1.1 At a meeting in December 1990, the Committee on Payment and Settlement Systems (CPSS) reviewed clearance and settlement arrangements in securities markets in the Group of Ten countries. The reports presented at that meeting indicated that substantial efforts have been made throughout the G-10 countries to reduce risk and increase efficiency in settlement arrangements since 1987, when the worldwide collapse of equity prices exposed weaknesses in many of those arrangements. In particular, market participants in each of the G-10 countries have been striving to implement a set of recommendations for strengthening and harmonising settlement arrangements in the corporate securities markets worldwide that were promulgated by the Group of Thirty in March 1989 (see Annex 1). Central banks are concerned about the strength of securities clearance and settlement arrangements because they perceive that disturbances to settlements in the securities markets have the potential to spread to the payment system and to the financial system generally. Because of this concern, most of the G-10 central banks have been actively involved in the efforts to implement the Group of Thirty's recommendations. In addition, publication of the Group of Thirty's report and recommendations has prompted authorities in many of the G-10 countries to re-examine settlement arrangements for government securities. in which central banks typically play a prominent role.
1.2 Although several of the Group of Thirty's recommendations were discussed by the CPSS at its December 1990 meeting, the recommendation that delivery versus payment (DVP) should be employed as the method of settling securities transactions received the most attention. The discussion revealed that the DVP recommendation has gained widespread acceptance. The intent of the recommendation is to reduce or eliminate principal risk in securities settlements, that is, the risk that the seller of a security could deliver the security but not receive payment or that the buyer of a security could make payment but not receive delivery of the security. Principal risk in securities clearance and settlement systems is generally recognised to be the largest potential source of systemic risk, that is, the risk that the inability of one institution to meet its obligations when due will cause other institutions to fail to meet their obligations when due, ultimately jeopardising the stability of payment systems and of financial markets.
1.3 Although the DVP recommendation has gained widespread acceptance, the CPSS's discussion revealed divergent views about the types of settlement systems that could be considered to achieve DVP. The vast majority of securities settlement systems in the G-10 countries claim compliance with the DVP recommendation. But the Committee's review uncovered significant differences in the means by which DVP is achieved, and, more importantly, suggested that sign)ficant differences might exist in the degree of protection provided by the various systems against principal risk and against credit and liquidity risks generally. In these respects, the understanding of DVP and its implications brought to mind the state of understanding of netting and its implications prior to publication of the Report on Netting Schemes (Angell Report) and the Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries (Lamfalussy Report).
1.4 The broad objective of the Delivery Versus Payment Study Group was to achieve a clearer understanding of mechanisms for achieving DVP and the implications of the design and operation of such mechanisms for credit and liquidity risks in securities clearance and settlement systems. Specific objectives included: (a) development of a framework for analysing the types and sources of financial risk in securities clearance and settlement; (b) review and description of securities settlement systems in use or under development in the G-10 countries; (c) identification of common approaches to DVP, common risk management issues and common risk safeguards; and (d) development of a framework for evaluation of the implications of the design and operation of DVP mechanisms for central bank policy objectives relating to stability and the containment of systemic risk. The Study Group also sought to make some progress towards understanding the implications of cross-border linkages between securities settlement systems for credit and liquidity risks in cross-border securities transactions.
1.5 The remainder of this section of the Study Group's report summarises the principal conclusions of its analysis and provides a brief account of its preliminary work on cross-border linkages. Section 2 develops a framework for analysing the types and sources of financial risk in securities clearance and settlement. Section 3 identifies and describes three common approaches to achieving DVP. Section 4 identifies several risk management issues common to all three approaches and common safeguards that may be employed to reduce risk. Section 5 considers whether the standards for the design and operation of cross-border and multicurrency netting and settlement schemes that were developed in the Lamfalussy Report (the Lamfalussy standards) also provide a useful framework for evaluating the implications of the design and operation of securities settlement systems for central bank policy objectives. Annex 2 is a glossary, while Annex 3 is a tabular summary of key features of the securities transfer systems in the G-10 countries that have been reviewed by the Study Group. Annex 4 lists the Lamfalussy standards.
