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The impact of the creation of CSDs in CEECs.
Implications for Armenia.
Karine THEMEJIAN (ECB)
Dominique CHABERT (University Lyon 2 / GATE UMR 5824 – CNRS)
The views expressed herein are solely those of the authors and do not represent the views of the European Central
Bank
General framework
Market infrastructures: critical component of operational efficiency of markets
Focus on one of the components of financial infrastructure: CSDs as « organic links » between issuers and investors
Purpose of our presentation
Present the impact of the creation of CSDs in CEECs
Examine the impact of these post-market infrastructures on the development of securities markets and the economy in general
Derive implications for the Armenian case
Outline
The role of CSDs as stabilising institutions for markets (1)
The implementation of CSDs in CEECs (2)
Implications for Armenia (3)
1. CSDs functions within a domestic area: post-market stabilisation
CSDs : a « double-sided market » with: A link to the issuer A link to investors
Issuers CSDInvestors
CSDs functions within a domestic area: post-market stabilisation
CSDs as « notaries » for securities: Keep record of the securities issued in the
country where they operate; Testify to the authenticity and the existence
of outstanding securities CSDs as a « securities carrier »:
Operate one or several SSSs and ensure the circulation of securities within the market
Ensure the traceability of securities flow in a dematerialized environment
CSDs functions within a domestic area: post-market stabilisation
Two parallel worlds: the money world and the securities world
MONEY SECURITIES
Central bank Central depositary
Bank A
Bank B
Custodian A
Custodian B
Agent X Agent Y Agent X Agent Y
CSDs functions within a domestic area: post market stabilisation
Central Banks Hold central
accounts of commercial banks
Operate the interbank systems and notably the RTGS
CSDs Hold central
accounts of custodians
Operate the SSS
CSDs functions within a domestic area: post market stabilisation
A central and ultimate custodian for issuers and investors
A central hub for securities flows For issuers & for investors For market users, banks and investment firms…but…
…not a « Central Bank for securities » ! CSDs are not securities issuers CSDs do not certify the stability of securities CSDs are not « lender of last resort »
CSDs functions within a domestic area: post market stabilisation
CSDs, like Stock Exchanges, can be demutualized
Status of CSDs in the world
private CSD 15%
not-for profit CSDs15%
CSD owned by the stock exchange
30%
Other20%
CSD owned by the Central
Bank20%
Source: Karyotis,2005
CSDs functions within a domestic area: post market stabilisation
CSDs and SSSs: important features of a « financial territory »
Like payment systems, SSSs constitute a tool for the operational efficiency of markets i.e.create the conditions of relationships between issuers and investors with conditions of: security rapidity cost
CSDs functions within a domestic area: post market stabilisation
SSSs cannot be reduced to their technical components. They represent a critical element of the issuance and circulation of property rights.
CSDs as « post-market » centralized actors are not only « back-office » actors.
International standards and recommendations for SSSs (1/3)
International initiatives Private sector level: G30, FIBV, ISSA Public sector level: CPSS and IOSCO with
notably Recommendations for SSSs (2001) risk-based approach covers all countries
But, need to take into account specificities linked to the particular context within a country
International standards and recommendations for SSSs (2/3)
At the European level Standards for securities clearing and
settlement in the European Union Developed by the ESCB in cooperation with CESR Consists in Europeanisation of CPSS-IOSCO
recommendations
Standards for the use of EU SSSs in ESCB credit operations
International standards and recommendations for SSSs (3/3)
For emerging/transition economies: Guadamillas & Keppler (2001): seven features for evaluation Clearing and settlement process Settlement risks Legal issues Regulatory oversight Clearing and settlement institutions Safeguard policies System capacities
2. The implementation of CSDs in CEECs
Criteria for assessment: Guadamillas and Keppler (2001) Level of consolidation of the post-trading
infrastructure, enabling to reap benefits of Economies of scale Economies of scope Network effects
Countries examined 8 CEECs new Member States of the EU (since 1 May
2004) 2 Accession countries
Country Single CSD
Name of CSD
Main functions Name of other CSD / SSS
Main functions
Bulgaria No CDAD Provides settlement services to the Bulgarian Stock Exchange and the OTC market securities depository
BNBG-SSS All kinds of government securities transactions
Czech Republic
No SCP Depository of securities SKDUnivycRM-SystemCentral Bank
Settles short term fixed income securitiesSettles securities listed on the PSESettles securities listed on the RM-System’s marketCentral depository for short-term government debt issues
Estonia Yes ECSD ClearingSettlement of stock exchange and OTC trades
Hungary Yes KELER
Clearing house, central counterparty and settlement agent for securities and derivatives traded on the BSE, BCE and can also settle OTC securities contracts
Latvia No LCD-DENOS
Settlement of private sector securities and government debtsecurities for non-banks. Safe custody; clearing
LB-VNS Settlement services for transactions in Latvian government debt securities (only for banks)
Lithuania Yes CDSL Clearing and settlement services
Poland No KDPW National depository for securitiesClearing and settlement of cash and derivatives transactions
CRBS-SKARBNET
CRBS: register for Treasury billsSKARBNET: book entry settlement system for Treasury bills
Romania No NSCSD Settlement of trades carried on the RASDAQ market BSE-SSSCentral Bank
Clearing and settlement of securities listed on the BSE
Settlement of trades in government securities
Slovakia No CDCP SR Clearing and settlement of all transactions executed on the BSSE and the OTC market
NBS-CR Settlement of trades on the short-term securities market
Slovenia No KDD Securities clearing and settlementActs as the CSD
BOSS Depository and settlement services for Bank of Slovenia tolar bills and foreign exchange bills
The implementation of CSDs in CEECs
Level of consolidation: progresses achieved at varying degrees. 3 main situations: Single CSD acting as central register, clearing
and settlement agent for private securities and public shares
Bicephalous organisation, distinguishing between a single CSD for private securities and the NCB acting as central depository for Government bonds
CSD acting as central depository only, besides other SSSs and the NCB
The implementation of CSDs in CEECs
Criteria defined by Guadamillas and Keppler (2001) Clearing and settlement processes: general
compliance with some exceptions Legal soudness: difficulty to assess Settlement risks: Most of the countries
implement DvP schemes (majority DvP model 1)
Settlement of transfer instructions
Final transfer of securities and funds Potential risks
Model 1 Gross basis Simultaneous settlement of individual securities transfer instructions and associated funds transfer instructions
High fail rates (linked to the need to maintain important money and securities balances) with consequences on replacement cost risk and liquidity risk
Model 2 Gross basis for securities Net basis for funds
Final transfer of securities throughout the processing cycle;Settlement of funds transfer on a net basis with final transfer at the end of the processing cycle
Principal risk (if no additional safeguard)Replacement cost risk and liquidity risk, but reduced thanks to the possibility to settle funds transfer on a net basis
Model 3 Net basis Simultaneous settlement at the end of the processing cycle
Principal risk may occurReplacement cost risk and liquidity riskSettlement bank failure if accounts are not held at a central bankPotential for high liquidity pressures Unwind
The implementation of CSDs in CEECs
Criteria defined by Guadamillas and Keppler (2001) Regulatory oversight: all SSSs are subject to
some form of regulation Clearing and settlement institutions and
their participants: no undue restriction Safeguard policies: various risk control
measures in place System capacities: progress in the
implementation of back up and disaster recovery facilities
The implementation of CSDs in CEECs
Most of these infrastructures comply with the minimum criteria
To what extent has the compliance with international requirements enabled a significant development of markets and the economy?
The implementation of CSDs in CEECs
Overview of market and post-market activity over the past ten years
The implementation of CSDs in CEECs
A relatively low level of market capitalisation
The implementation of CSDs in CEECs
Growth rates of volume of transactions on SEs and of volume of instructions handled by CSDs / SSSs
Country Growth rate of volume of transactions on Trading platforms
Growth rate of volume of instructions CSD
Global growth rate Average growth rate
Global growth rate
Average growth rate
Estonia + 32 % + 3,5 % + 125 % + 10,6 %
Hungary + 359 % + 21 % + 302 % + 19 %
Latvia + 812 % + 32 % + 229 % + 16 %
Lithuania + 679 % + 29,3 % + 1083 % + 36 %
Poland + 110 % + 9.7 % + 60.3 % + 6.1 %
Slovakia + 1472 % + 41,1 % + 1070 % + 35 %
Slovenia + 169 % +13,2 % + 163 % +12,9 %
Source: from ECB, 2006, Blue Book, addendum,
In all countries, a growing trend in market activity and settlement instructions held by CSDs
The implementation of CSDs in CEECs
Securities issues and securities registered between 1996 and 2004 (average annual growth rate)
Value of new issues / securities issued
Number of new issues / Number of securities
issued
Value of securities registered
Number of securities registered
New member states (CEEC countries only)
Czech Republic (val: 1996-2004 / Vol: 1999-2004)
13.46 % 12.5 %
Estonia (2000-2004) 58.4 % 80 % 34.4 % 128 %
Latvia nav nav 23.1 % 4.53 %
Lithuania nav nav 13.12 % - 7.16 %
Hungary 22.8 % - 23.16 %
Slovenia 24.7 % 17.6 %
Slovakia (97-04)BSSE + CSD
51% 60 % 25.5% 19 %
Poland KDPWPoland SKARBNETPoland SEBOP
Value of securities issued and registered Number of securities issued and registered
38.78 % 19.81 %
2.24 %31.6 %
- 0.25 %- 7 %
7.11 %- 9.3 %
- 0.25 %- 32.8 %
Accession countries
Bulgaria CDAD (97 – 04)Bulgaria GSD
nav nav 8 % - 52.5 %
13.9 % - 13.9 %
RomaniaBVB GSS
Value of securities issued and registered Number of securities issued and registered
149 % 21.7 %
27.8 % 6.2 %
Source : data from ECB, Blue Book
Securities issues and securities registered between 1996 and 2004 (average annual growth rate)
The implementation of CSDs in CEECs
In most countries under review, CSDs’ activity in volume & in value of transactions handled went along with the development of the volume of transactions on stock exchanges
A covariation sometimes blurred by the coexistence of several SSSs (for instance when the Central Bank operates a specific system for public bonds)
The implementation of CSDs in CEECs
In most countries, a significant growth of securities issued and securities registered at the national CSD IPO’s and privatisation process Development of mutual funds and pension
funds But, still a shy development
Privatisations have created a flow (not always with the expected effects)
Investment portfolios by non-residents still low
The implementation of CSDs in CEECs
The case of Baltic markets
The Baltic list
The links with OMX Group
The implementation of CSDs in CEECs
In grey : arithmetic scaleIn white: semi-logarithmic scale Data: from ECB, Blue Book
Volumes of trading transactions & of settlement instructions
Estonia
0
50
100
150
200
Year
Vo
l in
Th
ou
san
ds
Vol of transactionsTrading Platforms
Vol.of instructionshandled CSD
The implementation of CSDs in CEECs
Latvia
0,00
10,00
20,00
30,00
40,00
50,00
60,00 1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Vo
l in
th
ou
san
ds Volume of
Transactions onStock Exchange inLatvia
Volume oftransactions CSD
In grey : arithmetic scale Data: from ECB, Blue Book
In white: semi-logarithmic scale
Volumes of trading transactions & of settlement instructions
The implementation of CSDs in CEECs
Lithuania
0,00
20,00
40,00
60,00
80,00
100,00
120,00
1996
1998
2000
2002
2004
Year
Vo
l in
th
ou
san
ds
Volume ofTransactions onStock Exchange inLithuania
Volume ofTransactionshandled by CSD inLithuania
In grey : arithmetic scale Data: from ECB, Blue Book
In white: semi-logarithmic scale
Volumes of trading transactions & of settlement instructions
The implementation of CSDs in CEECs
Estonia
05
10152025303540
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Va
lue
in E
EK
Bill
ion
Market value oftransactions ontrading platform
Market value ofinstructions CSD
Market value of trading transactions & of settlement instructions
In grey : arithmetic scale Data: from ECB, Blue Book
In white: semi-logarithmic scale
The implementation of CSDs in CEECs
Latvia
1
10
100
1000
10000
100000
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Va
lue
in L
VL
Mill
ion
Market value oftransactions ontrading platform
Market value ofinstructions CSD
Market value of trading transactions & of settlement instructions
In grey : arithmetic scale Data: from ECB, Blue Book
In white: semi-logarithmic scale
The implementation of CSDs in CEECs
Lithuania
-
1 000,0
2 000,0
3 000,0
4 000,0
5 000,0
6 000,0
7 000,0 1
99
6
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Year
Va
lue
in L
TL
Mill
ion
Market value oftransactions ontrading plateform
Market value of DVPtransactions
Market value of FOPtransactions
Market value of trading transactions & of settlement instructions
In grey : arithmetic scale Data: from ECB, Blue Book
In white: semi-logarithmic scale
The implementation of CSDs in CEECs
Development of several arrangements with OMX Group over the past few years: Estonian’s CSD (ECSD) is part of the OMX group Riga Stock Exchange (RSE) is owned by OMX
group Project of a single settlement platform
The stake of a connection with A « mature » trading plateform to improve
liquidity CCPs and CSDs to improve post-markets
processings
The implementation of CSDs in CEECs
Foreign equity as % of total equity (listed equity turnover) in 5 new EU members
Market Foreign equity as % of
total equity (listed
equity turnover)
Prague stock exchange
Warsaw stock exchange
Ljubljana stock exchange
Bratislava stock exchange
OMX Vilnius stock
exchange
Average in European
stock exchanges
13.4
4.2
0
0
nav
19.9
Source: Federation of European Securities Exchanges, December 2004, p. 22.
The implementation of CSDs in CEECs
Link between Portfolio investment and market infrastructures Levelling of markets and post-market
infrastructures (DvP, RTGS…): components of the « check list » of international investors
Market infrastructure: an « operations centre » for traceability and monitoring
The implementation of CSDs in CEECs
Market infrastructures do not « make » market but…
…are a pre-requisite for connecting with mature markets and contributing to create liquidity
The implementation of CSDs in CEECs
The creation of CSDs has enabled to create the conditions to a shift towards a « secure securities economy ».
CSDs are also, with other market infrastructure, decisive actors: They enable to attract foreign investors who
would not invest in « CSD less » countries They enable issuers to have confidence in the
registry of securities issued They build, with Central Banks, a link
between the securities world and the cash world for repos operations
3. The financial reform in Armenia
Independence of the Republic of Armenia on 21 September 1991
Mass privatisation process started in 1995
USAID Capital markets development project In cooperation with Armenian actors In two phases (Jan. 1998 – June 2001 and May 2002
– May 2005)
The financial reform in Armenia
2 main actors in the post market infrastructure The CBA Government Securities Accounting
and Settlement System For settlement and central custody of Government
securities implemented in 2000 and enhanced in 2004 with the
addition of a secondary market module securing final settlement for transaction according to the DvP principle
Since 2005: implementation of the Armenian Stock Exchange FOREX Operations Settlement System (settlement performed by the CBA)
The financial reform in Armenia
The Central Depository of Armenia Processus of consolidation around one
depository (1996 – 2000) Non commercial, not-for profit organisation Functions
For corporate securities Central custody, central registry, clearing and
final settlement agent
Impact of the reform (1/2)
Processus of consolidation Progress towards centralisation around two
poles Further room for consolidation
Assessment against the criteria defined by Guadamillas and Keppler (2001) Clearing and settlement processes: T+0 Settlement risks: DvP model 3 Legal soundness: difficult to assess
Impact of the reform (2/2)
Assessment against the criteria defined by Guadamillas and Keppler (2001) Regulatory oversight: CBA Clearing and settlement institutions and
their participants: no undue restrictions Safeguard policies: guarantee funds System capacities: back up procedures
Recommendations for the future (1/3)
Based on information found on the Internet. More than recommendations, paths that could be
considered for the future development of Armenian infrastructures
Proper recommendations could only be derived after a mission is lead on site
Optimising the depository / registrar system Consolidation of the infastructures to offer wider
service to investors and benefit from scale and scope economies
Recommendations for the future (2/3)
Strengthening the financial and operational soundness of the CSD
Developing the attractiveness for international investors improve settlement efficiency Implement DvP model 1 or 2 Enhance the level of information in English Develop cooperation with other markets Create a CCP
Recommendations for the future (3/3)
Creating the conditions for a a structural demand of securities: Pension funds, mutual funds as « catalysts »
of a securities demand Few listed companies as « benchmarks »
On the local market On an other mature market
Thank you for your attention!
Questions & answers