2.1 Scope of the study: key definitions

In this study, a cross-border trade is defined as a trade between counterparties located in different countries. A cross-border settlement is defined as a securities settlement that takes place in a country other than the country in which one or both counterparties are located. Under these definitions every cross-border trade results in a cross-border settlement, but cross-border settlements can also result from domestic trades.

In the simplest and most common case, a counterparty located outside the country in which the security is issued trades with a counterparty located in the country of issue, and the trade is settled in the country of issue. However, it may be noted that the country of issue of a security is not necessarily the country in which the security is most actively traded or the country in which the majority of trades are settled. In the case of Euro-bonds, issuers are located in a variety of countries, the most active trading is usually in London, and settlement usually occurs in Belgium (through Euroclear) or in Luxembourg (through Cedel). In the last few years, much the same pattern has emerged for certain European government securities ­ much of the trading reportedly takes place in London rather than in the country of issue, and trades are often settled on the books of Cedel or Euroclear or via a link between one of these systems and a settlement system in the country of issue. For trades settled over these links, settlement should probably be considered to take place in more than one country. In any event, however, such settlements clearly should fall within the definition of the term cross-border settlement and, therefore, within the scope of this study.

It is worth noting that under the above definitions trading and settlement of a security outside the country of issue would not be considered cross-border trading or cross-border settlement if the counterparties are located in the same country and settlement takes place in that country. For example, secondary trades and related settlements of depository receipts would not be considered cross-border trades or cross-border settlements. In such cases, however, a bank or CSD in the home country must hold the securities in custody for a bank or CSD in the country in which the trading and settlement take place, so that a cross-border custody relationship is involved.

2.2 Expansion of cross-border trading and cross-border settlements

Comprehensive data on cross-border trading or cross-border settlements simply do not exist. The best data on cross-border trading are compiled from national balance-of-payments statistics. As shown in Table 1, these data indicate that in the G-7 countries the growth of cross-border trading of bonds and equities has far exceeded the growth of GDP over the last two decades and especially during the last few years. It should be noted that the quality of these data varies. The primary purpose of balance-of-payments statistics is to measure changes in net holdings of foreign securities by domestic residents and of domestic securities by foreign residents rather than gross volumes of cross-border trading. Indeed, the United Kingdom, which is probably the most important centre for cross-border trading, discontinued collection of gross transactions data after 1991. Nevertheless, that cross-border trading has grown extremely rapidly in recent years cannot be seriously disputed.