Central Securities Depositories’ Sideline Topics

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A new IMF Working Paper supported by the multi-donor First Initiative itemized the range of considerations for developing securities market central depositories (CSDs), and in particular whether the account, settlement and safekeeping functions should  be held in a single entity and if the government should own and operate them. No international detailed best practice has yet been developed in this area, and the study urges balance between safety and efficiency within explicit legal and supervisory regimes and public and private stakeholder involvement. The oversight body IOSCO presents general financial market infrastructure principles, and global case studies of central banks and stock exchanges clarify outstanding themes. CSDs are systematically important with payments network links and monetary policy applications including for open market operations. Corporate debt and equity responsibility is normally with the Finance Ministry, and of 95 countries surveyed, over half have a single one, with this model most common in the Eurozone. In Africa central banks lead the process, and of the 150 depositories in the World Bank’s data base one-third are run by them for government paper only. Economy of scale is the main argument for one unit enabling high cost technology recovery, and international custodians prefer this simpler model. Distributed ledger “block chain” capability may be the next generation with direct user access. Safety is an offsetting concern, and multiple provider systems integration may be an easier fix as in Tanzania and Georgia. Competition between operators is another solution as in India with the caveat that risk standards could also lower. Cross-border arrangement may be the chosen route as in the West Africa Francophone zone, and less formal unions such as Latin America’s Pacific Alliance grouping Chile, Colombia, Mexico and Peru. Private actors may not have the money or knowhow, and in startup stock exchanges like Rwanda’s the government has been fully in control from the outset. They must have contingency plans, offer book-entry automation and manage capital, credit and liquidity for their account within defined legal and regulatory parameters. The chief executive must also have convening power to mobilize banks, brokers, and central bank and ministry representatives, which may be difficult if commercial return is the overriding motive.

The paper cites a full gamut of alternatives, such as the dual CDSs in the Kyrgyz Republic for stability; Mexico’s pioneer single private one; the Philippines’ Finance Ministry governance: and Lithuania’s gradual public stake sale. Global debt houses are gearing up for an end decade burst of activity in the multiple local and external corporate and sovereign asset classes currently running $700 billion against benchmark indices with half in hard currency. Credit quality is majority investment-grade and duration and yields are above the developed world. Regional exposure is diversified and emerging markets account for only 10% of world debt versus 40% of GDP. Frontier destinations are early in refining depository methods despite economic stabilization and capital market development progress, and fund managers will increasingly incorporate such institutional factors into future allocation. According to recent research by Europe’s NN Partners on its 25th anniversary infrastructure reliability could feature in an extended environmental-social-governance screen also likely to be a central function.