GLOBAL Clearing Settlement AND - clearing and settlement infrastructure and inconsistent business practices

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  • G R O U P O F T H I R T Y 30

    ClearingClearing Settlement

    A Plan of Action

    GLOBAL AND

  • All members of the Steering Committee served in their personal capacities. The views expressed in this report do not necessarily reflect the views or policies of their respective institutions, nor does publication of the report by the Group of Thirty imply an endorsement of the views expressed herein.

    Copies of this report are available for $60 from:

    Group of Thirty 1990 M Street, N.W., Suite 450

    Washington, DC 20036 Tel: (202) 331-2472 · Fax: (202) 785-9423

    WWW – http://www.group30.org E-mail – info@group30.org

  • Global Clearing and Settlement A P L A N O F A C T I O N

    Group of Thirty©

    Washington, DC

    2003

  • iii

    CONTENTS

    Foreword, by Paul Volcker and Jacob Frenkel ...................................................................................................... v

    Chairman’s Message, by Sir Andrew Large ......................................................................................................... vii

    Steering Committee Members ............................................................................................................................ ix

    Acknowledgments ................................................................................................................................................ x

    Executive Summary ............................................................................................................................................... 1

    Chapter 1. Clearing and Settlement: What Is at Stake? .....................................................................................13

    Chapter 2. The Current State of Affairs ...............................................................................................................21

    Chapter 3. Building an Efficient, Interoperable Network .................................................................................... 25

    Recommendations 1-8 ................................................................................................................................. 29

    Chapter 4. Ensuring Safety and Stability ............................................................................................................ 35

    Recommendations 9-16 ...............................................................................................................................40

    Chapter 5. Governance: The Key to Reform.......................................................................................................49

    Recommendations 17-20 .............................................................................................................................50

    Chapter 6. From Recommendation to Implementation ......................................................................................57

    APPENDIXES

    Appendix 1. Detailed Background on the Recommendations ........................................................................... 67

    Apppendix 2. Conduct of the Study .................................................................................................................125

    Glossary ............................................................................................................................................................ 133

    Group of 30 Publications since 1989 ................................................................................................................ 135

    Group of 30 Members ......................................................................................................................................137

    FIGURES AND TABLES

    Figure 1-1. U.S. Activity in Foreign Securities versus

    Foreign Activity in U.S. Securities, 1980–2001 ............................................................................................... 17

    Table 6-1. Implementation Targets for the Private and Public Sector ................................................................. 61

    Table A2-1. Contributing Organizations ...........................................................................................................126

  • iv

    Table A2-2. Organizations Interviewed ............................................................................................................. 127

    Table A2-3. Related Studies Examined ............................................................................................................. 128

    BOXES

    1-1. Interoperability .............................................................................................................................................14

    2-1. System Components .................................................................................................................................... 22

    3-1. Participants in the Clearing and Settlement Process ................................................................................... 28

    A2-1. Individual Contributors ............................................................................................................................ 131

  • v

    FOREWORD

    v

    THE GROUP OF THIRTY COMMISSIONED THIS STUDY of global securities clearing and settlement arrange- ments out of concern that unevenly developed national clearing and settlement infrastructure and inconsistent business practices across markets could be a source of significant systemic risk, and certainly of inefficiency. Given rapid growth of debt, equity, and derivatives trading, both generally and cross-border, the wrong combination of market shocks and financial disloca- tions might be sufficient to overtax the infrastructure on which the functioning of global markets depends.

    With these concerns in mind, the Group of Thirty recruited a senior group of private executives and pub- lic officials to serve on the project’s Steering Commit- tee, and Andrew Large agreed to serve as its chair. Eleven members of the Group of Thirty itself and a dozen others joined him on the Committee, which undertook the substantial challenge to investigate the complex in- stitutional structures and processes that characterize glo- bal clearing and settlement. Their aim was to improve both the safety and efficiency of these global processes.

    The Committee began by assembling a formidable array of talent to complete the body of work that is catalogued in this report. Over the course of two years, survey teams and working parties analyzed cur- rent industry conditions, evaluated current practice and latest supervisory guidance, and framed propos- als for making the system safer and more efficient. If the hours of effort devoted to this venture by its many contributors were fully valued, it would certainly constitute a multi-million dollar enterprise.

    The particular focus of the exercise was the set of challenges arising from cross-border trading. Trades are moving across borders without support of com- mon — or even consistent — structures, performance standards, or operational rules. Achieving consistency will require far-reaching change, from purely technical

    and operational matters to risk management and gov- ernance practices. The Steering Committee devised a three-pronged strategy to accomplish this, including:

    � Technical and business practice standards intended to strengthen the connections across borders and systems;

    � Stronger risk management, including the stronger legal guarantees necessary to provide a solid legal basis for clearing and settlement; and

    � Improved governance by private boards, supported by official supervision and fair and open access to systems.

    The strategy encompasses 20 recommendations that constitute an action plan for global clearing and settlement. The plan is ambitious but it reflects the aspirations of market participants, gives direction to work that is already under way, and provides specific guidance for tackling new areas. Its fundamental logic is that a globally linked marketplace should be sub- ject to global norms.

    Like the Group of Thirty itself, the report seeks to achieve a balance of views and interests, incorporat- ing the best thinking of the private and public sectors. This is important because achieving its objectives will require significant attention from both quarters, along with significant investment by a great many market participants. All of this will take time and it will be important to review progress along the way. To ensure that the issues raised receive the continuing attention they deserve, the Group of Thirty will monitor progress on cross-border reforms going forward.

    The Group of Thirty is pleased to have sponsored this project and we commend its analysis and recom- mendations to all who are concerned about the safety and efficiency of global markets.

    Paul A. Volcker Jacob A. Frenkel Chairman of the Trustees Chairman Group of Thirty Group of Thirty

  • vii

    CHAIRMAN’S MESSAGE

    THE GLOBAL FINANCIAL SYSTEM is only as good as the infrastructure that supports it. And the smooth functioning of that system—and the confidence on which it depends—will be threatened if the infrastruc- ture is unreliable. Unfortunately attention to the over- all system of global securities clearing and settlement has been in short supply. Meanwhile the process of clearing and settlement has become much more in- terdependent globally, increa