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GLOBAL Clearing Settlementand a Plan of Action

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GLOBAL Clearing Settlementand a Plan of Action GLOBAL Clearing SettlementAND A Plan of Action G ROUP OF T HIR TY 30 All members of the Steering Committee served in their personal capacities. The views expressed in this report do not necessarily reflect the views or policies of their respective institutions, nor does publication of the report by the Group of Thirty imply an endorsement of the views expressed herein. Copies of this report are available for $60 from: Group of Thirty 1990 M Street, N.W., Suite 450 Washington, DC 20036 Tel: (202) 331-2472 · Fax: (202) 785-9423 WWW – http://www.group30.org E-mail – [email protected] Global Clearing and Settlement A PLAN OF ACTION Group of Thirty© Washington, DC 2003 CONTENTS Foreword, by Paul Volcker and Jacob Frenkel ...................................................................................................... v Chairman’s Message, by Sir Andrew Large ......................................................................................................... vii Steering Committee Members ............................................................................................................................ ix Acknowledgments ................................................................................................................................................ x Executive Summary ...............................................................................................................................................1 Chapter 1. Clearing and Settlement: What Is at Stake? .....................................................................................13 Chapter 2. The Current State of Affairs...............................................................................................................21 Chapter 3. Building an Efficient, Interoperable Network .................................................................................... 25 Recommendations 1-8 .................................................................................................................................29 Chapter 4. Ensuring Safety and Stability ............................................................................................................35 Recommendations 9-16 ...............................................................................................................................40 Chapter 5. Governance: The Key to Reform.......................................................................................................49 Recommendations 17-20 .............................................................................................................................50 Chapter 6. From Recommendation to Implementation ......................................................................................57 APPENDIXES Appendix 1. Detailed Background on the Recommendations ........................................................................... 67 Apppendix 2. Conduct of the Study .................................................................................................................125 Glossary ............................................................................................................................................................133 Group of 30 Publications since 1989 ................................................................................................................ 135 Group of 30 Members ......................................................................................................................................137 FIGURES AND TABLES Figure 1-1. U.S. Activity in Foreign Securities versus Foreign Activity in U.S. Securities, 1980–2001 ...............................................................................................17 Table 6-1. Implementation Targets for the Private and Public Sector ................................................................. 61 Table A2-1. Contributing Organizations ...........................................................................................................126 iii Table A2-2. Organizations Interviewed .............................................................................................................127 Table A2-3. Related Studies Examined .............................................................................................................128 BOXES 1-1. Interoperability.............................................................................................................................................14 2-1. System Components.................................................................................................................................... 22 3-1. Participants in the Clearing and Settlement Process ................................................................................... 28 A2-1. Individual Contributors ............................................................................................................................ 131 iv FOREWORD THE GROUP OF THIRTY COMMISSIONED THIS STUDY and operational matters to risk management and gov- of global securities clearing and settlement arrange- ernance practices. The Steering Committee devised a ments out of concern that unevenly developed national three-pronged strategy to accomplish this, including: clearing and settlement infrastructure and inconsistent business practices across markets could be a source of ½ Technical and business practice standards significant systemic risk, and certainly of inefficiency. intended to strengthen the connections across Given rapid growth of debt, equity, and derivatives borders and systems; trading, both generally and cross-border, the wrong ½ Stronger risk management, including the combination of market shocks and financial disloca- stronger legal guarantees necessary to provide a tions might be sufficient to overtax the infrastructure solid legal basis for clearing and settlement; and on which the functioning of global markets depends. ½ Improved governance by private boards, With these concerns in mind, the Group of Thirty supported by official supervision and fair and recruited a senior group of private executives and pub- open access to systems. lic officials to serve on the project’s Steering Commit- tee, and Andrew Large agreed to serve as its chair. Eleven The strategy encompasses 20 recommendations members of the Group of Thirty itself and a dozen that constitute an action plan for global clearing and others joined him on the Committee, which undertook settlement. The plan is ambitious but it reflects the the substantial challenge to investigate the complex in- aspirations of market participants, gives direction to stitutional structures and processes that characterize glo- work that is already under way, and provides specific bal clearing and settlement. Their aim was to improve guidance for tackling new areas. Its fundamental logic both the safety and efficiency of these global processes. is that a globally linked marketplace should be sub- The Committee began by assembling a formidable ject to global norms. array of talent to complete the body of work that is Like the Group of Thirty itself, the report seeks to catalogued in this report. Over the course of two achieve a balance of views and interests, incorporat- years, survey teams and working parties analyzed cur- ing the best thinking of the private and public sectors. rent industry conditions, evaluated current practice This is important because achieving its objectives will and latest supervisory guidance, and framed propos- require significant attention from both quarters, along als for making the system safer and more efficient. with significant investment by a great many market If the hours of effort devoted to this venture by its participants. All of this will take time and it will be many contributors were fully valued, it would certainly important to review progress along the way. To ensure constitute a multi-million dollar enterprise. that the issues raised receive the continuing attention The particular focus of the exercise was the set of they deserve, the Group of Thirty will monitor challenges arising from cross-border trading. Trades progress on cross-border reforms going forward. are moving across borders without support of com- The Group of Thirty is pleased to have sponsored mon — or even consistent — structures, performance this project and we commend its analysis and recom- standards, or operational rules. Achieving consistency mendations to all who are concerned about the safety will require far-reaching change, from purely technical and efficiency of global markets. Paul A. Volcker Jacob A. Frenkel Chairman of the Trustees Chairman Group of Thirty Group of Thirty v CHAIRMAN’S MESSAGE THE GLOBAL FINANCIAL SYSTEM is only as good as and what needs to change. We pursued a dialogue with the infrastructure that supports it. And the smooth major firms, smaller firms, service providers like con- functioning of that system—and the confidence on trol securities depositories (CSDs) and central which it depends—will be threatened if the infrastruc- counterparties, as well as investors and end-users. We ture is unreliable. Unfortunately attention to the over- reviewed the results against public policy requirements, all system of global securities clearing and settlement using as a starting point the CPSS/IOSCO recommen- has been in short supply. Meanwhile the process of dations of November 2001. We were also informed clearing and settlement has become much more in- by other studies—by
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