Asian Settlement System Evolves

Terry Flanagan

Proposal would link together CSDs as in Europe.

A pan-Asian securities settlement infrastructure patterned after one that’s being used in Europe is under development, as the region continues to experience intensive economic growth.

The Asian Bond Markets Initiative Group of Experts (GoE) has proposed a “central securities linkage” solution modeled after the Link Up Markets plan in Europe, as one of two main options for a regional settlement intermediary (RSI).

The other option proposed by the GoE–an Asian international central securities depository—would be costlier to implement.

”The Group of Experts report states that an Asian ICSD would require at least a 70 percent market share to be viable, which is not realistic,” Philippe Metoudi, member of the executive board at Clearstream Banking, Hong Kong, told Markets Media. “The linkage option is the more viable alternative.”

Link Up Markets is a joint venture by ten leading European central securities depositories (CSDs)—among them Clearstream––whose key objective is to improve efficiency and reduce costs of post-trade processing of cross-border securities transactions by streamlined interoperability on the CSD layer.

Launched in 2009, Link Up Markets has established a common infrastructure allowing for streamlined interoperability between CSD markets and introducing efficient cross-border processing capabilities. The solution enables CSD customers to significantly reduce the cost gap between settling and safekeeping domestic and foreign securities.

“Link Up Markets is built around the ideas of linking together CSDs, so that, for example, a customer in Switzerland can settle German securities using a Swiss banking account,” said Metoudi.

The GoE has identified clear differences between the two RSI options in terms of their operational structures. The Asian ICSD would operate its own settlement platform and provide banking services that are related with settlement of securities. If following European ICSD models, its legal entity will be a commercial bank specialized in operating a settlement platform.

One of these banking services is securities lending, which forms a key component of Clearstream’s business in Asia.

Most of the world’s securities lenders are from Asia, Metoudi said.

“Our securities lending flagship product, ASLplus, is our ‘street lending’ program in which Clearstream is the principal and sole borrower,” he said. “It generates important income for participating lenders while providing liquidity to the market.”

In contrast, the CSD Linkage is not an independent service provider; rather, it’s a mechanism that allows efficient communication and data sharing among participating CSDs.

As to the relationship with local settlement systems, especially with national CSDs, the Asian ICSD is relatively independent in the sense that it is a separate organization and, thus, in principle stand-alone operation is possible. The CSD Linkage, on the other hand, every aspect of its operation will be dependent on member national CSDs.

These differences between the two RSI options in the operational structures have important bearings on their potentials of reducing cross-border settlement costs and risks.

Conditions for realizing the goal of lower settlement costs would be different, though. In particular, the CSD Linkage would require harmonization among participant CSDs in their service scopes and technological infrastructure.

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