Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8

Market selection

Recommendation 5

The major risks in Securities Systems should be mitigated by five key measures:

• the implementation of real delivery versus payment
• the adoption of a trade date plus one settlement cycle in a form that does not increase operational risk.
• the minimisation of funding and liquidity constraints by enabling stock lending and borrowing, broad based cross collateralisation, the use of repos and netting as appropriate
• the enforcement of scrip-less settlement
• the establishment of mandatory trade matching and settlement performance measures.

1.	Does the market use DvP settlement procedures in accordance with one of the recognised BIS models? If so, which one? If the model is not BIS model 1, are there plans to move to this model?	The CREST system operates model 1 DvP in commercial bank money. This covers government securities, commercial debt and equities. Settlement of stock occurs against an assured payment from one of the UK Chaps settlement banks. Chaps is the RTGS system in the UK and the banks involved are major commercial banks operating in the UK. The assured payment is an undertaking from the buyer's bank that it will pay in central bank money the relevant consideration to the seller's bank at the end of the day. The settlement bank will normally have the right to reverse any payment posted to its client's (the buyer) account if the seller's settlement bank were to default. The CMO system for money markets settlements operates outside of this process with intraday finality of stock against a credit to a memorandum account that is settled with finality only at the end of the day. There is no intraday assurance of payment from settlement banks in the CMO system and the seller's risk is on their counterpart and its settlement bank until the end of day.
2.	Does the market have a rolling settlement cycle of T+3 or shorter for all exchange traded instruments?	The money markets settle on a same day basis and the government securities market settles on a T+1 basis. The equity market currently settles on T+5 for institutional trades and is scheduled to move to T+3 in February 2000. The timing is determined by Stock Exchange rules. The retail market may settle for longer forward dates depending on their arrangements with the relevant retail service provider. Normally the maximum settlement period in the retail market is T+10.
3.	Could the market reduce the current settlement period to T+2 or below, without increasing fails rates? If so, how would this be achieved, and what plans are there to shorten the existing settlement cycle?	CREST settles same day trades now, especially in relation to stock borrowing and funding. The equity market has advised that it does not plan to reduce settlement periods below T+3 for equities until it has seen the impact of T+1 in the US market. Given the importance of overseas activity for the market, there is also concern that the cross border activity in the UK market would suffer if the settlement period for trades were shorter than the current standard settlement period for foreign exchange.
4.	Is matching of trade details achieved on trade date, at least for direct market participants; and by trade date plus one for indirect participants?	Matching of trade details on trade date is the norm for broker dealers and for their stockbroker counterparties who account for the largest volume of transactions. The trade match (using the CREST settlement system) for direct and indirect participants is achieved on T+1 for government securities and T+2/3 for the bulk of bank custodian intermediated equity transitions. Money market trades are usually telephone matched on T+0. Fines under settlement discipline are believed by CREST to support performance in matching, as well as in settlement.
5.	Is the depository scrip-less, and, if not, is it working to enable scrip-less settlement?	Although institutional business is almost entirely scripless, a major part of retail activity is undertaken in certificated form. Under the CREST rules, settlement is always in dematerialised form and certificates for in bound sales have to be validated by the registrar prior to conversion by the registrar to a balance in the relevant broker CREST settlement account. The physical transmission of certificates is undertaken by an agent of CRESTCo under a service level agreement. This enables all registrars to receive certificates at start of business on the day subsequent to their lodgement as long as the lodgement occurs by the early afternoon. The lodgement takes place at dedicated collection centres throughout the UK and Ireland and is undertaken by selling brokers or other direct participants. In turn registrars have all signed a service level agreement committing to reject or process in bound certificates within approximately 30 hours of receipt. Generally, they are processed on the day of receipt. Outbound certificates for purchases are sent to the buyer's broker after settlement in the dematerialised environment. In addition to retail transactions, there remain a number of other physical transactions. Some corporate actions are in paper form; the majority (take-overs, scrip dividends, share splits etc) are electronic. A growing number of securities (including some mutual funds) are in electronic form. A diminishing number of equities are also dealt with in paper form under what is known as the residuals system. Mandatory dematerialization would require primary legislation and, to date, has not had political support. CREST works with market legislators and company stock transfer agents to encourage dematerialization and full CREST eligibility for all exchange traded securities.
6.	Does the market allow partial settlements?	Yes. Users, rather than the depository, need to split transactions to satisfy partial settlements.
7.	Can the depository accommodate same day turnarounds?	Yes. The depository operates in rapid batch/real time throughout the day.

Bank of International Settlements (BIS) Settlement Models

Model 1:	Systems that settle transfer instructions for both securities and funds on a trade-by-trade (gross) basis, with final (unconditional) transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment).
Model 2:	Systems that settle securities transfer instructions on a gross basis, with final transfer of securities from the seller to the buyer (delivery) occurring throughout the processing cycle, but settle funds transfer on a net basis, with final transfer of funds from the buyer to the seller (payment) occurring at the end of the processing cycle.
Model 3:	Systems that settle transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle.