DTCC, CDS to Link for Canadian Dollar Settlement
August 18, 2005
Getting up to speed with its European brethren, the U.S.' Depository Trust & Clearing Corp. will soon settle transactions in a foreign currency--Canadian dollars--for the first time ever.
An enhanced link between the DTCC's Depository Trust Co. (DTC) subsidiary and Canada's central securities depository, the Canadian Depository for Securities (CDS), will be piloted in November and go live in early 2006, the companies said this week. It is aimed at reducing broker-dealers' cross-border processing costs and inefficiencies by eliminating problems associated with maintaining split inventories at both DTC and CDS, said DTCC vice president John Abel.
In split inventories a portion of a position in an issue eligible for settlement in both DTC and CDS is maintained with CDS for Canadian dollar settlement; the remainder is kept with DTC for U.S dollar settlement. The new link will allow DTC customers to concentrate all U.S. and Canadian securities positions in their DTC accounts.
Until now, transactions in DTC- and CDS-eligible Canadian and U.S. securities could be settled only in U.S. dollars. Those wishing to settle in Canadian dollars needed to hire a local agent bank in Canada to pay for and accept delivery of securities from the CDS.
Cross-border transactions in U.S. dollar-denominated transactions with DTC account for one million--or about 25 percent--of CDS' yearly traffic, say CDS officials. CDS' link to DTC is its only link with a foreign depository for settlement of cross-border transactions. CDS connects to Japan and France's local depositories for custody purposes only.
International securities industry groups have been promoting efficient delivery-versus-payment linkages between national and international depositories in order to make settlement of cross-border transactions just as inexpensive and easy as settlement of local deals. Europe has taken the lead in this effort, in large part because of preexisting linkages between international depository Euroclear Bank in Brussels and numerous national depositories and other depositories in the Euroclear family.
Euroclear Bank maintains 38 links with depositories outside its home market in Belgium, some of them direct, others through local agent banks; it also connects to rival Clearstream Banking Luxembourg, and it settles in 33 currencies, including the euro.
Of the 38 linked depositories, all but 3 allow for delivery-versus-payment settlement of cross-border transactions. Thirty-one allow for same-day settlement, and 36 allow for same-day turnaround for some transactions, depending on the location of the counterparty. This means that counterparties dealing through Euroclear Bank or another depository can use their cash and securities on the same day their cross-border transaction settles. This frees parties to begin transacting business with yet another counterparty immediately, avoiding the financing costs associated with a day's delay, says Philip Van Hassel, director of network management for Euroclear Bank.
In some cases, such as the link between Euroclear Bank and Japan's central securities depository, same-day turnaround is not possible due to time-zone differences and differences in processing cycles.
At the behest of the European Commission, the trade group European Central Securities Depositories Association, has lobbied for common operating hours and operating procedures for its 15 member depositories. The EC has identified discrepancies in market practices as being one of the stumbling blocks to a unified capital market in Europe.
In addition to CDS, DTC has connections to another 12 national and international depositories to settle DTC-eligible issues in U.S. dollars, but its existing link with Canada is the oldest and largest by volume of traffic, reflecting the fact that Canada is the U.S.'s largest trading partner for securities transactions. Many Canadian and U.S. issues are listed in both markets, but more cross-border business takes place in U.S. securities than Canadian, says Abel.
