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?	DTCC: Yes, the DTCC operates DVP Type II settlement, which covers equities and corporate debt. Securities settle on a real-time gross basis throughout the day, while cash settles on a net basis at the end of the day. The net trade activity will either require participants to fund their obligation with DTCC by crediting funds to DTCC's account at the Federal Reserve bank for a net negative position, or DTCC will credit the participant's account at the Federal Reserve bank for net positive cash position. DTCC reserves the right to reverse out trades on a LIFO basis to protect participants, but this is rare, as the market has a number of default protections in place, including a participant fund, debit caps and credit lines of up to $US 1 billion. Non-trade related security transfers can be effected during any cycle - usually on a less than T+1 basis. FED: The Federal Reserve Bank operates DVP Type I settlement, which covers government debt issues. Securities and cash settle simultaneously throughout the day on settlement date.
2.	Does the market have a rolling settlement cycle of T+3 or shorter for all exchange traded instruments?	Equities and non-government debt settles on a rolling T+3 basis from Monday through Friday. Government bonds normally settle on a T+1 basis although they can settle on a T+0 basis in certain cases. Commercial paper settles on a same day basis (T+0).
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?	The market is tentatively scheduled to move to T+1 in June 2005. A Securities Industry Association (SIA) study was conducted that identified 10 major milestones that must be overcome before the T+1 standard will become feasible.
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?	DTCC: There are two methods of settlement in DTC. Under the institutional delivery system, through direct affirmation, DTC confirms trades to participants and they electronically affirm each trade for automatic settlement. For trades entered after the affirmation deadline on T+1, there is no formal trade matching mechanism. FED: The Fed Book Entry (FBE) system does not allow for the matching of trades prior to settlement. The settlement process is initiated by the seller who electronically delivers securities to the purchaser in exchange for immediate credit to its account. Trade matching for FBE is done through GSCC, restricted to members only. Most brokers and dealers are members of GSCC.
5.	Is the depository scrip-less, and, if not, is it working to enable scrip-less settlement?	Institutional transactions are almost entirely scripless. The settlement of equities and corporate debt within DTCC and government debt within the FED takes place in scripless form. As of October 2000, DTCC held 83% of all NYSE-traded shares outstanding and 72% of all NASDAQ-traded shares outstanding. The Securities Industry Association has issued a 'White Paper' outlining proposals targeted at complete "dematerialization" of physical stock certificates. The SIA recommends that these proposals should be implemented at least six months prior to T+1 taking effect - details can be found on the SIA's website.
6.	Does the market allow partial settlements?	DTCC: Yes, if both parties agree to this arrangement. FED: Not applicable
7.	Can the depository accommodate same day turnarounds?	DTCC/FED: Yes. The depository can accommodate same day turnarounds. Turnarounds are common in the US, particularly with securities lending transactions.

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.