The goal of developing a disclosure framework for securities settlement systems (SSSs) builds on important prior work undertaken by the CPSS and IOSCO to identify risks associated with securities settlement. The 1992 CPSS report Delivery versus Payment in Securities Settlement Systems (DVP Report) defines and analyses the types and sources of risk associated with settlements between direct participants in a single settlement system. This report also clarifies the meaning of delivery­versus­payment (DVP) mechanisms and describes three common approaches to achieving DVP, each of which entails different risks to market participants.

The Cross­Border Securities Settlements report (Cross-Border Report), prepared by the CPSS in 1995, expands on the DVP Report by analysing the channels that market participants use to complete cross-border securities transactions. This report outlines the different risks that may be present in these arrangements, even in those cases where DVP is achieved, including replacement cost risk, liquidity risk, cash deposit risk, custody risk and systemic risk. In particular, the report highlights the fact that custody risk will be present whenever market participants hold their securities through an intermediary, a standard practice for non-residents attempting to settle cross-border transactions.

The Cross-Border Report stresses the importance of understanding the nature of the custody risks, as well as the procedures used to effect back-to-back settlements and cross-system settlements in the cross-border context. The report concludes that the complexity of relationships between the multiple intermediaries associated with cross-border settlements poses challenges to the oversight of domestic markets and settlement systems. It notes that the most basic challenge stems from a lack of transparency in cross-border securities settlement arrangements.

In 1990, IOSCO published a report in which it endorsed and supported the prompt implementation of nine recommendations by the Group of Thirty, such as shortening the time between trade date and settlement and assuring the simultaneous exchange of payment and securities. Successive reports on their implementation have also been prepared (1993, 1994, 1995 and 1996). In 1992, IOSCO published a document entitled Clearing and Settlement in Emerging Markets - A Blueprint, to facilitate the development of centralised, automated SSSs.

More recently, IOSCO's 1996 Report on Cooperation Between Market Authorities and Default Procedures (IOSCO Report) determines that transparency of market default procedures is important in that it provides certainty and predictability to market participants, facilitates orderly handling in case of an actual default and enables market participants to make an informed assessment about markets.

These reports, as well as other work undertaken by the CPSS and IOSCO, have consistently emphasised the importance of transparency of market mechanisms. At the same time, however, growth in worldwide settlement volumes and greater use of financing transactions have required settlement system operators to develop processes for more rapid exchange of securities and funds and more efficient linkages between systems. Moreover, as prior reports have shown, apparent similarities in the technologies employed and services offered can mask significant differences in securities settlement arrangements, as well as in the approaches taken to the management of the associated risks.

Therefore, it is critical that participants in the securities markets carefully examine the rules and operating procedures and practices of each system, as well as the governing law, underlying custody arrangements and linkages across systems. While much relevant information of this type is publicly available, it is often contained only in extensive, detailed handbooks of rules and procedures. A number of SSSs do publish informative pamphlets for their participants, but these can take a variety of forms, making it difficult for participants to assess similarities or differences in the risk management approaches used by the different systems.

To assist market participants in identifying important risks associated with their participation in SSSs, the CPSS and IOSCO therefore determined that it would be beneficial to develop jointly a disclosure framework that system operators and participants could use to gain a clearer understanding of the rights, obligations and exposures associated with SSSs. The CPSS and IOSCO welcomed the participation of a number of private sector SSS operators in the development of the disclosure framework.

The framework is intended to be completed by SSS operators for the information and benefit of their direct participants, both current and potential, as well as for indirect participants. It is not intended as an attempt to set prescriptive standards for SSSs, as a replacement for the rules and procedures of the SSS or as a legal representation or binding contract. Moreover, the framework does not necessarily identify all information that the SSS should disclose in the light of its individual facts and circumstances and therefore it may be necessary for participants to discuss issues directly with the SSS to obtain a full understanding of the system. The framework should, however, help market participants and regulators to organise and understand the information that they need in order to appraise the risks, including any systemic risks, potentially associated with SSSs.

While the framework focuses on the risks of direct participation in SSSs, it is clear that many of the same issues arise in connection with the relationships between market participants and local or global custodians. Therefore, while this framework is not intended to cover the specific aspects of these relationships, it may be helpful as a point of reference for those using the services of custodians as well.

The sections below are intended to elicit important information from SSSs in the areas of organisational structure and market context, ownership arrangements, rules and procedures, relationships with participants, links to other SSSs and intermediaries, procedures for funds and securities transfers, default procedures, settlement of back-to-back transactions, risk control measures and operational risks. The disclosure framework is structured in the form of a questionnaire which SSSs would complete. The CPSS and IOSCO encourage SSSs to complete the questionnaire and make their responses available to market participants, regulators and other interested parties. To ensure that the information in their responses to the questionnaire remains accurate, SSSs would also need to review their responses periodically, at least annually, and make appropriate changes if necessary. The questionnaires completed by SSSs would therefore serve to increase the transparency of their operations to the market­place.

Instructions for Completing the Disclosure Framework 1. Please answer all the questions. If a question is not applicable, please indicate that this is the case and explain why it is not applicable. 2. Note that in most cases each section consists of a number of headline questions (shown in italics and labelled A, B, etc.) supplemented by more specific sub-questions. The headline questions are the key questions, so please make sure that each is answered in full. Answering each of the sub-questions may not, in all cases, provide a full answer to the headline question. 3. Please answer the questions in the order presented and restate the questions themselves when providing the answers. If necessary, cross-reference information given elsewhere in the response if this is helpful in avoiding duplication. 4. The glossary accompanying the disclosure framework defines the meaning of terms as used in the questionnaire. Please make sure that the use of terminology in the responses is consistent with these definitions. If a term used in a response is system-specific or used in a way that could be misunderstood, please provide a clear explanation of how the term is used. 5. Some of the questions specifically suggest the use of charts or diagrams to clarify a response. Please feel free to include additional charts or diagrams wherever they would be helpful. All charts and diagrams should be accompanied by a description that enables them to be understood. 6. In cases where multiple responses to a question are possible for example if the SSS offers multiple approaches to settlement processing, please provide a response covering each of the alternatives and indicate the extent to which each alternative response is relevant. 7. Please do not simply refer to or quote rules or regulations as a response to the questions unless this is specifically requested. As a supplement to a response, however, please feel free to indicate where relevant rules or regulations may be found. 8. Where questions ask about the timing of events, please provide responses relative to the local time zone where the SSS is located. 9. Please review responses periodically (at least annually) and update if necessary to ensure that they continue to provide an accurate description of the SSS and its practices. Significant changes to the SSS should also be reflected as soon as possible after they occur. Please date the response so that it will be possible to determine how recently an update has been made.