CSD Trends - Links, Integration, Collaboration

Prepared by: Jorge Jaramillo

Operations Vice-president BVC – Deceval
Challenges we face……..
Six main global trends impacting Exchanges and CSDs

Service & client • Increasingly more service and client • Recent years impacted by new
Regulation changes
orientation oriented to stay relevant regulations
- Increase in competition from traditional and - Creating new opportunities (e.g.,
non-traditional competitors centralization of OTC registration and migration
to CCP)
- Sophistication and globalization of capital
- Restricted cross border trading and
markets demanding better services
clearing, while required more transparency in
- Keep both regulators and clients engaged risk control and reporting

Broadening business • Broadening of scope and international • Cleared volumes are consolidating
expansion as important sources of Centralized clearing
model into large global CCPs
revenue growth for exchanges
- Non-trading revenues more relevant
• Risk concentrated in a few clearing
players
- Strong M&A activity
- Partnerships to increase liquidity and • Margin netting, collateral efficiencies
experience sharing are key and driving consolidation

• Distributed Ledgers have the Lack of issuers and other • Companies find easier funding in
IT & Tech innovations sources of financing
potential to re-shape the business, private equity funds, venture capitalists
and it is accelerating at a fast pace and banks

• Market financing comes as an option for

• Increasingly difficult to generate companies later in the game, reducing
competitive advantage via in-house the number of issues coming to the
development market
Challenges our Business Must Respond to…..

Industry Liquidity Competitiveness

pressures How to Market Access
Efficiency improve it ? Participation
-Cost - Risks New
Regulatory Instrumentos
Pressures ETF, FIBRAS,
CSDR REITS, Others
IOSCO
FSB International Eligibility
«Continue to be Relevant
Global Links
Innovation Interoperability
Digital
Transformation Fintech
Growth / Risk
APIs
Returns/ management
DLT
Industry cost Market Safety
Blockchain
Challenge : Free float and turnover ratio in our
markets
Turnover velocity
(2017)

Latam Emerging Developed

*Av. free float of sample = 0.45 Free float GDP per capita
(2017) (USD Thousands, 2016)
Note: GDP per capita in U.S. Dollars to 2016; Average free float and average turnover velocity do not include United States (*) Nasdaq was used as a proxy for United states turnover velocity
Source: The World Bank, WFE Annual Statistic guide 2017, free float: Bloomberg
We need to solve a problem …… Market liquidity
Growth of our markets

MARKET CAP AS % OF GDP, 2016 NO. OF LISTED COMPANIES, 2016 TURNOVER VELOCITY (RATIO) AVERAGE 2011-2016

Source: World Bank, World Federation of Exchanges, BVC, BVC Consultant

Besides regulation and cyclical downturns, market decline is
driven by changing client demands and technology

Client Demands Supply (technology)

Transparency Data & Analytics

Efficiency Disruption Automation & Processing

Solutions & Pricing Modular Platforms

Access Connectivity

Triggers and Speed bumps

Regulation

Cyclicality

Source: BVC consultant

Corporate customers are demanding more transparent,
faster, and integrated solutions
#3: Rapid Digitalization of Value Chain

Clients demand…
Access and
Transactional efficiency Digitization of processes Integrated solutions
ease-of-use

Access to rich information Faster, efficient execution of Digitization, to decrease Integrated solutions, that
from multiple sources transactions across multiple manual process and cater to many parts of the
available 24/7 stakeholders paperwork; increase analytics client’s value chain with
flexibility

1 2 3 4

Multi-bank portals that Payment platforms enabling near Paperless systems that are Specialist who addresses all the
aggregate information from real-time execution, keeping costs linked across multiple needs of client in that industry
across multiple providers low stakeholders of the value chain while offering flexibility to tailor
Technology developments will transform financial
market infrastructures in the future
KEY DRIVERS TRENDS

• Distributed Ledgers will re-shape the Exchange business, likely at an

1 accelerated pace… Demand for more advanced
and flexible solutions to
• … In addition, there is an increasing need for participants to differentiate to win differentiate
- Broadridge has just released a Blockchain bilateral repo this week and are interested in
coming to Latam markets

• Increased focus on innovative products such as FinTech, especially to

diversify sources of income
2 - FinTech market has been growing exploding over the last years
Increased focus on
- New models such as crowdfunding are disrupting the way that companies raise money
diversifying into non-core
- Blockchain technologies and cryptocurrencies are changing the way people think about
products
markets

• Resource & investment requirements with in-house IT becoming increasingly

prohibitive
- Shift in thinking: proprietary platforms no longer considered key differentiator to the business
3 Shifting away from
- Higher than market growth in 3rd party IT spend – will impact all market participants
in-house development in
• Demand for faster spread of technology & time-to-market with cheaper R&D favor of 3rd party solutions
investment
Distributed ledger is expected to have an impact
throughout the securities ecosystem

Sell-Side Buy-Side Market infrastructure/ Other

Capital
Other
Markets & Asset Hedge Execution Central
CSDs Custodians providers
Investment Managers Funds venues Banks
(incl. registrars)
Banks

Front Capital Investment Management

office Markets

Capital Middle Central

Clearing/ Securities services Clearing/ other securities services
markets Office Banking
Core benefits are for sell-side and buy-side
players Core disruption is in post trade & services

Back Office Collateral

Treasury
(Asset Liquidity Treasury & Liquidity
Management)

Source : BVC Consultant

Custodians and clearing houses face digital
disruption as a result of Blockchain adoption
Potential Impact of Blockchain

Risk Opportunity

CUSTODIANS CLEARING HOUSES

• Distributed asset ledgers will remove the value-add of core • Immediate settlement would reduce the role of clearing houses
custodial duties

• Risk of disintermediation as other players expand along value • Long term, distributed-ledger technology may develop
chain into other offerings sophisticated capabilities required for netting/novation and
nullify CH’s advantage
• Unbundling of custody fees possible as demand for
safekeeping/maintenance decline
• Continued mid-term need for trusted firm to handle novation to
achieve netting and reduce counterparty risk maintains CH’s
• Competition from pure tech players could result in downward value-add
revenue pressure

• Role may shift to ensuring automated securities servicing actions • Role may evolve to that of additional oversight of the
are done properly Blockchain-driven system

Source: BVC Consultant

CSDs and Exchanges will have new opportunities in
downstream services, threatening incumbent providers
Potential Impact of Blockchain

Risk Opportunity

CSDS EXCHANGES
• Investors may trade more equities peer-to-peer
• The ledger for fully digitized assets does not
outside the public markets through DL platforms
require a post-trade book entry system
that circumvent the exchanges
• Open access to ledgers by regulators and other
• Opportunity to grow data and analytic services
stakeholders will increase competition for the
through value-add services like algorithms for
provision of these services
HFs, data sets for quant funds, data inputs for
• Possible role expansion through the digitization HFT, etc.
of other asset classes for buy-side players
• Seek additional revenue opportunities by moving
• CSDs may also assume operational governance, upstream (custody) and downstream (registry
providing oversight as the ledger protocols evolve services)
• Additional value may come from developing • Expand investment offerings beyond equities as
platform functionality broader asset classes are digitized

Source: BVC Consultant

Use cases of Innovative Technologies in the
post-trade space - European Central Bank
Governance of DLT Solutions - Similar to that
of an FMI: Access requirements, risk
management, investor protection, processing
rules, data management, responsibilities, Initiatives for Identification of
Shareholder Rights Directive - applicable law etc. Shareholders and transparency of their
SRD2 positions - Bilateral Synchronic Book -
Investor Data Directory – IDD
European Union
Innovation and Developments - Encourage shareholder
Initiatives for electronic
voting
Fintech - DLT European Post Trade participation in the assemblies
Forum - EPTF -Shareholders - Tokens - Votes
Capital Market Union - CMU
Initiatives for the DLT - Smart Contracts - «Golden
transmission of information Copy» - »trusted copy» of
of corporate events Corporate Event Information
Harmonization and
Fintech
Code of Conduct for the standardization of
handling of Tax Withholdings Developments Creation of a Digital Identity Unit -
practices
- Cross Border «Refunds - Certificates of Residence
Relief at source» Process automation

Source : ECB January 2019

Require Regulation
Investor Rights Directive : SRD II
«Disclose
«Disclose
Ensure and encourage investors to Third party
relevant participate in the long-term
management of companies. Improve related
transactions « the economic sustainability of the
European Union
transactions «
«Short Term Returns»
Improve the identification of
investors through the action of Encourage participation of investors
intermediaries - Limit> 0.5%
ownership
«Chain of Intermediaries –
Rights of in the governance of companies -
better means for their participation in
the General Assemblies
«Benefits for the Investor»
International Information
Management »
the «Process costs - non-discriminatory»

Investors Influence the decisions of directors'

Increase the transparency of investment remuneration through the participation of
strategies of institutional investors and investors in their establishment, voting
investment managers and implementation follow-up
«Raise investor awareness » «Full disclosure - correlation to the
performance of the company»

Source: Investor Rights Directive

Target 2 Securities – European Central Bank T2S
One year of full operation LOGROS
Single pool of collateral Optimization of liquidity
for banks and management through the
intermediaries for their introduction of a central
European business liquidity manager

22 CSDs, 20 Markets and two

Self collateralization
currencies on the platform
mechanism to reduce the
(EURO - DANISH CROWN)
need to pre-funding cash
Harmonization of settlement
accounts

Harmonization of Settlement Efficiency- 97.70%

post-trade practices DVP - 69% of the total volume
mitigating cross-border 500 thousand to 625 thousand
settlement risks daily transactions

Single point of entry to the

DVP Resources between 554.2
European Market and
Million Euros and 698.5 Billion
improvement of market
Euros
access to international
Settlement efficiency: 97.54%
investors

Source: European Central Bank Report: T2S Special Series: One year of full operation
Major Initiatives in the Americas Region…

ORIENTED TO THE CLIENT AND TO

THE SERVICE DYNAMIC CHANGES IN
CONSOLIDATION OF VERTICAL
REGULATION AND MARKET
INTEGRATIONS
REQUIREMENTS

ACSDA
NEW DEMANDS FOR REGIONAL
NEW BUSINESS
DEVELOPMENT Members INTEGRATION REGIONAL
IPOs
DIVERSIFICATION
Main Trends IMPROVEMENT OF LIQUIDITY

REQUIREMENT FOR THE

TRANSFORMATIONS AND
ADOPTION OF STANDARDS AND
IMPORTANT TECHNOLOGICAL
NTEROPERATING GLOBALLY COMPLIANCE –
PROJECTS
INTERNATIONAL SERVICES CONTINUE BEING ELIGIBLE
Evaluation of the Colombian Capital Market in relation to
International Standards

PRINCIPAL FINDINGS SUMMARY TABLE

• Risk Management – Control
1 - CCP risk waterfall : CRCC aligned with IOSCO standards on security rings (collateral, warranty funds,, own capital)
A
- Participant Segmentacion : Potential to segment participants according to services they use (e.g., Negotiating Risk Management and Control
members, Clearing and settlement, information, issuers)
B
- Cybersecurity: Collective effort of the entire ecosystem for the prevention and mitigation of cyber attacks. New
1 2 Market Structure
SFC requirements in line with international standards
C
- KYC Requirements: Appropriate level of control with international standards. Duplication of controls between
D entities and requirements not adapted to new technologies (e.g., eKYC)
- Continuidad de negocio: Fortalecimiento de los procesos de crisis y continuidad del negocio a raíz de la
E integración en línea con estándares internacionales
• Market Structure
2 - Central counterparty systems (CCP): Clearing and Settlement by CCP partially implemented. Security rings
aligned with international standards.
-A Central securities depository: Inefficient and expensive bilateral clearing and settlement system. To consider
hybrid omnibus system with final beneficiary registration in depository
-B Regulatory framework: The regulatory framework is adequate for the control of financial markets and in line
with international standards
-C International Custody: No gap has been identified against international principles on international custody

D
Interoperability
3 - Communication standards: Pre-trade and adequate trade communication standards (FIX). Need to standardize
messaging in post-trade (ISO 20022)
A- Unequivocal identification codes: Key ISO identification codes partially implemented (implemented: ISIN, CFI
and MIC, pending: FISN and LEI).
B- International eligibility: The product team takes into consideration international best practices for potential
harmonization with local practices
CLiquidity and Products Interoperability
3 4 Liquidy and Products
4 - Securities Lending for Equity : Multiple barriers hinder the liquidity of equity securities loans (TTVs)
A
- Market makers: Partial adoption of market makers (esp. In equities and derivatives), given the incentives
(regulation, low liquidity, more attractive OTC)
B
- Cross-collateral optimization: CRCC cross-collaterals between products with the same underlying and correlated
underlying assets, not between markets. Non-existent mechanism in bvc
C
4 = In line with international standards and / or global examples
= In line with international standards and / or global examples with opportunity for improvement
2 = Partial compliance with the best international / standard examples
1 = Not in line with the best international / standard examples
Source: BVC consultant