the percentage of volume accounting for more than 8% by June 2018. The CAS draws volume mostly from the end of the continuous trading session, with the last 15-minute interval (15:45-16:00) contributing the largest volume migration. On the other hand, the decline in volume in the rest of the continuous session is very small. To address our main research question, we examine the effect of CAS on a variety of market liquidity and price efficiency measures. Regarding the impact of CAS on market liquidity, we find that the introduction of the close auction results in a slight decline in liquidity during the continuous trading session, with the reduction of liquidity most pronounced in the last 15-minute interval, as evidenced by a wider bid-ask spread and lower depth. However, the price impact (defined as the absolute return divided by the trading volume) in the last 15-minute decreases significantly. Regarding the impact of CAS on price efficiency, if the uninformed traders migrate to the close auction from the daily session, we expect a temporary price pressure near the close of the daily session to fall and a weaker subsequent price reversal. Using the return reversals observed subsequent to the end of the daily trading session, from the trading price at 16:00 to the trading price of the next day, we find that this is indeed the case. There is a general pattern of return reversal, but the magnitude of the reversal is smaller after the introduction of CAS. This indicates that price is more efficient after the implementation of CAS. The finding is in line with the evidence suggesting that passive funds shift from the continuous trading session to the closing auction session. These passive funds are incentivised to trade near the market close, as they are benchmarked against the index they track based on the closing price. Since these passive fund investors demand liquidity from the market, their migration to the closing auction session will lower liquidity in the last 15-minute period of the continuous trading session but can increase price efficiency at the market close. Overall, the introduction of CAS by HKEX is beneficial to many market participants who use the closing price as a reference price for the day-end settlement of many financial securities, such as mutual funds' NAV, the asset value of exchange-tr aded funds.

CSDs and the reform of the settlement process

The post-trade activities in securities has again raised considerable attention and discussions: recent public consultations of European Commission have resulted in a very active debate concentrating on three issues: new regime for settlement finality, with specific attention to the Buy-in process, the consequences of possible introduction of distributed ledger technology in the securities settlement process, and finality the widespread use of internalisation as a replacement to the CSDs. Overall, these discussions also result in a debate about the supervisory system. The debates on these topics are still open and are likely to keep us busy for quite some time. Therefore, this status questionis may be useful.

Distributed Ledger Technology Experiments in Payments and Settlements

Major transformations in payment and settlements have occurred in generations. The first generation was paper-based. Delivery times for payment instruments took several days domestically and weeks internationally. The second generation involved computerization with batch processing. Links between payment systems were made through manual or file-based interfaces. The change-over period between technologies was long and still some paper-based instruments like checks and cash remain in use. The third generation, which has been emerging, involves electronic and mobile payment schemes that enable integrated, immediate, and end-to-end payment and settlement transfers. For example, real-time gross settlement systems have been available in almost all countries. DLT has been viewed as a potential platform for the next generation of payment systems, enhancing the integration and the reconciliation of settlement accounts and their ledgers. So far, experiments with DLT experimentations point to the potential for financial infrastructures to move towards real-time settlement, flatter structures, continuous operations, and global reach. Testing in large-value payments and securities settlement systems have partly demonstrated the technical feasibility of DLT for this new environment. The projects examined analyzed issues associated with operational capacity, resiliency, liquidity savings, settlement finality, and privacy. DLT-based solutions can also facilitate delivery versus payment of securities, payment versus payment of foreign exchange transactions, and efficient cross-border payments.

The Economics of Distributed Ledger Technology for Securities Settlement

We apply economic principles to understand how distributed ledger technology (DLT) might impact the innovation process and eventual market structure in the security settlement industry. Our main conclusions are that: i) Although DLT has the potential to significantly reduce costs in securities settlement, implementation is challenging, ii) technological innovation in the post-trade industry is more likely to succeed with some degree of coordination, which could be facilitated by the relevant authorities, and iii) DLTbased securities settlement is likely to be concentrated among few providers which, absent any regulation, could result in inefficient monopoly pricing or efficient price discrimination with service providers capturing much of the market surplus

Shaping success through creative failure: A historical sensemaking analysis of the computerisation of the UK financial market

This article draws on the concept of sensemaking and sensegiving to examine how the failure of a project, TAURUS, influenced the successful development of an innovative security settlement system, CREST, which has shaped the computerisation of the wholesale UK financial industry. We use a historiographic interpretative approach to analyse publicly available documents, via three theoretical constructs that have emerged from combining business history and organisational studies literature. First, we define historical sensegiving as the ability to shape contextually the way others make sense of complex historical situations. Second, we establish the sensemaking of failure, which is the ability to make sense of failure in a historical context. Finally, we find that historical enactment supports the creation of structures and events by bracketing them in a historical context. We coin the term ‘creative failure’ to characterise how failure can be reimagined as a route to creative success through a sensemaking process.

Publish Offer. Official Quotation.

For the publication 2020-21.04 we looked at the legislative evolution in the context of the conditions for the admission of securities to the official listing of a stock exchange starting from 1979; we have considered the changes introduced in the Italian legal system introduced with the stability decree of 2014 with reference to the increased vote and multiple vote, that make changes to the provisions regarding the obligation to publish a takeover bid, including in the limit beyond the holding of a stake of more than 30% also the availability of a voting right of more than 30% following purchases. We carried out a study on the official listing on the stock exchange regulated by Directive 2001/34/EC, taking a look at the legislative changes since 1979 at the EU level and which led to the same directive; further studies were of interest to the public prospectus with reference to the requirements relating to the preparation, approval and dissemination. In the last paragraph we took a look at the regulation (EU) 909/2014 (CSDR) concerning central depositories that improves the securities settlment operated by CSDs, considering the systemic importance they assume in this role for the functioning of the securities markets. The commission has issued provisions aimed at increasing the prudential requirements established by the CRD IV regulation which regulates access to credit institutions, both for depositaries and for the same credit institutions when they provide the accessory banking services defined by the CSDR regulation for a securities settlement system has also sanctioned the prohibition of providing other banking services by the same legal entity to reduce exposure to the risk of bankruptcy, considering the application of limited liability for corporations and the article 44 paragraph 1 subparagraph 1 letter b and f that the relative subparagraph 3, of the BRRD directive (2014/59/EU). In the appendix we are interested in the additions made by the European Commission to the market abuse regulation, regulation (EU) 596/2014, with reference to the provisions of article 16 concerning the harmonization of a single model for reporting transactions and information deemed suspicious (STOR).