Essay on Globalization of International Clearings: continued

Globalization and the Group of Thirty

John Reed's Initiative

In October 1987, there was a sharp crash in stock prices that placed unusual stress on financial clearing and settlement. Recognizing the dangers of severe price swings to global clearings, thirty large international banks came together under the leadership of John Reed, Chairman of Citibank, and issued nine succinct recommendations for reducing risk in cross-border securities settlement.

These banks called themselves The Group of Thirty (G30) (4). Their recommendations included curtailing settlement time, setting up book-entry settlement procedures and a central depository, adopting delivery against payment rules, netting trades while using same-day-funds, accepting International Standards Organization (ISO) guidelines for security identification and messages, and promoting the lending and borrowing of securities to ease settlement.

The G30's Small Staff

The G30 used its exceedingly small staff to send an annual questionnaire to securities regulators throughout the world, asking them to report compliance with the G30 suggestions. The G30 issued an annual report of progress and added further proposals.

Despite the G30's lack of official status, response to the questionnaire was good, since countries were eager to show the international banks that their markets were safe or improving, deserving attention of foreign portfolio investors.

The ISSA Joins In

An older organization, the International Society of Securities Administrators (ISSA) (5), backed the initiative of the G30. This society had members in common with the G30.

The heads of the global custodial services of Citibank and the Union Bank of Switzerland proposed setting up the ISSA in 1975. In 1979, other banks joined ISSA and took part in annual seminars on securities custody.

The published reports of these meetings were of high technical quality and contained valuable information on custodial practices, prepared by experts with decades of experience.

The ISSA published a Handbook that was the world’s best source of summarized, up-to-date operational information on world capital markets.

The original nine recommendations of G30 were still being surveyed a decade later, now called the G30/ISSA recommendations to signal the joint-backing of these two associations.

IOSCO Gets Involved

In the 1970s, the U.S. Securities and Exchange Commission decided to sponsor an international organization to help promote American securities regulatory practice in Latin America.

This group, called the International Organization of Securities Commissions (IOSCO) was headquartered in Montreal, Canada (to make the group acceptable in Latin America where anti-American sentiment ran high). In the 1980s, with globalization and growth of international portfolio investment, almost every country with a stock market rushed to join IOSCO.

Now the organization acts as a supra-national policy board for securities regulators, with four strong committees serving the Americas, Europe, the Mid-East and Africa, and the Asia-Pacific regions. IOSCO approved the G30/ISSA recommendations in the 1990s. IOSCO received financial support from the World Bank and from member countries.

The FIBV Supports The Movement

The Fédération Internationale des Bourses de Valeurs (FIBV) with fifty-seven member stock exchanges also became involved in clearing and settlement matters and issued its own recommendations and ratings of clearing systems.

The FIBV was formed in the 1930s in Paris by the International Chambers of Commerce, and was known as the International Bureau of Stock Exchanges until World War II. In 2001, the FIBV changed its name to the World Federation of Exchanges.

Other regional associations of stock exchanges issued similar recommendations on clearing issues: African Stock Exchanges Association (ASEA), East Asian and Oceanian Stock Exchanges Federation (EAOSEF), Federación Iberoamericana de Bolsas de Valores (FIABV), Federation of Euro-Asian Stock Exchanges (FEAS), Federation of European Securities Exchanges (FESE), and the South Asian Federation of Exchanges (SAFE)

The BIS Sets Up the CPSS

Finally, the Bank for International Settlements (BIS), dating from before World War II, got involved and formed a Committee on Payment and Settlement Systems (CPSS) and issued its own recommendations on clearings and settlement.

Perhaps feeling the G30/ISSA recommendations were tainted by having originated in the private sector, IOSCO and the BIS adopted the G30/ISSA recommendations but added a few more, now calling the expanded package: the CPSS/IOSCO recommendations.

Whereas the G30/ISSA recommendations had been devised by experienced custodians with a practical knowledge of the field, the CPSS/IOSCO Task Force on Securities Settlement Systems was made up of civil servants and politicians.

The CPSS/IOSCO Task Force took over the original G30/ISSA recommendations, adding ten recommendations of slight technical merit such as the suggestion that “settlement systems should be cost-effective”.

Essay: continued >

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