Issues on Developing Electronic Trading and Efficient Clearing and Settlement Systems

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Issues on Developing Electronic Trading and
Efficient Clearing and Settlement Systems

• Dr. Salman Iqbal
• Damascus, Syria, 2-3 December 2007

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Presentation Layout
The presentation covers

• Capital Market Structure is based on three key
  areas Trading, Clearing and Settlement and
  Depository Functions
• Pains and Gains of Electronic Trading, Settlement
  and Depository
• Risk Management Areas
• Operational Challenges in an automated
  environment
• Technical Challenges - IT infrastructure,
  Security and Control

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Capital Market Structure
There are three basic functions performed while
trading in securities

• Trading Function Trading of securities through
  trading interface provided by the Stock Exchange
• Clearing Settlement Function Settlement of
  securities as well as cash, through the Clearing
  Settlement System (CSS)
• Depository Function Custody and movement of
  Securities, through a Depository System (DS)

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Participating Entities
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Order/Trade Flow in Automated Environment
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Depository Network
Exchange 1 Network
Exchange 3 Network
Exchange 2 Network
Complete Network
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Electronic Trading Features

• Diverse Markets can be supported
• Ready Market for Cash Trading
• Carry Over or Financing Market for Leverage
  Trading
• Derivative / Futures Market for Hedging
• Straight Through Order Processing Highly
  Efficient Mechanism
• Access to Live Market
• Real Time Confirmations - Efficient/Transparent
  Trading Paradigm
• Auto Risk Management Pre-Trade Risk Averse
  Strategy
• Real-Time Market Surveillance Detect Market
  Manipulation
• Auto Pay and Collect Bank Integration with CSS
• Real-Time Technical Analysis More Informed
  Trading Decisions

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National Clearing Settlement Features

• The outstanding positions of securities as well
  as cash of the stock broker traded on stock
  exchange is settled through an automated clearing
  settlement system based on settlement cycle,
  such as T1, T2, T3 etc.
• The cash is handled through the designated
  commercial banks, known as the settling banks.
• The securities are maintained and transferred
  using the depository system.
• Normally clearing, settlement and depository
  functions are with one agency, with trading under
  the exchange company

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Major Benefits of National Clearing Settlement
System

• It performs netting for both cash securities.
  Intra and Cross exchange netting is performed on
  Clearing Settlement System (CSS)
• Settlement of non-broker institution transactions
  directly with the Clearing Company using the CSS
• Registration of Unique Identification Number
  (UIN) of all clients with codes making the market
  highly transparent
• Automated Pay and Collect System directly with
  the Settlement Bank same day settlement

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Money Default ManagementActions taken by
Clearing Company in case of Suspension or
Restriction

• Determination of Final Loss when Clearing Member
  Fails to Pay
• Square-up/close out the unsettled positions and
  determine the final loss
• Serve final loss notice to defaulter CM to pay
  such amount by the next business day
• Declaration of CM a Defaulter by a Stock Exchange
  or by the Company (Trading rights are suspended)

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CSS Risk Management Controls and Checks

• Collect Margins on CMs exposure and mark to
  market requirements through CSS or by the
  Exchanges on the trading systems or even both
• Movement of Securities Bought securities are
  delivered to buying CMs DS main accounts in
  blocked status. Blocked securities are available
  to buying CMs DS main accounts after discharging
  their obligations.
• Short Deliveries Debits In case of short
  deliveries by designated time system additionally
  debits CMs accounts with the previous day
  Closing Prices (i.e., System Prices) with 15
  margin of late/fail deliveries.
• Retrieval Securities In case of money default by
  CM, blocked securities in his DS main account are
  retrieved for selling-out.
• 
  

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Central Depository System (DS)

• Depository System is an electronic book entry
  system to record and transfer securities.
  Electronic book entry means that the securities
  do not physically change hands and the transfer
  from one client account to another takes place
  electronically.
• Participants / Account Holders (Brokers)
  Maintaining Accounts in DS for custody and
  delivery of Securities
• Issuers Companies issuing of securities
• Eligible Pledgees Banks and other Financial
  Institution lending against securities

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Benefits of DS

• Reduced workload manpower requirements due to
  paperless settlement
• Instantaneous transfer of ownership
• No risk of damaged, lost, forged or duplicate
  certificates
• No impact in case of sudden increase in
  settlement volumes
• Instant credit of bonus, rights and new issues
  (IPO)
• Convenient pledging of securities

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OPERATIONAL CHALLENGES IN IMPLEMENTING ELECTRONIC
TRADING, CLEARING AND DEPOSITORY SYSTEMS

• Formulation and promulgation of necessary laws
  Electronic Trading/Settlement Depository has
  set of different challenges e.g. authentication
  and non-repudiation of transaction should have
  legal backing, paperless share holding etc.
• Formulation of comprehensive Regulations
  Procedures to serve as SOPs for the relevant
  body.
• Confidence building of the different segments
  being affected by the implementation of the
  automated systems like the Listed Companies,
  Stock Brokers, Financial Institutions, Share
  Registrars and General Public at large.

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OPERATIONAL CHALLENGES IN IMPLEMENTING ELECTRONIC
TRADING, CLEARING AND DEPOSITORY SYSTEMS

• Develop a well trained Trainer Support staff
  for giving training and customer support to all
  the relevant parties.
• Impart proper training to the relevant segments
  listed above.
• Ensure ample mock sessions for the market players
  to feel comfortable with the new systems.
• Ensure proper Customer Support during the mock
  sessions for proper hands on training of the all
  the users. A proactive approach by the support
  staff to ensure users fully utilize the mock
  sessions.

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OPERATIONAL CHALLENGES IN IMPLEMENTING AUTOMATED
TRADING, CLEARING AND DEPOSITORY SYSTEM

• Energetic and ample Support force to ensure
  proper transition to the automated system.
• Ensuring proper IT support to the relevant
  segments in setting up the automated systems.
• Arrange ample seminars and public lectures for
  educating different market players and masses at
  large.
• Proper advertisement in the media for information.

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Security / Control Features

• Some of the Security Control Features built in
  the Trading, Clearing Settlement and Depository
  Systems are
• Contingency Site
• Terminal Authentication
• Private-Wire Firewalls
• User Id Password Authentication
• Segregation of Save Post mode authorities
• Access only to authorized users
• Daily review of logs by department and Internal
  Auditor
• Disclosure of information strictly in accordance
  with the provision of the law
• Annual review to ensure compliance with the
  Regulations

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Technical Challenges in setting up a new Trading,
Clearing and Settlement System

• Highly skilled IT Setup
• Extensive Hardware / software platform
• Hardware Redundancy, Backup and Failure Switch
  Over Capability
• Extensive database administration and performance
  tuning
• Extensive Networking with redundancy and backups
• IT security OS, network, DB, viruses etc
• Highly skilled business users who are proficient
  with computers
• Reliability of hardware platform and network
• Reliability, extensive QA and low bug count in
  trading / clearing software
• Provisions of prompt support and fixing in case
  of live hardware/software problems service
  level agreements, service time guarantees

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Conclusions

• Formulation and promulgation of necessary laws
  for Electronic Trading, Clearing, Settlement and
  Depository
• Bring on-board all the participating segments,
  impacted by the implementation of the automated
  systems, like the Listed Companies, Stock
  Brokers, Financial Institutions, Share Registrars
  and General Public at large. Get feedback to
  evolve the right application model compliant to
  business needs
• Choice of an experienced application and
  technology partner in capital market segment who
  is able to handle all the phases of the project
  from initial design to deployment and training of
  all the participants

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Thank You