Custodian in Electronic Trading
What has necessitated Electronic Trading?
As I highlighted in my article last week in which I mentioned the custodian-centric electronic settlement model in the Zimbabwean capital markets, electronic trading has come about as a result of inefficiencies encountered during the paper era where high volumes, riddled with the movement of massive amounts of physical securities, were traded. A lot of delays and error were noted resulting in more settlement delays.
Severely delayed settlement of securities transactions could give rise to liquidity problems in the financial markets and late settlement penalties significantly eroded an investor’s wealth. Physical certificates could also increase the probability of fraud and forgeries.
It is from this background that national authorities and central banks in some markets saw it paramount to set up central securities depositories (CSDs) many decades ago to immobilise the securities certificates for the whole market so that physical movements would be eliminated.
Advances in technology enabled other markets to dematerialise, meaning securities would only exist in electronic form. Whether by immobilisation or dematerialisation, securities are transferred from one holder to another in CSDs by “book entry settlement” between securities account holders, which are commonly called members or participants through the custodian.
The first immobilisation of securities in central institutions to facilitate settlement without physical deliveries happened at the end of the 19th century in Germany. In France, the CSD was established in 1942. The majority of the other European CSDs were established in the 1960s onwards. The establishment of CREST in 1996 in the UK finally completed the immobilisation of securities in all the European Union member states prior to enlargement in 2004. Investors in some markets, however, still have the option to hold physical securities if they prefer.
Zimbabwe has recently joined the pack with the setting up of our very own CSD to meet such international best practice. This establishment has merits of efficiencies which encompass:
Reduction of the trade cycle from the current T+7 to T+3 (international standard);
Early settlement resulting in improved liquidity;
Minimisation of risk;
Boost in investor confidence; and
All related asset servicing will now happen electronically thereby improving market efficiency.
Follow the next article in next week’s edition, as I will explore more aspects of Custodial Services.
Contacts: Ground Floor, Fanum House 57 Samora Machel Avenue, Telephone 04-748050-70, email: email@example.com, website :www.cbz.co.zw
Paul Chimudzi is a CBZ Executive in charge of Custodial Services
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