33656287 custody project
TRANSCRIPT
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CUSTODY OVERVIEW
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WHAT THEY DO ??WHAT THEY DO ??
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Introduction Contd.
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Introduction to CSDHigh trading volumes can cause delayed
settlement transactions & thus liquidityproblems
Physical certificates increase probability of
fraud & forgeryThus CSDs were set up to immobilize
securities for the whole market
Shifted the focus from physical safekeeping
to the provision of information oncustomers transactions and securitiesholdings
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Contd.Economies of Scale where services
efficiently delivered by a central serviceprovider
Services provided were:
income collection from issuersdistribution to securities holders
notification of corporate actions and taxreporting
collection services for national authoritiescentralized securities lending service
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Contd.CSD was best placed to match demand with
supply
Little or no Customization provided to client
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TRANSFORMATION OF CUSTODYTRANSFORMATION OF CUSTODYIN ELECTRONIC AGEIN ELECTRONIC AGE
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Services Provided byCustodian
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Services Provided by CustodianContd.
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WHOM THEY SERVE ?WHOM THEY SERVE ?
INTERMEDIARYNTERMEDIARY
RETAIL PRIVATE BANKING CORPORATIONS INVESTMENT FIRMS INSTITUTIONAL
INVESTORS
GLOBAL
CUSTODIANS BROKERS ASSET MANAGERS
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Demand for Custody Services(Clients).
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Investor Clients Contd.
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Investor Clients Contd.
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Intermediaries Contd.
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CUSTODY SCENARIO IN INDIACUSTODY SCENARIO IN INDIA
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MARKET REGULATIONSMARKET REGULATIONS
Post 1992, NEAT was introduced (whichoperated on a strict price/time priority) toreduce information asymmetry & Hightransaction cost
At investor level, listed companies had toincrease the frequency of their accountannouncements
To ensure transferability of securities with
speed, accuracy and security, theDepositories Act was passed in 1996
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Regulations Contd.
This provided for the establishment ofsecurities depositories and allowedsecurities to be dematerialized & NSDLwas launched
Other measures to reduce Transaction Costa movement toward electronic trading and
settlement
streamlining of procedures with respect to
clearance of new issues
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MARKET REGULATIONSMARKET REGULATIONS
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EQUITY REFORMS RESULTSEQUITY REFORMS RESULTS
Modernization of market with increasedefficiency
Trading has become more transparent
Eliminate risks of bad delivery and
counterfeit shares due to depositoryavailable
The two depositories that are in operationnow ensure faster, cleaner and cheaper
settlement
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DEBT MARKET REGULATIONSDEBT MARKET REGULATIONS
Classified into three segments: G-sec market
PSU bond market
Corporate bond market
Focus of debt market reforms on G-sec
Establishment of primary market for G-sec
Strengthening of legal, regulatory and
payments infrastructure contributed todevelopment of secondary market
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DEBT MARKET REGULATIONSDEBT MARKET REGULATIONSCONTD.CONTD.
Reforms Auction of Treasury Bills with varying
maturities
Entry of FIIs to Primary & Secondary Market
Introduction of DVP system to acceleratesettlement, enhance transparency,eliminate risk
Promotion of G-sec by RBI by providingliquidity support
Active inter bank Repo market developmentto boost liquidity
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Regulatory Issues
Regulators:a)SEBI
b)RBI
c)Department of Company Affairs
d)Department of Economic Affairs
SEBI's mandate includes ensuring investorprotection; promoting orderly growth of
security market
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Regulatory Issues Contd.
RBI is responsible for primary issues ofGovernment Securities
Also includes the regulation of all contractsin G- sec, gold related securities, money
market securitiesSEBI is mandated to regulate the trading of
these securities on recognized stockexchanges in line with the guidelines
issued by RBI
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REGULATORY AUTHORITIESREGULATORY AUTHORITIES
Regulator Role
SEBI Ensuring investor protectionPromoting growth of security
market
RBI Primary issue of G-sec
Regulation of all contracts in G-sec, gold related securities,money market securities
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OVERVIEW OF NSDLOVERVIEW OF NSDL
Depository Act 1996 passed to ensuretransferability of securities with speed,accuracy and security
NSDL launched allowing securities to bedematerialized
Aims at synchronizing settlement of trade andtransfer of securities irrespective of
geographical locationsEliminates ills associated with paper-based
securities system such as delay in transfer,bad delivery, theft and forgery
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NSDL OVERVIEW CONTD..NSDL OVERVIEW CONTD..
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NSDL OVERVIEW CONTD..NSDL OVERVIEW CONTD..
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NSDL OVERVIEW CONTD..NSDL OVERVIEW CONTD..
Functions of DepositoryDematerialization
Account Transfer
Transfer RegistrationCorporate Actions
Linkages with clearing system
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NSDL ELECTRONIC LINKAGESNSDL ELECTRONIC LINKAGES
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CLEARING CORPORATIONSCLEARING CORPORATIONS
Financial Settlements are guaranteed byCCIl
Settlement guarantee fund ensuressettlement of trades irrespective of default
by trading membersEliminates counter party risk; thus boosts
investor confidence
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ROLE OF NSE AND CLEARINGROLE OF NSE AND CLEARINGHOUSESHOUSES
The transaction in secondary market pass through3 distinct phasesTrading: Stock exchange
Clearing: Clearing Corporation determines the
fund & security obligation of trading membersand ensures the trade is settled throughexchange of obligations
Settlement
Clearing corporation, clearing members,custodians, clearing banks, depositories areinvolved in the process of clearing
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ROLE OF NSE AND CLEARINGROLE OF NSE AND CLEARINGHOUSES CONTD..HOUSES CONTD..
Clearing Corporation: responsible for posttrade activities like risk management &clearing and settlement of trades executedon a stock exchange
Clearing Members: responsible for settlingtheir obligations as determined by theNSCCL by making the funds/ securitiesavailable on settlement day to the clearing
bank/ depositories
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ROLE OF NSE AND CLEARINGROLE OF NSE AND CLEARINGHOUSES CONTD..HOUSES CONTD..
Custodians: settle trades on behalf oftrading members; is required to confirmwhether he is going to settle that trade ornot
Cl i d S ttl t
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Clearing and SettlementProcess
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CLEARING AND SETTLEMENTCLEARING AND SETTLEMENT
N S E
C L E A R IN G B A N K
C U S T O D IA N S
D E P O S IT O R IE S N S C C L
radeDetails
&otificationaffirmation
Obligatio& payn advicefsecurities
nstructions toake funds
vailable-y pay in time
nstructions toake securities
vailable by-ay in time
-ay in ofsecurities -ay in offunds
-ay out ofsecurities -ay out offunds
InformthroughDPInformCustodia
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RISKS INVOLVEDRISKS INVOLVED
Counter Party RiskCounter Party Risk
Country RiskCountry Risk
Cash RiskCash Risk
Market RiskMarket Risk
Operational RiskOperational Risk
Settlement RiskSettlement Risk
Systemic RiskSystemic Risk
Transfer RiskTransfer Risk
Business RiskBusiness Risk
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Risks in Custody
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Risks in Custody Contd.
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Risks in Custody Contd.
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OUTSOURCINGOUTSOURCINGWHY? Constant threat of tighter
margins Consolidation of industry players
WHAT? Fund Accounting and
AdministrationTrade Matching and
Confirmation
Back & Middle Office
OUTCOME ? Increased Profitability due to foll.
Additional services providedCash Management
Securities Lending
Compliance Monitoring
Risk Management
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Outsourcing
Safe-keeping of assets and Tradesettlements are now considered plainvanilla services
constant threat of tighter margins ontraditional products and consolidation ofindustry players
These competitive factors have led banks tooffer new value-added services such ascash management
securities lendingcompliance monitoringrisk managementproxy voting and corporate actions.
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Outsourcing Contd.
So far these diversification strategies haveworked & increased the profitability ofbanks
The latest value-added offering is back and
middle office outsourcing which custodianshave identified as a business withsubstantial growth prospects
UT UR IN REVENUE
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UT UR IN REVENUEPOTENTIALPOTENTIAL
SBi
llions
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Outsourcing Contd.
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Outsourcing Contd.
Fund Accounting & Fund Administrationservices are outsourced
Fund accounting:security pricing
general ledger bookkeepingNAV calculation
data distribution,
Reconciliation and daily, monthly and ad hoc
reporting
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Outsourcing Contd.
Fund administration:statutory reporting
tax compliance
performance measurement
Middle office outsourcing covers tradematching and confirmation which involvesestablishing links between brokers andcustodians
Can also cover cash flow forecasting andcash position reporting
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Outsourcing Contd.
Middle office outsourcing has been driven bythe shift to shorter settlement cycles
Unwilling to invest in new technology thatwill improve straight through processing;
fund managers choose to outsource tradematching and confirmation to a third party
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