Academic journal article ABA Banking Journal

Standards Would Lower Securities Settlement Risk

Academic journal article ABA Banking Journal

Standards Would Lower Securities Settlement Risk

Article excerpt

A set of standards to help central bankers and securities regulators reduce the risks in the world's securities settlement networks was released in January by a joint task force of the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Corn missions (IOSCO).

Contributing editor Ed Blount recently met to discuss the document with Gregor Heinrich, head of the CPSS secretariat, at the Bank for International Settlements in Basle, Switzerland.

While not directly related to the risk-based capital proposal described in the article at left, improved control of systemic risk in clearing networks could reduce the capital costs for banks that operate in this market. (For more on securities settlement issues, see the article on page 35 about moving to a T+1 settlement date.)

ABA BJ: How will the standards recommendations reduce settlement system risks?

A. The shortening of settlement cycles is clearly a goal. These recommendations split up the whole process to address the pre-settlement risk areas and settlement risk areas. For example, one of the recommendations aims at trade confirmations in the pre-settlement risk area. This should be done on the same day--and is usually done through automated trade matching. This is the goal that should be achieved: the sooner you confirm a trade, the better your chance of reducing error or misunderstanding at that phase. That will, of course, reduce the overall potential for any problems farther down the line.

ABABJ: This was recommended by G30 in 1989, so how is it new?

A. These recommendations, in line with the international call for standards aimed at strengthening financial stability worldwide, are aimed as the minimum standards for all markets, not just for the few developed markets. They should be accepted everywhere. And T+3 could be a very tough call for many, many markets. Upgrading is always difficult -- even in a highly-developed technical infrastructure like the United States, it's difficult to move from T+3 to T+1.

ABABJ: Is T+3 the ultimate goal?

A. Nowhere do the recommendations say that T+3 "is the best." T+3 is the minimum. According to Recommendation #3, "Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be assessed. …

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