Interlinking securities settlement systems

Central securities depositories (CSDs) have opened mutual links, but most of them are seldom used. Why are idle links established? By allowing a foreign CSD to offer services through the link the domestic CSD invites competition. The domestic CSD can determine the cost efficiency of the rival by charging suitable fees, and prevent it from becoming more competitive than the domestic CSD. By inviting the competitor the domestic CSD can commit itself not to charge monopoly fees for secondary market services. This enables the domestic CSD to charge high fees in the primary market without violating investors’ participation constraints.

Introduction: The key functions in securities markets are trading, clearing and settlement. In a trading system investors simply agree on buying and selling securities. This is of no use unless the trades are implemented. Clearing involves verification and matching of trades and calculation of the parties’ obligations. In the settlement process securities are transferred from seller to buyer and the payment from buyer to seller.Securities settlement systems are essential market infrastructure institutions. In a typical modern system there is a central system in each country, or possibly several systems for different types of securities. The nature of the settlement system may depend on the structure of the book-entry system. The central bank or state treasury may be a member, but most members are private companies in the financial industry, such as banks and investment firms, which participate in the central settlement system on behalf of their customers. In the following, these financial institutions are simply referred to as investment firms (IFs).

Author: Karlo Kauko

Source: Research Discussion Papers, Bank of Finland

Download URL 2: Visit Now