SCEFI I & II - Vision, Concept and Progress Briefing for SFS - PowerPoint PPT Presentation

SCEFI I & II - Vision, Concept and Progress Briefing for SFS July 2001

SCEFI I - Steering Committee for the Enhancement of Financial Infrastructure  Study ways to enhance Hong Kong’s competitiveness as an IFC  Chaired by the Chairman of SFC  Members from SEHK, HKFE, CCASS, FSB, ITB, HKMA and market participants  Assisted by Andersen Consulting  Completed work in September 1999

Vision for success GLOBAL Strategic Market Reach Positioning Truly Global Hong Kong Germany Cross Region US France Singapore Switzerland UK DISPARATE INTEGRATED Market Integration Within Region Within Country Legend: Current assessment Japan Strategic direction based on announced plans Hong Kong Australia Potential direction for Hong Kong in two years Disparate Entity Vertical Silo Cross Market Complete Integration LOCAL

Vision for success Vision as a leading eEconomy : To embrace an infrastructure that allows local and global market participants to access, via a “single window” (which is web-enabled), the full spectrum of financial products and services on an open, robust, secure, scalable, and high performance network.

Vision for success Creating our future... One of the leading clearing & settlement centers in  the Asian time zone A center of excellence for risk management & a  liquidity center in Asia Asia’s portal for strategic links with global markets  A center of excellence for financial infrastructure 

Recommendations - Single clearing arrangement Building blocks: Consolidated clearing account structure  Real-time position creation & management  Unified money settlement through interbank RTGS  Portfolio-based risk management & collateralization  Synchronized processing of consolidated clearing  Key Benefits: Improve risk management across markets  Reduce settlement risks and improve efficiency  Enhance market liquidity 

Recommendations - Straight-through processing Building blocks: Transaction flow manager (TFM)  Transaction routing system  Electronic transaction interface  Common banking interface  CSD-to-CSD bridges (multiple bilateral links)  Key Benefits: Reduce pre-settlement risks and operating cost  Shorten the settlement cycle to achieve T+1 settlement  Increase settlement accuracy/efficiency 

Recommendations - Scripless securities market Building blocks: Electronic & instantaneous share registration  CSD-to-registrars links  Comprehensive investor participation for direct settlement  CSD/registrars’ infrastructure upgrade  Fine-tune the legal & regulatory framework  Key Benefits: Ensure instantaneous legal certainty of share transfers  Enable real-time DvP and registration  Through STP, increase efficiency and reduce cost 

Recommendations - Robust technology structure Building blocks: Unified, open & global access through various channels and  complying to standards (e.g., Web, APIs, SWIFT, ISO) Secure, high performance & resilient community network ;  scalable, flexible & interoperable with the financial conduit “FinNet” Reliable gateway for message-based/interactive connections  Integrated global leading league’s services for alliance readiness  Key Benefits: Pave the way for FinNet implementation  Provide a “single” window access to the full spectrum of financial  services Provide an integrated platform for risk management and STP  initiatives

Vision for success Local Investors Global Users & Investors Components of Local Investors Global Users & Investors The eFrastructure eFrastructure: Market Market Single clearing Overseas Brokers FinNet - Securities & Derivatives Community Network Brokers Regulator Regulator  arrangement HKEC Trading Exchange Alliances Exchanges Exchanges HKEC Clearing STP HKEC Transaction HKEC Transaction Straight-through Processing  Information Routing System Information Routing System Services Services Consolidated Clearing Account Transaction Scripless Transaction Cross-market Risk Management Flow Manager  Flow Manager Cross-collateralization Clearing Houses Fund Clearing Houses Fund Managers securities Managers Electronic Electronic Securities Risk Derivatives Transaction Transaction Clearing Collateralization Clearing CSD-to-CSD Bridges Depositories Depositories Interface Interface market Common Common Banking Banking Securities Settlement Securities Depository Interface Interface Share Open, robust, Share Registration Registration  Unified Money Settlement and scalable technology Custodians FinNet - Securities & Derivatives Community Network Issuers Custodians Issuers structure Banks RTGS Foreign Currency Settlement Payment Systems Banks RTGS Payment Systems

SCEFI II SCEFI I Report published in September 1999  Progress on FinNet and STP was slow during 2000  Financial Secretary reconvened SCEFI II in November  2000 Inaugural meeting of SCEFI II held on 5 December  2000 Differences of views on role of CCASS in FinNet caused  delay in agreement on way forward Consensus reached on FinNet with HKEx in April 2001  2nd meeting held on 27 April 2001 

SCEFI II Work Progress  FinNet - SFC Project Team  Outsourcing of FinNet’s network infrastructure service  Jointly selected New T&T with HKEx  HKEx signed a three-year service contract for CCASS/3 network service on 20 June 2001  SFC is negotiating a service contract for FinNet  Straight through processing - Working Group on Money Settlement of CCASS Items  Advancing money settlement of CCASS CNS transactions to day end of T+2  Appointing a consultant to examine and enhance retail payment for online trading  Dematerialisation - SFC Working Team  “Scriplessness” time table set up in June 2001  Developing a detailed proposal

SCEFI II Work Progress  CCASS/3 architecture  New CCASS network - FinNet  ISO 15022 compliance (Q2 2002)  User access options (Q2 2002)  Browser  API  SWIFT (GSTPA)  Database segmentation  Middle-Tier architecture  DCASS architecture  OM SECUR + OM Click = a seamless trading and clearing derivatives platform for futures and stock options  Single clearing arrangement  CCASS/3 + DCASS  Common risk management system  Common collateral management system

Common Problem for International Financial Centres  Many networks  Many circuits  Many workstations  Different protocols  Different user interfaces  Different messaging formats  (New York, London, Hong Kong etc.)

A Common Problem Payment System Futures Exchange Stock Exchange Banks Independent Financial Planners Securities Brokerage Insurance Houses Companies Regulatory Bodies

Many connections and workstations  Brokers participating in all 3 markets require:  Dozen+ connections and workstations to: – Trade stocks, options, futures – Settle transactions with 3 markets – Make payments – Deposit/withdraw securities to/from custodians – Obtain market news – Lack of STP creates costs + risks  Service providers benefit at additional cost to market

No STP = Additional costs + Risks  High cost and inconveniences - only problems on the surface  Real issue = No single driver - users are reluctant to change their existing systems due to inertia.

Straight-through Processing (STP) • STP - Transactions, once entered, processing across automated and integrated systems, without data re-entry and conducting non- value-added manual intervention • Benefits: reduce errors, costs, settlement risk, faster settlement cycle, good audit trail, faster market transparency = more efficient market operation • STP critical to HK’s competitiveness given high staff costs and rents

According to an STP audit conducted by SWIFT, savings for increased STP in Hong Kong could be as much as HK$234-312 million annually. Savings USD 40% to 45% 8 - 10 Cost of STP Rate million/year settlement Cost of Savings USD 80% settlement 15 - 20 STP Rate million/year Source: SWIFT

How Nice? all on a common network, accessing all systems, via one single connection?

Organic Growth of FinNet HKEx Fund RTGS Managers Overseas Systems Payment Insurance Banks Services Companies Boutique AMS/3 TvP RTGS Network Financial Companies STP FinNet Independent Insurance DvP Agents FinNet FinNet CCASS Network PvP CCASS CCASS/3 Independent Mortgage Law Brokers Firms HKATS HKMA & Clearing OCI Independent Brokerage SFC Financial Planners MPFA Houses Regulatory Bodies

Vision of FinNet  A single secure, open, scalable, high performance financial community network  interconnecting banking, securities, insurance, and all other licensed entities in Hong Kong,  with a global reach,  to effect STP, achieving real time DvP, PvP and TvP.

FinNet  Open standards technology - Extranet  Uniform user-interface  Standard message formats  Public key (PKI) security technology  High availability and reliability  Open to provide service to one another