Securities Settlement Research Articles

Europe’s plumbers: Keeping capital flowing

The Eurosystem contributes to making sure Europe has the infrastructure it needs so that money and financial assets can flow safely and efficiently within and across European borders. This paper looks at the latest piece of the financial market infrastructure to have been put in place: TARGET2-Securities, or T2S. This pan-European securities settlement platform brings an array of benefits to the markets in terms of lower prices, more efficient and standardised settlement practices, better collateral management and more competition. But it also benefits Europe’s economy more broadly by bringing greater financial stability and making Europe a more attractive place for investors both at home and abroad. With the migration of European markets to the T2S platform over the course of the next two years, these benefits will increasingly come to fruition. T2S, together with the other initiatives in this field that the Eurosystem will focus its efforts on over the next few years, will move Europe ever closer to the goal of a true single market in Europe.

Money laundering and Greek banking payment and settlement systems

Purpose – The purpose of this paper is to identify, categorize and describe the Greek banking payment and settlement systems and the way to SEPA. Also, the purpose is to describe authorities that supervise money laundering through Greek payment systems and identify major categories of suspicious transaction reports and amounts of criminal assets per each category. Design/methodology/approach – The Bank of Greece, central bank of Greece, has explicit tasks in the field of payment and settlement systems. In Greece, there are three payment and settlement systems: large-value payment system (TARGET2), retail payment systems and securities settlement systems. Findings – TARGET2 is based on a technically centralized platform (single shared platform – SSP), which is provided by the central banks of Germany, France and Italy, and it replaces the decentralized structure of the original TARGET system. Migration on TARGET2 took place in Greece on May 19, 2008. Ongoing cooperation between the European System of Central Banks and the banking community through extensive consultations facilitated the smooth migration to TARGET2. Retail payment systems consist of DIAS credit transfers, direct debits, check, ATM transactions and card payments. During the year 2013, DIAS cleared 144.13 million payment transactions with a total value of €184.1 billion. Most of the transactions were credit transfers SEPA compliant. Securities settlement systems operate on the delivery versus payment principle, whereby sales of securities and respective payments are affected simultaneously, as well as the principle of dual notice. Migration of Greek data systems toward SEPA through a regulatory framework will promote the use of common European standards and business practices for a fully automated and efficient processing of payment instruments. Bank of Greece and Greek Anti-Money Laundering and Counter Terrorist Financing Authority are responsible authorities to supervise illegal activity through bank payment systems. Data show that Greek bank payment systems were used during 2012 for tax evasion and for offences that result in imprisonment for over six months. Practical implications – Above findings are useful for information technology management, legislative and compliance authorities, investors and person that operate transactions with Greek banking payment and settlement systems. Originality/value – To the best of the author’s knowledge, it is the first study about Greek banking payment systems.

Republic of Moldova: Financial Sector Assessment Program-Oversight and Supervision of Financial Market Infrastructures (FMIS) and Risk Assessment of Central Securities Depositories-Technical Note

Moldova has a modern interbank payment system that lies at the heart of its financial markets. The Automated Interbank Payment System (AIPS) settled on average MDL 2 billion (US$ 214 million) per day, or 2.7 percent of GDP in 2013. It has real-time gross settlement features that help reduce systemic risks, settles large-value and time-critical payments, and is interdependent with two securities settlement systems. This includes the central bank’s Book-Entry System (BES) that handles government securities and central bank certificate settlements, and the National Securities Depository (NSD) that settles private sector securities trades. It largely met international standards in the FSAP Update of 2008. A self-assessment of the BES against the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs) has been completed in December 2013 by the NBM. The preliminary results suggest full observance with 11 principles and broad observance with three principles (Principle 1 on Legal Basis, Principle 22 on Communication Procedures and Standards). They are currently under the peer review process by the National Commission for Financial Markets (NCFM).

Capital Markets Union, Investment Securities and the Tradition of Casting Liquidity into the Law

The latest version of this paper is available at http://ssrn.com/abstract=2697718.Since markets have elevated intermediation to become the organising principle of securities transactions, legal certainty regarding the enforceability of rights in securities has been exchanged for considerably increased levels of liquidity. This happened incrementally on the basis of three major developments that were only poorly accommodated by the law. As a result, securities holders and takers of securities collateral have to rely on the solvency and regulatory compliance of their intermediaries, instead of enjoying a right that is good against everybody. In this context, the potential of the ‘blockchain’ is discussed intensely since very recently and is by most expected to revolutionise the practice of securities settlement. However, the relationship between blockchain technology and enforceability of rights in securities is still entirely unclear. This article traces how the tandem of practice and law of securities settlement has developed over the past 200 years. On this basis, it outlines the conditions under which the introduction of blockchain technology in securities settlement will be beneficial, in terms of both liquidity and legal certainty.

Capital markets integration: A sociotechnical study of the development of a cross-border securities settlement system

Digital information and communications technologies (ICTs) are transforming capital markets. The integration of capital markets is seen as one such area of transformation. The research presented in this article studies one integration initiative that took shape around the proposed combination of a number of key European securities marketplaces through the development of a cross-border settlement system. Taking a sociotechnical approach, the research presents the positions of the key actants identified in relation to key controversies regarding the development of the settlement system and shows how the relations between the controversies and the positions of the actants involved in them evolve. By examining the role of ICTs in the evolution of these relations, the study seeks to illuminate the complex causalities between the social and technical aspects of cross-border capital market integration. The article argues that in addition to enabling the interconnecting of an expanded set of transacting parties, ICTs bring important cognitive dimensions that enable the inspiration, planning, and foresight necessary for both developers and market participants to formulate their plans, strategies, and positions vis-à-vis the expanded and transformed marketplace arrangements.

Central Securities Depositories Regulation: The next systemic crisis waiting to happen?

Central securities depositories (CSDs) are essential infrastructures within the securities market. Historically, they were natural monop­olies serving many functions and providing many services, but now they are being regulated and their role closely defined, with some activities curtailed and then subjected to competition with the objective of forcing rationalisation and consolidation of the European post-trade landscape. The Central Securities Depositories Regulation EU (No. 909/2014) of the European Parliament and of the Council dated 23rd July, 2014 (CSDR) seeks to increase the safety and efficiency of securities settlement and settlement infrastructures. This paper will explore the likely impact of CSDR on the European landscape. The author’s view is that, instead of increasing safety and efficiency as CSDR is supposed to, the consequences will increase the systemic risk within the European capital markets. The question is whether CSDR will be able to solve more problems than it causes, and whether or not CSDR in fact may be the next systemic crisis waiting to happen.

Regional Settlement Infrastructure and Currency Internationalization: The Case of Asia and the Renminbi

The squeeze in United States dollar liquidity that emerged with the global financial crisis highlighted the risks inherent in the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy continues to expand, its dependence on the US dollar is bound to increase, raising further its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability. As demonstrated by the renminbi trade settlement scheme piloted between the People’s Republic of China; Hong Kong, China; and Macao, China, the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the United States dollar. As most central banks are securities depositories of government bonds, combining trade settlement with government bond securities settlement could also have large synergy effects without substantial extra costs. This proposal does not require full liberalization of the capital account or full deregulation of capital markets, and is more politically feasible in transition. As such, extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.

Optimal Decomposition of Service Level Objectives into Policy Assertions.

WS-agreement specifies quality objectives that each partner is obligated to provide. To meet quality objectives, the corresponding partner should apply appropriate policy assertions to its web services and adjust their parameters accordingly. Transformation of WS-CDL to WSBPEL is addressed in some related works, but neither of them considers quality aspects of transformation nor run-time adaptation. Here, in conformance with web services standards, we propose an optimal decomposition method to make a set of WS-policy assertions. Assertions can be applied to WSBPEL elements and affect their run-time behaviors. The decomposition method achieves the best outcome for a performance indicator. It also guarantees the lowest adaptation overhead by reducing the number of service reselections. We considered securities settlement case study to prototype and evaluate the decomposition method. The results show an acceptable threshold between customer satisfaction—the targeted performance indicator in our case study—and adaptation overhead.

Mapping the Cyber Security Dilemma. Selective Theoretical Remarks

To date only a few scholars and security studies experts around the world referred explicitly the cyber security dilemma within their research works. As I generally agree with Nicholas Rueter and Mike McConnell findings on this topic, I strongly believe the classical security dilemma framework – as defined and conceptualized by Robert Jervis previously, emerges within cyberspace undoubtedly. In other words, in terms of cyber security, this paper aims to identify and reveal the most likely elements which describe the both cyber security dilemma escalation and de-escalation (referred herein as “ease” or “settlement”). Therefore, I focus my attention on continuing Rueter’s work, by stepping forward his theory in terms of factors or behavior leading to the occurrence and escalation of cyber clashes among international “cyber stakeholders”. Last but not the least, I describe and review briefly the cyber security dilemma escalation and settlement pattern.

An Efficient Approach for Detection of Wormhole Attack in Mobile ad-hoc Network

Mobile ad hoc networks (MANETs) consist of a collection of wireless mobile nodes which dynamically exchange data among themselves without the reliance on a fixed base station or a wired resolution network. MANET nodes are typically well known by their precise power, transformation, and memory effects as well as high degree of mobility. In MANET mobile node is responsible for route establishment using wireless link where each node behave like both as a host and router. In such networks, the wireless mobile nodes may dynamically enter the network as well as go-ahead the network. Mobile ad hoc network is a group of many more devices or nodes with the capability of communication and networking. MANET encounter by number of security threat because of its open entrusted environment with little security settlement, even if security over MANET is not to be enhance up to satisfactory level because of its characteristics Security is an essential service for wired and wireless network communication. Due to its mobility and self routing effective nature, there are many deficiencies in its security. Various security threats show their impact at different layers, Among all of security thread worm hole is consider to be a very serious security thread over MANET. In wormhole two selfish node which is geographically very far away to each other, makes tunnel between each other to cover their actual location and try to believe that they are true neighbors and makes conversation through the wormhole tunnel. Wormhole attacks enable an attacker with limited resources and no cryptographic material to wreak havoc on wireless networks. For wormhole attack to have a best impact on the wired or wireless network, it must fascinate a huge amount of network traffic which is done by giving a shortest route to destination in the network. Therefore, the routes going through the wormhole must be shorter than alternate routes through valid network nodes. This Paper focuses on threat that wormhole attack possesses on network and also mentions few of the initiatives with their respective specifications to solve the problem of wormhole attack.

Cross-border securities settlement in Europe: Improvements so far

The post-trade market in Europe is still fragmented. Differences in market practices have led to inefficiencies in a cross-border context. Integration of the European post-trade industry should lower cross-border settlement costs to the level of domestic transactions, while breaking down the Giovannini barriers by market parties should improve European Union (EU) clearing and settlement arrangements. This paper focuses on the efforts of the post-trade industry regarding the Giovannini industry-related barriers and what has been achieved so far. The market parties are well on track. The post-trade industry has introduced several standards and harmonised procedures to which they have committed themselves. Costs and prices of both domestic and cross-border transactions have come down. Regulation (Central Securities Depository (CSD) Regulation, Securities Law Legislation etc) can help to further improve efficiency in the post-trade environment and enhance market integration, in addition to the Eurosystem TARGET2-Securities (T2S) platform, which will provide cross-border securities settlement as of June 2015 in Europe in central bank money (e). Further harmonisation — both within and outside of the context of T2S — is needed, which ultimately should lead to more efficiency and lower costs in the EU.

Optimal central securities depository reshaping toward TARGET2-Securities

TARGET2-Securities (T2S) is the single and harmonized IT platform for securities settlement in central bank money, developed by the Eurosystem to promote integration in the European post-trading industry, and will go live in 2015. Central securities depositories (CSDs) joining T2S thus face the need to determine the degree to which they should reshape, that is, adapt their own IT infrastructure, human resources and business strategy to T2S. A more complete reshaping entails higher immediate fixed costs, but allows us to benefit the most from the cost reduction allowed by T2S. In this paper we use a game-theoretic approach to model the strategic choice of the CSDs. We then derive several results from this model. In particular, we give closed-form solutions for the degree of optimal reshaping and the optimal prices set in the unique equilibrium if the time horizon is finite. In the case of an infinite horizon we give a sufficient and necessary condition for the existence of another subgame perfect Nash equilibrium in which CSDs continually delay the decision to reshape.We argue this equilibrium is not robust and provide a condition under which a given CSD will always reshape, whatever the other CSDs'strategy. We note that by adjusting the cost function and the interpretation of the reshaping parameter, the same game-theoretic framework can be used to model the decision to join or not to join T2S.

Practical development of a CCP risk management system for institutional investor settlement in the Korean stock market

The authors have redesigned the logic for setting the net debit cap and provided the architecture for a credit and market value at risk (VaR) measuring system for risk mitigation in institutional investor settlement in the Korean stock market, where the Korea Securities Depository (KSD) as a central counterparty (CCP) assumes the payment obligation of participants and settles by DVP2 on settlement date T + 2. In total, 6,345 data points of net settlement funds from 16th January to 27th August, 2012, were used for 89 members to redesign the logic of the net debit cap and 11,541 data points of net settlement funds from 16th January to 27th August, 2012, were used for the 125 account groups (a set of securities settlement accounts designated for participants’ convenience, such as management of margin surplus value and payment and delivery of settlement fund) to calculate risk exposure. For setting the net debit cap, all data were divided into four different groups by quartile and four different net debit caps on quartile 3 were set, with 75 per cent points for each group. According to the simulation result, the total amount of the guaranteed net settlement fund could be reduced by 52.22 per cent while maintaining operational efficiency of members. In addition, 62 artificial default rates for credit VaR were generated by using the bond default rates of the Korea Financial Investment Association (KOFIA) and the global and Asia-Pacific corporate default rates of Standard & Poor’s (S&P). For market VaR, the International Monetary Fund (IMF) crisis, 9/11, sub-prime crisis and Lehman’s bankruptcy were chosen to build the ‘stress-test’ environment. Four risk exposures — ‘high risk’, ‘risk’, ‘semi risk’ and ‘low risk’ — of the net settlement fund were devised for measuring the degree of risk exposure of the net settlement fund. For further study, measurement of a net debit cap to be calculated with an average of three highest values may not be sufficient, so, alternative methods to measure the optimal number of settlement funds to represent the whole settlement fund may be needed.

COURT-APPOINTED NEUTRAL ECONOMIC EXPERTS

Complex civil litigation routinely includes expert economic testimony. However, it may be hard for a jury to determine at trial which expert economist is more credible, and it may be hard for the judge to determine at the Daubert hearing whether the methodology upon which a given expert economist relies is intellectually rigorous enough to produce results that constitute admissible testimony. One solution rarely employed is for the court to appoint its own neutral economic expert under Rule 706 of the Federal Rules of Evidence when a lawsuit contains a claim for damages that will require rigorous analysis of data. Based on my recent experience as Judge Richard Posner’s court-appointed economic expert on damages in patent infringement litigation, I explain how the wider use of Rule 706 would assist the judge and jury and would facilitate the prompt settlement of intellectual property, antitrust, securities, contract, business tort, and other complex disputes. The benefits to courts and litigants would surely exceed the costs.

A Practical Approach to International Monetary System Reform: Building Settlement Infrastructure for Regional Currencies

The squeeze in US dollar liquidity that emerged with the global financial crisis highlighted the risks associated with the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy expands further, its dependence on the US dollar is bound to increase, raising even more its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability. As demonstrated by the renminbi trade settlement scheme piloted between the People’s Republic of China and Hong Kong, China, the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the US dollar. As most central banks are securities depositories of government bonds, combining trade settlement with government bond securities settlement can also have large synergy effects without much extra costs. This proposal does not require full liberalization of the capital account or full deregulation of capital markets, and is more politically feasible in transition. As such, extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.

Facilitating Investor Engagement and Stewardship

This article puts forward the idea that the creation of an online review facility where all market participants are able to review and rate all companies listed in a particular market would solve a number of problems that currently prevent shareholders, in particular institutional investors and the ultimate beneficiaries of investment vehicles such as pension funds, from engaging with companies. It would also allow shareholders and stakeholders with a long-term focus to engage with companies. It is suggested that all listed companies should be required to have a link to this review and rating facility on their website. Listed companies should have the ability to respond to the reviews and ratings on the site. Furthermore, the review facility should be regulated. The arrangement currently used for appointing and overseeing the operator of the UK securities settlement system could serve as a model.

Court-Appointed Neutral Economic Experts

Complex civil litigation routinely includes expert economic testimony. However, it may be hard for a jury to determine at trial which expert economist is more credible, and it may be hard for the judge to determine at the Daubert hearing whether the methodology upon which a given expert economist relies is intellectually rigorous enough to produce results that constitute admissible testimony. One solution rarely employed is for the court to appoint its own neutral economic expert under Rule 706 of the Federal Rules of Evidence when a lawsuit contains a claim for damages that will require rigorous analysis of data. Based on my recent experience as Judge Richard Posner’s court appointed economic expert on damages in patent infringement litigation, I explain how the wider use of Rule 706 would assist the judge and jury and would facilitate the prompt settlement of intellectual property, antitrust, securities, contract, business tort, and other complex disputes. The benefits to courts and litigants would surely exceed the costs.

France: Financial Sector Assessment Program—Detailed Assessment of Observance of CPSS/IOSCO Recommendations for Securities Settlement Systems and for Central Counterparties

France: Financial Sector Assessment Program—Detailed Assessment of Observance of CPSS/IOSCO Recommendations for Securities Settlement Systems and for Central Counterparties

India: Financial Sector Assessment Program—Detailed Assessments Report on CPSS IOSCO Recommendations for Securities Settlement Systems and Central Counterparties

India: Financial Sector Assessment Program—Detailed Assessments Report on CPSS IOSCO Recommendations for Securities Settlement Systems and Central Counterparties

A central bank perspective on liquidity management

This paper investigates the main liquidity management infrastructures and their recent development from a central bank perspective. Liquidity and liquidity management are defined and the functions and benefits of real-time gross settlement and payment-versus-payment systems are explained, leading to a discussion of several developments in infrastructures. For large-value payment systems the topics are standards, robustness and direct participation. For secured lending the issues covered are repo market funding, collateral, central counterparties and securities settlement. For central bank collateral management the focus is on harmonization, tri-party services, quality and efficiency. The paper proposes improvements in all these areas.