Clearing and Settlement for PanEuropean Securities Trading

1
Clearing and Settlement for Pan-European
Securities Trading

• Iain Saville, CEO CRESTCo Ltd
• 22 June 2000

2
What does the future hold?

• Trading some securities on multiple electronic
  platforms
• 24-hour trading of global securities
• But local securities still exist
• Increasing volumes
• Central counterparty
• netting, cross-margining, cross-collateralisation
• Importance of risk control measures
• Global investors - retail as well as wholesale

3
The European landscape

• A single currency not yet a single securities
  market
• Multiple interfaces
• Markets with different structures, law,
  regulation
• ...and taxes .. of all sorts
• Rapidly evolving trading environment
• Fragmented liquidity - in trading and settlement
• Duplication in clearing and settlement solutions
• Equity liquidity remains in domestic markets
  domestic CSDs

4
Are securities homogenous?

• Bonds Equities
• stable volumes very rapid growth
• little retail lots of retail
• simple benefits complex corporate
  actions
• little voting complex
  governance issues
• vanilla x-border big national
  differences
• tax is simple complex,
  includes txn taxes
• Pace of system consolidation may need to be
  different

5
Risk Control

• Challenges and one national response
• Capacity risk . Move to 1 mn transactions per
  day next summer (4 mn easily possible)
• Payment risk ..Central bank money by end 2001
• Title risk Change in law later this year
• Counterparty risk. Central counterparty with LCH
• and move to T3

6
The Best and the Good

• economies of scale from single system
• if one size can fit all
• how many sizes can Europe afford?
• retail versus wholesale .. or together?
• commodity versus global custodian
• standardisation versus innovation (internet
  impact)
• local ggods and the European best?
• Consolidation is the future
• but to a competitive or monopoly industry?

7
Approaches to integration

• Technology... and business model
• One single platform fits all
• and/or networked solutions?
• For profit, competitive
• and/or mutually owned?
• Business merger first
• or deliverables driven?

8
What is on offer?

• Euroclear Sicovam Euroclear (two hubs)
• Cedel DBC Clearstream (one hub)
• Build on national CSDs The Settlement Network

9
The Settlement Network

• A partnership between CREST and SIS
• Open to other (I)CSDs
• Focus on deliverables, not ownership
• A single integrated process for holding and
  settling securities at low cost, regardless of
  the location or nationality of the securities or
  the counterparty

10
Core principles of TSN
1. Provide enhanced and economical
services 2. Buy services from each other 3. Run
on commercial lines, but not for
profit 4. Open-book accounting approach 5. One
link only from inner CSDs to outer
CSDs 6. Co-ordinate development plans 7. Joint
discussions with other partners in the
industry 8. Admission of new members with 2/3
majority 9. In due time, design and build a
single settlement platform 10.Develop partnership
in line with ESF
11
CSD of choice as gateway to Network
Exchange
12
Access to CSDs outside the Network
Exchange
13
And central counterparty (-ies)
Exchange
LCH
CCP
14
Continuous succession of deliveries
2000
2001
1999
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
15
The LSE and DBAG

• Agreement about trading system.. Xetra
• Clearstream not an asset of iX
• Decisions on clearing and settlement still to be
  taken
• Especially in the central counterparty space
• Clearstream and CREST are working together as
  partners to support the customers of the new
  exchange - deliverables driven

16
The PEX solution

• DvP in multiple currencies (euro, , CHF)
• matched feed from trading platform
• each counterparty can be in any of the TSN hubs -
  same process
• single customer interface to all TSN hubs
• central counterparty

17
LCH/CREST central counterparty

• No duplicate investment
• LCH provides balance sheet
• LCH takes and manages margin
• margin efficiency
• CREST logs and maintains transaction database
• CREST calculates positions and nets
• Same STP for gross and net
• Readily re-usable for other markets

18
What the market needs - CCP
Market needs

• A single central counterparty balance sheet.
• to deliver efficient collateral use
• across the whole range of securities and
  derivatives
• ..independent of exchanges and CSDs
• doubtless with multiple subsystems covering
  different market segments

19
Market Structure
Our vision
PEX
SWX
DBAG
LSE
ECNs
OTCs
CENTRAL COUNTERPARTY CCP
CREST
SIS
CSDs
GERMAN EQUITIES