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1 Introduction1

1.1 The Purpose and Scope1

1.2 The Chapters in Outline3

2 Basic Elements of Post-trade Infrastructure9

2.1 Introduction9

2.1.1 The Importance of Post-trade Infrastructure10

2.1.2 The Changing Landscape of Post-trade Infrastructure11

A. Central Counterparty13

B. Clearing15

C. Settlement18

2.2 Payment Systems and Securities Settlement Systems20

2.2.1 Introduction20

2.2.2 Payment Systems22

2.2.3 Securities Settlement Systems23

2.3 Modern Indirect-holding Structure and Book-Entry Securities24

2.3.1 Introduction24

2.3.2 Indirect-holding Structure25

2.3.3 Book-entry Securities27

2.3.4 Transfer of Book-entry Securities30

2.3.5 Concluding Remarks32

2.4 Relevant Developments in Shaping the Future of Post-Trade Infrastructure32

2.4.1 Delivery Versus Payment (DVP): Horizontal Linkage between Payment and Securities Settlement Systems,Various Forms of DVP32

A. UK CREST35

B. CREST DVP Process36

C. Self-collateralisation in CREST37

2.4.2 Straight-Through Processing (STP): Vertical Linkage between Different Tiers of Holding Systems37

A. The Drive towards STP39

B. Benefits40

C. Challenges40

D. The Role of CCPs in STP Process41

E. Market Development41

2.4.3 Concluding Remarks42

2.5 The Future of Post-trade Infrastructure42

3 The Functional and Operational Aspects of Central Counterparties44

3.1 Origins and Historical Development44

3.1.1 Cheque Clearing (Timeline: from 1773)45

3.1.2 Commodity Clearing (Timeline: from 1883)48

3.1.3 Central Counterparty Clearing (Timeline: from 1888)49

3.1.4 Concluding Remarks51

3.2 The Functional Aspects of CCPs52

3.2.1 CCP as Risk Manager52

3.2.2 CCP as Fund Manager54

3.2.3 CCP as Payment and Settlement System Operator56

3.2.4 CCP as Post-trade Market Facilitator57

3.3 The Operational Aspects of CCPs59

3.3.1 Risk Operations60

3.3.2 Treasury Operations62

A. Specially Arranged Payment Scheme62

B. Margining Operations63

C. Operations for Other Services65

3.3.3 Settlement Operations for CCPs65

A. Trade Registration66

B. Pre-netting67

C. Netting Process68

D. Post-netting68

E. Settlement69

F. Major Factors that Affect Settlement Operations70

G. UK CREST71

3.4 Concluding Remarks72

4 Legal Issues: The Key Relationships73

4.1 Introduction75

4.1.1 Trading Rules and Clearing Rules77

A. Trading77

B. Trading/Exchange Rules v CCP Clearing Rules78

C. The Timing Issue79

4.1.2 The Conditions for Transaction Acceptance/Registration80

4.1.3 The Results82

4.2 Overview of the Key Relationships82

4.3 The Relationship between CCPs and Their Members86

4.4 The Relationship between Clearing Members Themselves89

4.5 The Relationship Between Clearing Members and their Clients90

4.5.1 The Nature of the Relationship91

4.5.2 The Relationship between the Two Different Clearing Arrangements92

4.5.3 The Legal Position of Clearing Members affected by CCP Clearing93

4.6 The Position of Clients of Clearing Members95

4.6.1 The Effectiveness and Implications of Implied Terms:Clearing Rules and Regulations as Implied Terms96

4.6.2 The Rights of Clients of Clearing Members96

4.7 The Relationship between CCPs Themselves98

4.8 Concluding Remarks99

5 Default Procedures and CCPs' Default101

5.1 Collateralisation and Financial Collateral Arrangements101

5.1.1 Types of Collateral102

5.1.2 The Use of Collateral103

A. Collateralisation in DVP Arrangements103

B. Collateralisation in Payment Systems103

C. Collateralisation in CCPs104

5.1.3 The Limitation of Collateralisation105

5.1.4 Characterisation and Realisation105

5.2 Netting and Set-off108

5.2.1 Netting108

5.2.2 Definition and Distinctions109

5.2.3 Settlement Netting112

5.2.4 Novation Netting114

5.2.5 Close-out Netting116

5.3 Default by a Clearing Member117

5.3.1 Commencement of Default Procedures119

A. The Prescribed Events that Trigger Default Procedures119

B. Procedures to be Followed120

C. Close-out of Positions120

5.3.2 The Effect of Default Procedures on Other Clearing Members and Third Parties122

5.4 Default by a CCP122

5.5 Concluding Remarks125

6 Regulatory Issues126

6.1 The Purposes and Objectives of Financial Regulation126

6.1.1 The Purposes and Objectives of Financial Regulation126

6.1.2 The Interaction between Financial Regulation and the Markets129

6.2 Regulatory Approaches132

6.2.1 The Modes of Financial Regulation132

6.2.2 The Risk-based Functional Approach135

6.2.3 The Interest of Central Banks137

6.3 CCPs and the Regulatory Regime139

6.3.1 The Need for Separated Treatment for CCPs139

6.3.2 CCPs as Self-Regulatory Organisations141

6.3.3 The UK Regulatory Regime143

A. Market Contracts, Market Charges and Default Rules145

B. Roles of Relevant Authorities149

C. Competition Issues: A Special Competition Regime150

D. The Effect of Recognition152

6.4 Current Situation in the European Union155

6.4.1 The Current EU Initiatives155

6.4.2 The EU Directives161

A. The EU Directive on Directive on Settlement Finality161

B. The EU Directive on Directive on Financial Collateral Arrangements162

C. The EU Directive on Markets in Financial Instruments Directive (MiFID)163

6.4.3 The Challenges to the EU Regulators and Supervisors164

6.5 Concluding Remarks166

7 The Case for a Single Multi-market Central Counterparty169

7.1 Advantages and Disadvantages of CCP Clearing171

7.1.1 From the Markets' Perspective173

7.1.2 From Members' Perspective175

7.1.3 From Non-members' Perspective179

7.1.4 Concluding Remarks180

7.2 The Case for a Single Multi-market Central Counterparty180

7.2.1 The Raison D'être for a Single Multi-market CCP180

7.2.2 The Benefits of a Single Multi-market CCP182

7.2.3 The Risks of a Single Multi-market CCP185

7.2.4 The Global CCP Initiative190

7.3 European Union Developments191

7.3.1 The Current Situation193

7.3.2 The Argument for a Single Pan-European CCP196

7.3.3 Future Prospects198

7.4 Concluding Remarks199

8 Conclusions200

8.1 Modern Post-trade Infrastructure200

8.2 The Legal and Regulatory Framework201

8.3 A Single Multi-market CCP203

Select Bibliography205

Index215