Hong Kong Securities Industry Group Update on Implementation of Update on Implementation of G30 Recommendations G30 Recommendations Andrew Sheng Chairman Securities and Futures Commission 1 March 2005
Challenges for global securities clearing and settlement system (1) Disparate domestic securities clearing and settlement system (SCSS) networks impose different standards of efficiency and add unnecessary risks to settle cross-border trades Interdependency between different domestic SCSS networks gives rise to contagion (e.g. 9.11 risks) Different domestic rules restrict competition 2
Challenges for global securities clearing and settlement system (2) Cross-border settlement in global SCSS is not cost-effective Cross-border settlement costs in Europe are higher than the U.S. (NERA Economic Consulting, June 2004) € 5 in the U.S. vs € 5-27 in Europe (settled through international CSDs) contributed by (1) legal, regulatory and cultural barriers to cross-border settlement in Europe and (2) higher costs associated with fragmented infrastructure 3
Cooperation key to global markets Cooperation at regional and global levels can bring about major increases in efficiency and lower levels of risks Need cooperation at regional and global levels to achieve international recognized technical standards, harmonized business processes and consistent legal and regulatory frameworks But it is fear of competition that prevents cooperation 4
Standardization is happening at various levels Regulators - e.g. IOSCO, CPSS, European Commission CPSS/IOSCO Recommendations for SSS (Nov 2001) CPSS/IOSCO Recommendations for CCP (Nov 2004) Giovannini 2001 and 2003 Reports Service Providers - e.g. ISSA, SWIFT, CCPs ISSA Recommendations 2000 EACH Risk Management Standards (2001) Users - e.g. G30 G30 1989 and 2003 Recommendations 5
Major standards for SCSSs Geographic scope Mainly address domestic issues Global focus CPSS/IOSCO Global CPSS/IOSCO G30 2003 G30 1989 ISSA 2000 2004 2001 Provide more comprehensive standards for CCP risk management Except for the EU Wise Men Regional markets, no widely Giovannini Group 2001 (Europe) accepted regional 2001 and 2003 reports standards in other regions EACH 2001 Timeline 6
G30 2003 Recommendations Chaired by Sir Andrew Large Vice-Chairs, John Heimann/David Walker Built on key recommendations of 1989 report on domestic SCSS Examined implications of global SCSS 7
Conduct of the G30 Study “Top down” analysis Assessed existing standards, principles and other authoritative guidance to identify gaps Particular focus on recommendations issued by ISSA and CPSS/IOSCO “Bottom up” analysis Analysed the current state of the global SCSS and identified areas of concern based on an industry survey (by PwC) 8
What are industry’s concerns Industry survey by PwC revealed: Access barriers to markets and services that limit effective competition Lack of interoperability and connectivity among clearing and settlement systems Continuing deficiencies in the basic clearing and settlement model, e.g., finality of transfer and reliance on paper in the process Concerns about risk management including business continuity and disaster recovery Impact of complex asset servicing requirements on clearing and settlement 9
G30 2003 Recommendation Report Published the new recommendation report in January 2003 containing 20 best industry practices Target for developed markets (14 major markets) US, Canada, Belgium, France, Germany, Italy, Luxembourg, Netherlands, UK, Switzerland, Australia, Hong Kong, Japan and Singapore 10
G30 Recommendations in Three Areas Strengthening network Building an efficient and safety and stability interoperable global network Improving governance Address Develop industry global concerns standards 1. Global standards replace local standards 2. Clearing and settlement systems should be interoperable 3. The wider system is rendered fully accessible to service providers and users 11
G30 Monitoring of Implementation Expect to take 5 to 7 years for full implementation The G30 has established a monitoring committee to assess the initial stage of implementation progress (met in Dec 2003, July 2004 and Dec 2004) Regional monitoring committees have been set up to review developments in each region: European Monitoring Committee (chaired by Tom Swaan, ABN AMRO and Stephan Schuster, Deutsche Bank) North American Monitoring Committee (chaired by Thomspon Swayne, JP Morgan) Asia-Pacific Monitoring Committee (chaired by Andrew Sheng, SFC) 12
Monitoring Process Appointed monitoring organizations to assess implementation progress on each recommendation (e.g. ISSA, PwC, Association of Global Custodians) Designated a reviewer to critique each assessment in terms of (1) timeliness, (2) consistency with the spirit of the recommendations and (3) consistency with initiatives being undertaken Implementation of the 20 recommendations has been in good progress in the 14 major markets An interim progress report will be published soon 13
Monitoring Efforts in Asia-Pacific The Asia-Pacific Monitoring Committee comprises Securities and Futures Commission (chair) Australian Securities and Investments Commission Australian Stock Exchange Hong Kong Exchanges and Clearing Limited HSBC Group (advise on operational issues after considering its presence in the Asia region) Japan Securities Dealers Association Monetary Authority of Singapore Central Depository (Pte) Limited (Singapore) Also asked 12 emerging markets in Asia to consider implementing the G30 recommendations 14
What are the major areas for improvement in Asia-Pacific (1) Implementation of the recommendations on “interoperability” has been progressing slowly High implementation costs due to a legacy of systems e.g. capital investment required to fully adopt ISO 15022 Lack of international standards e.g. (1) reference standards for data classes such as fees, currencies and time zones, (2) standards for trade matching and confirmation and (3) standards in the area of corporate actions Wide adoption of domestic standards e.g. local securities and client identification codes are used rather than ISIN and BIC 15
What are the major areas for improvement in Asia-Pacific (2) Need for regulatory harmonization of standards across Asia-Pacific region for market integration Harmonize regulatory framework to facilitate cross- border trading e.g. strengthen implementation of the IOSCO Objectives and Principles Encourage uncooperative jurisdictions to cooperate with cross-border enforcement investigations e.g. adopt the IOSCO Multilateral MoU as a standard/benchmark for enforcement cooperation 16
What can the industry help (1) Industry working groups established to Identify their major impediments to cross-border trading and clearing (e.g. processing inefficiencies in cross-border settlement) and collaborate with the relevant infrastructure providers to find suitable solutions Develop globally applicable standards (e.g. reference data standards and communication protocol) Harmonize business practices as far as possible 17
What can the industry help (2) Regional office to liaise with its head office to ensure local issues/practices will be addressed e.g. standardized templates for electronic dissemination of corporate action information should accommodate all commonly used corporate action types in domestic markets Market participants to exercise influence over their key markets to enhance regulatory harmonization of standards across jurisdictions 18
Conclusion: Still some way to go Implementation of the G30 recommendations has been in good progress in Australia, HK, Japan and Singapore – other Asian markets have incentives to comply, bringing Asian markets close to global clearing and settlement infrastructure standards On regulatory standards, we have also long way to go, because of historical barriers that have been erected unintentionally Need industry support to take the implementation process forward 19
Summary The global marketplace is only as good as the The global marketplace is only as good as the infrastructure that supports it. infrastructure that supports it. Effectiveness of the global financial network Effectiveness of the global financial network is only as strong as its weakest link. is only as strong as its weakest link. Efforts from the industry are thus required to Efforts from the industry are thus required to strengthen the global financial market strengthen the global financial market network. network. 20
Thank You
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