The present report, prepared by the Study Group on Cross-Border Securities Settlements, continues the work that was begun with the publication in 1992 of the Committee's report on Delivery Versus Payment in Securities Settlement Systems (the DVP Report). The DVP Report focused on the settlement of securities transactions between direct participants in a single settlement system. In the course of preparing the DVP Report, it became clear to members of the Committee that settlement arrangements for cross-border trades nearly always involve additional intermediaries whose roles and operations were not thoroughly examined in the DVP Report. In this new effort, the Study Group has examined all of the channels that market participants use to complete cross-border securities transactions, including the use of local agents, global custodians and international central securities depositories (ICSDs). Special attention has been paid to the links that have been developed between ICSDs and local CSDs.

The Study Group's work highlights several important developments in securities markets in recent years and their implications for settlement risks. The daily volume of settlements has grown dramatically over the last few years in most of the G-10 countries, in large part because of the expanding use of market transactions, such as repurchase agreements, to finance securities inventories. These same financing techniques have increased the pressure on settlement agents to permit receipt and redelivery of securities on the same day. This, in turn, has fuelled demands for the development of electronic transfer systems and efficient links between systems.

The growing importance of links between securities settlement systems has significant implications for systemic risk. Most of these systems have been designed to meet local market needs. The technology that drives them is often similar, creating an impression that all book-entry securities transfers are the same. As the present study and the DVP Report have shown, those apparent similarities can mask significant differences between systems. Participants in the securities markets must carefully examine the rules and operating procedures of each system, the governing law and the underlying custody arrangements. When carrying out settlements via links between systems, they must also carefully consider how differences in the rules and procedures of the linked systems affect settlement risks.

Many of the issues examined in this report ­ the role of intermediaries, custody risk and the costs and risks involved in settling "back-to-back" trades - are also important to domestic settlements. The report therefore serves two functions: it identifies sources of risk in cross-border settlement arrangements, and it contributes to a deeper understanding of risks in domestic securities settlements.

William J. McDonough, Chairman,

Committee on Payment and Settlement Systems

and President, Federal Reserve Bank of New York

March 1995