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Central Securities Depositories and Securities Clearing and Settlement: Business Practice and Public Policy Concerns
Abstract
This chapter describes the emergence of national and international central securities depositories (CSDs) and the systems of tiered account-based security ownership they support. It examines clearing and settlement risks, including principal risk now largely removed by DVP, and liquidity risk reduced but far from fully removed by multilateral netting. Liquidity demand and the complexity of some underlying transactions results in a surprisingly high volume of postponed settlements (trade fails). Systems of clearing and settlement were resilient during the crisis of 2008, but the remarkable complexity of these networks suggests two policy concerns that need further examination. Problems in clearing and settlement could still magnify or transmit systemic financial risk in a future crisis, if firms do not again obtain public sector support; and the sheer complexity of clearing and settlement arrangements may both create operational risks and heighten barriers to entry, hence reducing competition and raising costs to investors.
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