Published Date: 16 October 2003

"International Standards for Clearing and Settlement" - Keynote Address by Mr Shane Tregillis, Assistant Managing Director (Market Conduct), Monetary Authority of Singapore, at the International Securities Services Association (ISSA) Regional Meeting Asia -Pacific on 16 October 2003

Good evening. Thank you for inviting me to join you here today at the Welcome Dinner for the ISSA Regional Meeting for the Asia-Pacific. First of all, I would like to welcome our overseas guests to Singapore. We have the pleasure of dining at one of the highest restaurants in Singapore, and I’m sure you’ll enjoy not only the food but the magnificent view as well.

2.     I noticed on the agenda for the ISSA Regional Meeting tomorrow that the G30 and ISSA Recommendations will feature in some of the discussions. As a prelude to the meeting, I thought it would be appropriate tonight to touch briefly on the subject of international standards for clearing and settlement. More specifically, I will discuss Singapore’s experience in being assessed against these standards during the IMF and World Bank’s Financial Sector Assessment Programme, and also provide a brief overview and update on the work of the CPSS-IOSCO Task Force, with which I am closely involved.

Standards and Assessment Against Standards

3.     For a long time, clearing and settlement had been regarded as back office, technical and a somewhat un-interesting part of the securities business. It never had quite the same ring to say that you worked in securities settlement rather than front office functions, such as investment banking. But it now seems that securities settlement is the topic of the moment with a plethora of reports and recommendations in recent years, and is also an increasing focus among financial institutions. So it is useful to pause to ponder why this sudden surge in interest in what is very much a nuts and bolts part of the securities industry value chain.

4.     There are a number of forces driving this upsurge in interest.

(a) First, a stronger focus on settlement costs in the cost of trading, given increased competition and a renewed bottom line mentality within financial institutions. Also, as trading is now crossing borders and markets centres are consolidating, the cost of clearing cross-border transactions through fragmented clearing and settlement infrastructures still bounded by national borders has been thrown into sharp relief.

(b) Second, clearing and settlement is increasingly seen as separate business line rather than just a bundled good with exchange trading. This has increased with the demutualisation of exchanges and emergence of stand-alone clearing organisations, providing clearing services not just for transactions executed on exchanges, but also OTC trades.

(c) Third, with technology advancements, the processes involved in clearing and settlement have undergone and, are continuing to undergo, profound changes. Straight Through Processing (STP) is one example of the challenges facing the industry.

(d) Finally, regulators are increasingly aware of the vulnerabilities of financial system infrastructure in our interconnected world and the implications of a failure for systemic stability. Heightened awareness of the threat of terrorism, has further emphasised the importance of robust clearing and settlement systems to the well-being of our financial markets.

5.     So for all these, and no doubt other reasons, clearing and settlement has been at the receiving end of much attention over recent years. This can be very clearly seen in the recent emergence of standards, including those by G30, CPSS-IOSCO Task Force, ESCB/CESR, and of course, ISSA – all, in one way or the other, providing guidance on risk management practices to operators and participants of clearing and settlement systems.

6.     With standards, comes the job of assessing the extent to which these standards are being met. There are different ways in which this assessment may be made.

(a) ISSA, for example, commissioned a user-driven survey to evaluate each country’s status against the ISSA Recommendations 2000, and published a status report presenting the results in 2001.

(b) The G30 has set up a monitoring group chaired by ex-BIS chairman Andrew Crockett to monitor progress with implementation of its ambitious vision for global clearing and settlement outlined in its recent report

(c) On the other hand, the CPSS-IOSCO Task Force in its Recommendations for Securities Settlement Systems (“SSSs”), encourages regulators of securities settlement systems to assess whether markets in their jurisdictions have implemented the CPSS-IOSCO Recommendations. To facilitate this, the Task Force also published a report setting out the methodology for such assessments.

(d) The IMF and World Bank’s Financial Sector Assessment Programme (or FSAP) provides an opportunity for an independent assessment of each jurisdiction’s level of compliance with a set of 12 international standards and codes, which includes the CPSS-IOSCO Recommendations for SSSs.

Singapore’s FSAP Experience

7.     Singapore recently underwent an FSAP, with the process taking place in phases, starting in August 2002. The resilience of our financial sector to various shocks and stresses was evaluated, and our regulatory practices and legal framework were scrutinised by the expert assessors drawn from peer regulators around the world. In essence, MAS, as a regulator, was now at the unfamiliar end of an inspection.

8.     The assessment against the CPSS-IOSCO Recommendations for SSSs took place during an intensive two weeks in November 2002. Background materials setting out our market structure and regulatory framework were provided to the FSAP assessors prior to the visit. During the two weeks, meetings were arranged between the FSAP team and MAS, where clarifications were sought, and nuances of Singapore’s market structure were further elaborated. The FSAP team also met with a range of market practitioners in order to get different perspectives on the issues.

9.     While it was a very resource intensive, exhaustive and exhausting process, we consider that there are clear benefits to be gained from having gone through the assessment.

10.      The independent assessment by the international experts provided new perspectives on our regulatory framework and market practices. Probing questions were asked about the way MAS regulates clearing and settlement, and the mechanisms by which clearing and settlement risks are being identified and managed. We are hopeful that the assessors came away satisfied that our practices were sound and appropriate given the context and structure of our market.

11.      Of course, the FSAP team also identified some areas where Singapore could further enhance its current arrangements. We will address any issues raised by the FSAP, with the objective of further enhancing the safety and soundness of our financial markets.

CPSS-IOSCO’s Risk Management Standards for Central Counterparties

12.      Now, I would like to take the opportunity to speak to you briefly about a new initiative recently taken up by the CPSS-IOSCO Task Force following the completion of its work on the Recommendations for SSSs.

13.      In the course of its work on the Recommendations for SSSs, the CPSS-IOSCO Task Force recognised that SSSs could also perform a central counterparty (“CCP”) function. Given the concentration of risks and risk management responsibilities at CCPs, the proper management of risks by CCPs is crucial to the systemic stability of financial markets. While the Task Force developed a broad recommendation to address the risk management mechanisms of the CCP, it was acknowledged that the development of comprehensive risk management standards for CCPs would warrant a separate project on its own.

14.      We had hoped that the work commenced by bodies such as EACH and taken on by CCP-12 would provide globally accepted standards on risk management. But progress on these private sector initiatives has been relatively slow. There has also been emerging pressure in Europe to tackle these issues.

15.      So the Task Force was given a new mandate at the beginning of the year by the CPSS and the Technical Committee of IOSCO to develop risk management standards for CCPs. In order not to reinvent the wheel, the Task Force studied closely the work already being done on these topics by groups such as the European Association of Clearing Houses, CCP-12, ISSA and the Reserve Bank of Australia. Since its new mandate was approved, the Task Force has met 3 times this year and good progress has been made.

16.      The Taskforce has completed a detailed survey of its members of the financial resource requirements of CCPs, developed the framework of its report, agreed on the broad scope of coverage of its recommendations and has established working groups to develop drafts for key recommendations based on the detailed discussions.

17.      These drafting groups cover legal risk, participation requirements, collaterisation arrangements, default procedures, financial resources, investment and custody risk, operational risk, settlement risk and regulation and oversight. We have recently commenced work on issues relating to governance, transparency and the risks arising from a CCP engaging in other activities.

18.      Once complete, these standards will complement the Recommendations for SSSs and would hopefully provide useful guidance to regulatory authorities and CCPs in reviewing the robustness of their risk management practices. While highly ambitious, we would like to release a public consultative document early next year.


19.      Although clearing and settlement systems used to be regarded as bridesmaids, playing a supporting role to the more visible and more easily understood exchanges, times have changed. Clearing and settlement systems are increasingly being regarded as separate business lines, and in some cases operating as separate entities from the exchanges. Their systemic and system-wide importance has been recognised by regulators.

20.      The introduction of clearing for OTC derivatives products in recent years is driven by financial institutions’ desire to better manage their capital resources and risk exposures. Given the increasing interest in clearing for the OTC market, the potential for the clearing and settlement business to continue to develop is clear. But this does mean that issues of CCP risk management take on even more importance. The current work by CPSS-IOSCO on providing guidance on safe and sound risk management practices should help elaborate the globally recognised minimum requirements in this area.

21.      I wish you fruitful discussions at the meeting tomorrow.