Links between securities settlement systems: oligopoly approach

This paper presents a duopoly model of the securities settlement industry. Because pooling a large amount of payments can help in using liquidity efficiently, issuers prefer systems where a large number of securities are issued. If the central securities depositories establish a mutual link that enables investors to make transactions with foreign securities, cost savings can be achieved. However, these links may have unexpected effects on CSDs’ pricing, and the issuers’ share of the fee burden can increase substantially. It is not advisable to ban additional fees for using the link, as the CSDs might simply increase the fee for domestic transactions.

Introduction: The key functions in secondary markets for securities are trading, clearing and settlement. In conducting trades, agents simply agree (make a deal) on buying and selling securities. The deals are executed in the clearing and settlement process. To put it simply, clearing entails the matching and verification of deals and computation of obligations. In the settlement process, monetary payments from buyers to sellers are executed and securities are delivered from sellers to buyers.Securities transactions are usually settled a few days after the deal.

Author: Karlo Kauko

Source: Research Discussion Papers, Bank of Finland

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