## howtonote1901

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---

### Introduction and summary
- Objective and scope:
  - Support authorities in decision making about the optimal organization of central securities depositories (CSDs) in their country.
  - Definition: a CSD is an entity that provides securities accounts, a securities settlement system, and central safekeeping services to market participants.
  - Note prepared by Froukelien Wendt, Peter Katz, and Alice Zanza; draws on IMF and World Bank interactions and missions, academic literature, and international standards (notably the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) and the World Bank Global Payment Systems Survey).
- Target audience:
  - Decision makers (ministries of finance, central banks, securities regulators), private financial sector participants, policymakers, international standard-setters.
- Main recommendations:
  - Authorities should balance safety and efficiency considerations.
  - A single, private CSD can be most efficient from a cost perspective but only if safety and soundness are not at stake.
  - Private ownership and operation acceptable only if private entities can address public interests; otherwise central bank ownership/operation may be preferable.
  - Three cornerstones for any decision: a sound legal framework; effective supervision and oversight; cooperation and coordination among stakeholders.
- When to reconsider CSD organization:
  - Technology modernization reviews; central bank reconsideration of securities/settlement roles; frauds; coordinated market-wide reviews to develop securities market.

### Public function and typical services of a CSD
- Rationale for public interest:
  - Supports market development, trading, capital formation, and liquidity.
  - CSDs typically systemically important; failure could disrupt securities markets and broader economy (CPSS-IOSCO 2012).
  - Strong operational connections with payment systems (for example, RTGS); failures can affect cash settlement and delivery versus payment.
  - Governments rely on markets for government securities for budgeting, liquidity management, and debt strategy; central banks rely on CSDs for monetary policy operations and timely collateral availability.
  - Public function generally stronger for government securities CSDs than corporate securities CSDs.
- Typical CSD services (Box 1):
  - Securities accounts.
  - A securities settlement system (trend toward automated book entry processing of dematerialized or immobilized securities; settlement often involves delivery versus payment).
  - Central safekeeping services.
  - Asset services: administration of corporate actions and redemptions.
  - Registrar services: maintenance of definitive legal ownership records; reconciliation with official registrar if CSD is not official registrar.

### Efficiency options and international practices
- Efficiency routes:
  - Single CSD (concentration) — economies of scale and scope, reduced costs and complexity, higher service level and innovation.
  - Links between CSDs — can increase efficiencies in large, developed markets; often not useful for smaller/developing markets due to high fixed IT costs.
  - Competition among CSDs — can yield efficiencies in large, developed markets; not useful for smaller markets for same reasons.
  - Cross-border CSDs and regional integration as additional options.
- World Bank GPSS survey findings (95 countries responded):
  - 55 have a single CSD for all types of securities;
  - 34 have two or more CSDs, each handling only certain types of securities;
  - 6 countries have multiple CSDs, each handling all types of securities.
- Governance of CSDs worldwide:
  - 33 percent of all CSDs worldwide are operated by the central bank;
  - 67 percent are operated by the private sector.
- CSDs in World Bank GPSS (of 138 CSDs):
  - 45 were operated by a central bank;
  - of those 45, 38 handled government securities only;
  - none of the privately operated CSDs handle only government securities.
- Income-level distribution of central bank operation (as reported):
  - High Income (50)
  - Upper-middle Income (48)
  - Lower-middle Income (33)
  - Low Income (7)
- Regional patterns:
  - Europe/euro area: single CSD most prevalent.
  - South Asia: preference for two CSDs (one for government securities and one for equities).
  - Middle East and North Africa, east Asia and the Pacific: all types of CSDs can be found.
  - Sub-Saharan Africa: strong central bank operational role; euro area: very limited central bank operational role.
- Observations:
  - Central bank–operated CSDs typically handle only government securities.
  - Private sector–operated CSDs dominate in high-income countries.
  - Large markets (e.g., China, the United States, and India) may be less inclined to adopt a single CSD.

### Seven considerations for organizing CSD functions (Box 2)
- Efficiency considerations:
  1. Efficiencies through a single CSD: estimate potential economies of scale and scope before deciding.
  2. Efficiencies through links between CSDs: can help in large markets; often not useful in smaller/developing markets.
  3. Efficiencies through competition among CSDs: applicable in large, developed markets; requires legal framework for level playing field.
- Safety and public-interest considerations:
  4. Promotion of public interests: CSD should promote financial stability and market development and support monetary policy, government debt management, supervision and monitoring.
  5. Sufficient financial resources and human resources: operator should have adequate capital and competent staff.
  6. Compliance with international standards: operator should comply with PFMI or be able to comply within a reasonable time frame.
  7. Good reputation and integrity: operator should have high integrity and be trusted by authorities and participants.

### How authorities can address the public function
- Ensure CSDs comply with governance, risk management, and operational reliability requirements via sound regulation, supervision, and oversight (PFMI framework).
- Decide number of CSDs, types of securities settled, and central bank role (capital contributions, operation, governance participation).
- Central banks can facilitate cash settlement in central bank money via central bank payment systems.

### Technology and innovation
- Technology options (Box 4):
  - Choice between in-house systems or vendor "off-the-shelf" systems; vendor software may reduce testing risk and implementation time.
  - New technologies can improve robustness and security.
  - Distributed ledger technology (DLT) prospects:
    - Proponents claim potential safety and efficiency improvements.
    - Key issues remain: operational and security uncertainty; interoperability with existing infrastructures; ambiguity about settlement finality and legal underpinning; data integrity, immutability, and privacy concerns (CPMI 2017).

### Decision support, cross-border integration, and risks
- Decision tree tool combines seven considerations to guide number of CSDs and governance choices (national and cross-border).
- Cross-border integration drivers:
  - Political agreements, customer/participant demands to reduce cross-border settlement costs, growth orientation via foreign investor participation.
- Cross-border options mirror national options: single regional CSD, links between CSDs, competition among CSDs.
- Cross-border linkages create additional challenges and risks; disruptions can spread across borders and may be more difficult to manage.

### Safety considerations in detail (Box 5 and Section VI)
- Consideration 4—Promotion of public interests:
  - CSD should explicitly address public interest responsibilities (CPMI-IOSCO 2012, Principle 2).
  - Public involvement options: advisory roles, board seats, ownership stakes, full public ownership/operation in some cases (e.g., government securities CSD).
- Consideration 5—Sufficient financial and human resources:
  - Capital needed for IT, networks, buildings, and to cover potential losses in extreme but plausible circumstances.
  - Adequate skilled staff required; remuneration aligned with market terms.
  - Public sector may provide financial support via ownership stakes when private sector cannot raise sufficient capital (examples: Rwanda, Lithuania).
- Public financing and operator suitability:
  - Public financing should be provided only when private operator is stable and safe; financing an incapable operator "may be considered a waste of taxpayers’ money."
  - If private operator lacks reputation and capacity, central bank ownership/operation may be preferable.
- Consideration 6—Compliance with international standards:
  - CSD operator should comply with PFMI or be able to comply within a reasonable time frame.
  - Operational expectations include business continuity, safekeeping integrity, immobilization/dematerialization, credit and liquidity risk management, capital adequacy (including stress testing), safe cash settlement (preferably via RTGS link), short settlement cycles, and use of international communication standards (SWIFT, ISO, ISIN).
  - Outsourcing government securities CSD requires demonstrable PFMI compliance or achievable compliance within reasonable time frame (example: Kyrgyz Republic decision in 2008 not to outsource).
- Consideration 7—Good reputation and integrity:
  - Operator should have good reputation and provide timely access to data and information to authorities.
- Three cornerstones:
  1. Sound legal and regulatory framework: defines rights/obligations, settlement finality, netting, immobilization/dematerialization, collateral, default procedures, resolution, and mandates for authorities.
  2. Effective supervision and oversight: cooperation among central banks, securities regulators, and other authorities; address conflicts of interest if central bank is owner/operator.
  3. Coordination and cooperation among stakeholders: project structures, National Payments Council or similar forum to facilitate communication and roles.

### Decision outcomes — Models for organizing CSDs
- Model A — Single CSD, private sector operator with full or majority stake:
  - Suits all market sizes if private operator meets public-interest criteria (financial/human resources, PFMI compliance, reputation).
- Model B — Single CSD, public sector majority stake:
  - Well suited for small markets; public operator supports market development and stability when private operator is weak.
- Model C — Multiple CSDs, all private sector operated:
  - Suited for large, liquid markets; efficiencies via competition under legal framework ensuring fair access.
- Model D — Two or more CSDs: at least one public, others private:
  - Suitable for most market sizes; efficiencies via links and competition; recommended that public and private CSDs do not service the same securities.
- Model E — Multiple public CSDs:
  - Theoretically possible but generally not recommended; efficiency favors centralizing settlement and safekeeping in one public entity.

### Selected country cases illustrating models and implementation choices
- India (Model D):
  - One CSD for government securities (RBI Public Debt Office system); two private CSDs for corporate securities (NSDL and CDSL); interoperability via a real-time link.
  - NSDL ownership: NSE 24 percent; CDSL promoter: BSE 24 percent stake; CDSL listed on June 30, 2017.
- Kyrgyz Republic (Model D):
  - Two CSDs: government securities CSD fully owned by National Bank of the Kyrgyz Republic; corporate securities CSD a for-profit JSC since 1997.
  - 2016 decree to increase state shareholding to enhance risk profile and financial capacity.
- Lithuania (Model A):
  - Single CSD (CSDL) established 1994; initial ownership: National Stock Exchange 8 percent, government 32 percent, Bank of Lithuania (BOL) 60 percent.
  - 2004: stakes sold to Nasdaq OMX; BOL reduced stake to zero in January 2013 and transitioned to arm’s-length oversight.
- Mexico (Model A):
  - 1995: two CSDs merged into single Indeval operated by the Mexican Stock Exchange.
  - Banco de Mexico retained 2.43 percent shareholding and a board seat; Indeval modernized in 2008 to near real time (two-minute cycles with a netting algorithm).
  - Concession to operate as a CSD granted by MOF with conditions including sufficient financial capacity and nondiscriminatory access.
- Philippines (Model D):
  - Government securities in state-owned RoSS (Bureau of the Treasury); corporate securities in PDTC (majority-owned subsidiary of Philippines Dealing System Holding Corp.).
  - RoSS supports cash settlement through PhilPaSS (RTGS) owned/operated by Bangko Sentral ng Pilipinas (BSP).
  - BSP jointly supervises PDTC with Securities and Exchange Commission; RoSS not supervised/overseen by BSP and Securities and Exchange Commission.
- Rwanda (Model B):
  - Single CSD owned/operated by National Bank of Rwanda (BNR) for government and private securities; Rwanda Integrated Payment Processing System (2011) supports RTGS linkage for delivery versus payment.
- Tanzania (Model D):
  - Two CSDs: Government Securities System (GSS) by Bank of Tanzania for treasury bills and bonds; Dar es Salaam Stock Exchange (DSE) CSD for equities and corporate bonds.
  - A link established in 2002 to facilitate settlement of government securities traded on DSE; plans to replace manual procedures with an electronic link.

### Annex — Decision tree key elements (Annex 1)
- Decision tree start node: START
- Sequential considerations preserved in decision logic:
  - Consideration 1: Does the market have potential for efficiencies for all types of securities?
  - Consideration 2: Can these efficiencies be realized through CSD links?
  - Consideration 3: Can these efficiencies be realized through competition?
  - Consideration 4: Is private operator able to promote public interests?
  - Consideration 5: Has private operator sufficient financial and human resources?
  - Consideration 6: Is private operator able to comply with international standards?
  - Consideration 7: Has private operator good reputation?
  - Public-sector question repeated: Is public sector willing or able to provide financial support?
- Branch outcomes: Models A, B, C, D, and E with conditional logic notes (questions 4–7 evaluated “FOR EVERY TYPE OF SECURITIES MARKET” on some branches).

*Source: howtonote1901 - Introduction and Summary; Box 1; Box 2; Box 3; Box 4; Box 5; Section VI; Country cases; Annex 1.*

### Introduction and Summary

### Introduction and Summary

### Objective and scope
- Key objective: support authorities in decision making about the optimal organization of central securities depositories (CSDs) in their country.
- Definition used: a CSD is an entity that provides securities accounts, a securities settlement system, and central safekeeping services to market participants, which can be banks and other financial institutions.
- Note prepared by Froukelien Wendt, Peter Katz, and Alice Zanza; draws on IMF and World Bank interactions and missions to multiple countries and on academic literature and international standards (notably the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) and the World Bank Global Payment Systems Survey).

### Target audience
- Decision makers responsible for the organization of CSDs (ministries of finance, central banks, securities regulators, and other relevant authorities).
- Broader public: private financial sector participants (stock exchanges, private CSD operators, clearing houses, banks, custodians, broker-dealers), policymakers, international standard-setters, and parties involved in financial market infrastructure issues.

### Summary of main recommendations
- Authorities should balance safety and efficiency considerations for securities markets.
- A single, private CSD can be the most efficient from a cost perspective, but should be pursued only if safety and soundness are not at stake.
- Private ownership and operation of a CSD is acceptable only if private entities have the capacity to address public interests; otherwise central bank ownership and operation may be preferable.
- Three cornerstones underpin any decision about (re)organizing CSD functions:
  - a sound legal framework;
  - effective supervision and oversight;
  - cooperation and coordination among all stakeholders (private and public).

### Basis of guidance
- Combines theory and country cases; considers academic literature, international standards (PFMI), World Bank Global Payment Systems Survey results, and IMF/World Bank missions and interactions with authorities in multiple jurisdictions.

### When to reconsider CSD organization
- Opportune times include:
  - when an existing domestic CSD undertakes a technology modernization review;
  - when the central bank reconsiders its role in providing securities and settlement services as a core function;
  - when the market is subject to frauds;
  - as part of a coordinated market-wide review to develop the securities market.

---

### Public function of a CSD
- Rationale for public interest in CSDs:
  - supports market development via central clearing and settlement, aiding trading, capital formation, and liquidity.
  - typically classified as systemically important; failure could disrupt securities markets and cause broader financial and economic instability (CPSS-IOSCO 2012).
  - strong operational connections with payment systems (for example, RTGS) mean CSD failures can affect cash settlement and delivery versus payment.
  - governments rely on markets for government securities for budgeting, liquidity management, and debt strategy; disruptions could undermine government debt management programs and investor confidence.
  - central banks rely on CSDs for monetary policy operations and timely availability of collateral, affecting intraday credit and RTGS functioning.
  - CSDs are essential for timely posting/delivery of collateral and development of capital markets.
- Public function is generally stronger for government securities CSDs than for corporate securities CSDs, but corporate securities CSDs also must address public interests and maintain a sound risk profile.

### Box 1 — Typical CSD services (as described in the note)
- Securities accounts: deposit of issuer securities allowing investors to hold and trade in a centralized system; accounts often provided to banks and professional entities; in some countries investors may open CSD accounts directly.
- A securities settlement system: enables transfer and settlement on securities accounts under multilateral rules; trend toward automated book entry processing of dematerialized or immobilized securities; settlement often involves delivery versus payment.
- Central safekeeping services: ensures integrity of securities issue records and customer records.
- Asset services: administration of corporate actions and redemptions (interest payments, dividends).
- Registrar services: maintenance of the definitive record of legal ownership and issuer services; if CSD is not official registrar, regular reconciliation with official registrar is required.

---

### Efficiency and organizational options
- Efficiency through a single CSD:
  - concentration can bring economies of scale and scope, reduce costs and complexity, and increase service level and innovation.
  - potential efficiencies should be estimated; limited potential efficiencies may indicate a single CSD is not optimal for some (often larger) markets.
- Efficiency through links between CSDs:
  - links can increase efficiencies in large, developed markets.
  - links are often not useful for smaller or developing markets due to high fixed IT costs.
- Efficiency through competition among CSDs:
  - multiple competing CSDs can yield efficiencies in large, developed markets.
  - competition is not useful for smaller or less developed markets because of high fixed IT costs.

---

### International practices and data (World Bank GPSS findings)
- Survey responses: of the 95 countries that responded to the most recent survey:
  - 55 have a single CSD for all types of securities;
  - 34 have two or more CSDs, each CSD handling only certain types of securities (for example, only government securities or only equities);
  - only six countries have multiple CSDs, each CSD handling all types of securities.
- Governance of CSDs worldwide:
  - 33 percent of all CSDs worldwide are operated by the central bank;
  - 67 percent are operated by the private sector.
- CSDs incorporated in the World Bank GPSS: of the 138 CSDs:
  - 45 were operated by a central bank;
  - of those, 38 handled government securities only.
  - none of the privately operated CSDs handle only government securities.
- Income-level distribution of central bank operation (as reported):
  - High Income (50)
  - Upper-middle Income (48)
  - Lower-middle Income (33)
  - Low Income (7)
- Regional patterns (summary points in note):
  - In Europe and the euro area, a single CSD is most prevalent.
  - In South Asia, preference appears to be for two CSDs at national level (one for government securities and one for equities).
  - In Middle East and North Africa, and in east Asia and the Pacific, all types of CSDs can be found.
  - Central banks have a strong operational role in sub-Saharan Africa and a very limited operational role in the euro area.
- Observations:
  - Central bank–operated CSDs typically handle only government securities, reflecting central bank roles as agent for the ministry of finance and operator of RTGS systems.
  - Private sector–operated CSDs dominate in high-income countries, reflecting central bank involvement during early market development and subsequent outsourcing as markets mature.
  - Large markets may be less inclined to adopt a single CSD; high population size may point to larger markets and a smaller need to search for further efficiencies (examples mentioned include China, the United States, and India having multiple CSDs).

---

### Seven considerations for organizing CSD functions (Box 2)
- Efficiency considerations:
  1. Efficiencies through a single central securities depository (CSD): potential economies of scale and scope, but estimate potential before deciding.
  2. Efficiencies through links between CSDs: can help in large, developed markets; usually not useful in smaller/developing markets because of high fixed IT costs.
  3. Efficiencies through competition among CSDs: can work in large, developed markets; not useful in smaller or less developed markets for the same reasons.
- Safety and public-interest considerations:
  4. Promotion of public interests: the CSD should promote financial stability and market development and support monetary policy, government debt management, supervision and monitoring of financial institutions.
  5. Sufficient financial resources and human resources: the operator should have sufficient resources to support CSD operations.
  6. Compliance with international standards: the operator should be compliant with requirements such as the Principles for Financial Market Infrastructures (PFMI), or be able to comply within a reasonable time frame.
  7. Good reputation and integrity: the operator should have a good reputation and high integrity.

### How authorities can address the public function
- Make sure CSDs comply with strict governance, risk management, and operational reliability requirements via sound regulation, supervision, and oversight (framework: PFMI).
- Organize CSDs in a safe and efficient manner, deciding number of CSDs, types of securities settled, and whether central banks play a role (capital contributions, operating the CSD, participating in governance as shareholder or board seat).
- Central banks can facilitate cash settlement in central bank money via the central bank payment system.

---

### Decision support and complementarities
- The seven considerations are intended to guide choices about:
  - number of CSDs in the country (single vs multiple);
  - governance structure (public vs private ownership/operation).
- The considerations are grouped into “efficiency considerations” and “safety considerations” and complemented by three cornerstones that are necessary conditions for sound and stable operations of CSDs.

_Source: howtonote1901 - Introduction and Summary_

### 1. Eciency through a single CSD

### 1. Efficiency through a single CSD

### Overview
- Efficient CSDs contribute to the development of securities markets by delivering higher levels of service, lower prices, and appropriate investments in risk-management systems, which may attract issuers and investors.
- Authorities can pursue efficiency via: (1) concentration in a single CSD, (2) links between multiple CSDs, (3) competition among multiple CSDs, and (4) use of a cross-border CSD.
- Efficiency considerations must be weighed against safety considerations.

### Consideration 1—Efficiencies through a single CSD
- Concentration of CSD services into a single CSD can bring efficiencies via economies of scale and scope, reducing costs and complexity of settlement and safekeeping, and increasing service level and innovation.
- Potential efficiencies should be estimated; limited potential efficiencies may indicate a single CSD is not the best solution, particularly for larger markets.
- Theory and practice indicate that average cost per settled securities transaction diminishes with more transactions because IT infrastructure has relatively high fixed costs. Integration of platforms into a single system is likely more cost efficient than several systems in parallel.
- Economies of scale: realized using one IT infrastructure for the same type of securities (merging multiple CSDs settling the same type).
- Economies of scope: realized using one IT infrastructure for different types of securities (adding equities, government securities, central bank securities). The marginal cost of adding a security type to a single platform is often significantly less than running two systems in parallel.
- Estimation of potential efficiencies is an important input into integration decisions. Significant potential efficiencies support reorganization; minimum or low cost savings indicate no efficiency reason to reconsider number of CSDs.
- Potential cost efficiencies to consider in estimation:
  - The number of IT systems, networks, and interfaces used by market participants; integration may reduce these, lowering costs and complexity and decreasing staff time for training and system changes. Choice of CSD technology is instrumental (see Box 4).
  - The number of direct trading counterparties reachable; integration may increase participants joining the same clearing and settlement systems, benefiting participants and clients by enabling direct settlement with more counterparties (network character of CSDs).
  - Required support functions; integration may reduce staff in support functions (human resources, legal, finance, audit) and create a single point for data entry and reporting for multiple stakeholders including supervisors and overseers.
  - Market resilience and developmental efficiencies; for example, a single point of entry is desirable for international custodians because it is cheaper, less complex, and operationally more efficient.
- Efficiency gains should not compromise safety. Risk profiles after merger should be the same or improved compared with pre-merger configuration.
- Example: United States has one CSD for government securities (Fedwire Securities Service) and one for corporate securities (Depository Trust Corporation), and shows relatively low potential for further economies of scale (Schmiedel, Malkamäki, and Tarkka 2004).

### Box 3 — Literature on Efficiencies in Central Securities Depositories
- Schmiedel, Malkamäki, and Tarkka (2004): Evidence from 16 settlement institutions (years 1993–2000) indicates existence of significant economies of scale; degree differs by size and region. Smaller providers show high potential for economies; larger institutions show increasing cost effectiveness.
- Van Cayseele and Wuyts (2007): Confirm evidence of large economies of scale in clearing and settlement by estimating multiproduct cost functions of settlement providers and quantifying cost savings potential in European CSDs. Smaller institutions especially benefit, but larger operators can also grow along a cost-reducing path.

### Box 4 — Central Securities Depository Technology Options
- CSD technology (software, hardware, networks) is critical for safe and efficient services and should ensure high availability and be practical and cost efficient for users.
- Authorities must decide between in-house systems or vendor "off-the-shelf" systems. Benefits of vendor software include:
  - Developed and utilized by other CSDs, reducing testing risk relative to in-house systems.
  - Supporting hardware configurations proven to international standards.
  - Experience gained from other users through forums.
  - Typically shorter implementation time with lower risk of nonperformance.
- New technology developments can improve robustness and communication security.
- Distributed ledger technology (DLT): ledgers can be maintained and updated securely by network users rather than a central agency (He and others 2017). Proponents claim potential safety and efficiency improvements, but issues remain before full realization:
  - Potential uncertainty about operational and security issues.
  - Lack of interoperability with existing processes and infrastructures.
  - Ambiguity relating to settlement finality and legal underpinning.
  - Issues related to data integrity, immutability, and privacy (CPMI 2017).

### Consideration 2—Efficiencies through links between CSDs
- Links between multiple CSDs can increase market efficiencies, particularly in large, developed markets; often not useful for smaller or developing markets due to high fixed IT costs.
- A link is a set of technical and legal arrangements for cross-system transfer of securities, permitting participants in either CSD to trade and settle trades in securities held in the other CSD via their own CSD acting as a “single gateway.”
- Linking is typically more cost efficient than market participants joining multiple CSDs directly.
  - Example: Tanzania—two CSDs established a link to facilitate settlement of government securities traded OTC and on the stock exchange but held in only one CSD.
- Adoption of the same technology is another form of linking. Shared technology platforms reduce capital required, operating costs, and fees. Parts of software can be sectioned to allow independent business management.
  - Example: Georgia—two CSDs (central bank for government securities; stock exchange for corporate bonds and equities) plan to use the same technology platform maintained by the central bank, enabling settlement automation and delivery versus payment in central bank money while operators retain separate rules and procedures.
- Links may offer fewer economies of scale than a single CSD since different IT systems may continue operating. Links may introduce operational, credit, and other risks that must be identified and managed. In many smaller or developing markets, authorities often choose merger into a single CSD instead of linking.

### Consideration 3—Efficiencies through competition among CSDs
- Competition among multiple, competing CSDs can yield market efficiencies in large, developed markets; not useful for smaller or less developed markets due to high fixed IT costs.
- Competition may lead to downward price pressure, stimulate innovation and operational efficiency. It requires a legal framework ensuring level playing field, fair and open access, price transparency, and sufficient incentives to innovate (Giovannini Group 2003).
- Examples:
  - Europe: competition between Euroclear Bank and Clearstream Banking Luxembourg offering similar settlement and custody services to overlapping members, resulting in well-developed services and competitive tariffs; both serve as potential substitutes if one faces disruption.
  - India: two CSDs for corporate securities compete after capital market liberalization in 1992, introduced to bring efficiencies.
- Limitations and risks of competition:
  - High fixed costs of multiple CSDs can produce relatively high average transaction costs and discourage trading in capital markets, making competition unsuitable in many smaller developing markets.
  - Excessive competition may lower risk standards; if competition deteriorates profitability, risk management, or service provision and leads to bankruptcy, competition may harm the market.

### Decision framework and cross-border integration
- Decision tree (Figure 6) summarizes steps for choosing number of CSDs nationally; same steps can apply at cross-border level with specific aspects.
- Authorities may consider cross-border integration of CSD infrastructure to deliver efficiencies in technology development and infrastructure, provided arrangements are compatible with sovereignty and acceptable cross-border legal, oversight, and governance arrangements.
- Main drivers for regional integration:
  - Political agreements to expand trade, increase investment flows, and deepen regional economic and financial integration.
  - Customer/participant demands to reduce settlement costs of cross-border trades and facilitate access to regional markets.
  - Growth orientation through increased foreign investor participation, deepening and broadening regional markets.
- Cross-border efficiency options mirror national options:
  - Single regional CSD: example WAEMU regional CSD for issuance and settlement of securities issued by several governments; Euroclear S.A. example where clearing and settlement arrangements allowed more efficient domestic and cross-border settlement while national CSDs remained separate legal entities; Nasdaq OMX example via ownership stakes.
  - Links between CSDs: simple agreements for direct/indirect cross-participation or complex interoperability; examples include Mercado Integrado Latinoamericano (Chile, Colombia, Mexico, Peru), Asian Development Bank proposals, and the European "Link Up Markets."
  - Competition: European Commission promotes competition among national CSDs via legislation and harmonized requirements; ECB merged settlement activities onto Target2Securities while national CSDs compete for depository services.
- Cross-border linkages create new challenges and risks that may be more difficult to manage than single-country arrangements; disruptions can spread across borders.

*Source: IMF.*

### Box 5. Efficiencies through Cross-Border Integration

### Box 5. Efficiencies through Cross-Border Integration

### Role of CSDs and implications for financial stability
- Safe CSDs are critical for the development and safety of securities markets.
- Poorly designed and operated CSDs can contribute to and exacerbate financial crises, with disruptions impacting not only the CSD and its participants, but more generally financial markets and the broader economy (CPSS-IOSCO 2012).
- Resilient CSDs give market participants the confidence to fulfil their payment and settlement obligations on time, even in periods of market stress, and are an important building block in the development of securities markets.
- Considerations 4–7 can guide authorities in deciding whether the private sector is capable of operating a safe CSD, or whether (some form of) involvement of the public sector is needed.

### Consideration 4—Promotion of public interests
- The CSD should promote public interests, such as financial stability and financial market development.
- The CSD should be able to support the implementation of monetary policy, government debt management, and supervision and monitoring of the financial institutions.
- The public function of a CSD requires its owners and management team to explicitly address public interest. This is first a responsibility of the CSD itself (CPMI-IOSCO 2012, Principle 2).
- Supporting the public interest includes:
  - fostering fair and efficient markets;
  - striving for solid risk-management practices to support financial stability;
  - considering interests of a range of stakeholders, including the CSD’s participants, their clients, and the authorities.
- Investor protection is part of addressing public interests.
- If public authorities are of the opinion that the private operator of the CSD is not (fully) capable of addressing public interests, they may partake in the governance of the CSD. This role in the governance of a CSD is in addition to authorities’ role in the regulation, supervision, and oversight of the CSD.

### Options for public involvement in CSD governance (Russo and others 2004)
- The central bank or another public authority may be part of advisory groups, which are consulted by the management board of the CSD on specific topics—for example, fees, IT reforms, and legal issues.
- The central bank or another public authority may occupy seats on the supervisory board or the management board to represent the public interest. A seat may be imposed by regulation or be voluntarily adopted by the CSD itself.
- The central bank or another public authority may take a stake in the ownership structure of the CSD. As such, the authorities can determine who will be elected to the board of directors. The authorities are generally assured that the board members they elect will take their interests into account in their deliberations and be responsive to their concerns. Whether the stake is minority or majority depends on the legal and regulatory framework in the country, and the authorities’ confidence in the ability of the operator to address public interests.
- In some cases, authorities may decide that the public sector is the best place to fully own and operate the CSD. This may be the case for the CSD for government securities, given its importance for the government debt issuance program and monetary policy implementation.
- In special circumstances—for example, in cases of multiple incidents of fraud or another proven inability of the private sector to operate the CSD in the public interest—authorities may decide to operate the CSD for all types of securities.

### Consideration 5—Sufficient financial resources and human resources
- The operator of a CSD should have sufficient resources (financial and human) to support CSD operations.
- An important requirement for a CSD operator is that it has sufficient financial resources to invest in modern IT systems and ensure sufficient capital to cover operational and other losses.
- A private operator must be able to raise capital for operations through the private sector.
- Typically, capital is needed to:
  - (1) fund investments in IT systems, networks, buildings, and other needs to set up or maintain the CSD’s operations; and
  - (2) cover potential losses in extreme but plausible circumstances, such as business losses in cases of negative income and operational losses.
- Operational losses can be the result of fraud, errors, and system failures. Also, there may be credit risks and liquidity risks to be covered by the CSD’s capital.
- Equally important, the CSD should have adequate human resources. The CSD needs staff with advanced knowledge and understanding of the different areas of the CSD’s operations.
- Staff should be competent to run a safe and efficient CSD, in line with international standards, and should have knowledge of, and be able to address requirements expressed in, the PFMI, to manage legal, credit, liquidity, operational, and other types of risks.
- To attract and sustain competent resources, CSDs should remunerate their staff adequately in line with market terms.
- The ministry of finance or the central bank may decide to provide financial support to a private operator through a stake in the capital of the CSD.
- In smaller, developing markets, private entities often face difficulties raising sufficient capital and realizing an income stream that fully covers the operational costs. This often results in high transaction costs, which may ultimately threaten the existence of the CSD. As this hampers market development, public authorities may decide to provide financial support through a stake in the ownership of the company (IMF and World Bank 2001).
- Examples:
  - In the case of Rwanda, the central bank of Rwanda decided to fully own and operate a single CSD for all types of securities to allow the private sector to build financial resources and human capacity.
  - In Lithuania, the public authorities gradually reduced their ownership stake in the CSD, in reflection of strengthened capacity of the CSD, until the CSD was fully owned by the private sector.

*Source: howtonote1901 - Box 5. Efficiencies through Cross-Border Integration*

### Section VI).

### Section VI)

### Public financing and operator suitability
- Public financing should be provided only when a private operator is a stable and safe entity.
- Providing financing to an entity that cannot operate a safe and efficient CSD, is noncompliant with international standards, or cannot support development of the securities markets "may be considered a waste of taxpayers’ money."
- If a private operator lacks the requisite reputation and capacity, it may be preferable for the central bank to fully own and operate the CSD.

### Consideration 6—Compliance with international standards
- A CSD operator should be compliant with requirements laid down in international standards, such as the PFMI, or be able to comply within a reasonable time frame.
- The PFMI provide a benchmark for safe and efficient systems, fostering transparency and financial stability, and guide risk identification and mitigation.
- Examples of operational and risk-management expectations for a CSD operator:
  - Address operational risk, including maintaining robust and tested business continuity and disaster recovery arrangements and ensure a recovery of platforms and same-day settlement in the event of system hardware, software, or network failures.
  - Protect the integrity of the securities issues and minimize risks related to safekeeping of securities to safeguard rights of securities issuers and investors.
  - Maintain securities in an immobilized or dematerialized form for transfer in book entry form.
  - Manage credit and liquidity risks by investing the CSD’s capital at accounts of safe counterparties.
  - Calculate and hold the necessary capital for the CSD’s operations, enabling the CSD to cover credit, liquidity, or operational losses in extreme events, including natural disasters and cyberattacks. (The calculation should include stress testing capital adequacy in extreme but plausible scenarios.)
  - Ensure safe cash settlement, preferably through an electronic link with the interbank payment system run by the central bank (often a real-time gross settlement system).
  - Tailor securities settlement arrangements to market needs, reduce principal risk through delivery versus payment and short settlement cycles.
  - Use international communication standards, such as SWIFT, ISO standards, and ISIN securities numbering.
- A detailed assessment of a potential, new, or existing operator should show the level of compliance with the PFMI. When a central bank operates a CSD for government securities and contemplates outsourcing, it should do so only if assessment shows PFMI compliance or achievable compliance within a reasonable time frame. If not achievable, the central bank should continue operating the government securities CSD.
- Example: Authorities in the Kyrgyz Republic decided in 2008 not to outsource the government securities CSD to the private sector.

### Consideration 7—Good reputation and integrity
- The CSD operator should have a good reputation and high integrity to secure confidence and trust from authorities and market participants.
- Good reputation and integrity encourage market participants to support the entity financially and participate in development and adoption of systems, rules, procedures, and agreements.
- An indication of integrity is that the operator supports the central bank and supervisory authorities by providing timely access to relevant data and information.
- The decision tree in Figure 7 summarizes how safety considerations may lead to a public or private operator choice.

### Three Cornerstones underpinning CSD organization decisions
- Three cornerstones: (1) a sound legal framework, (2) effective supervision and oversight, and (3) coordination and cooperation among all stakeholders.
- With these cornerstones in place, decision-making is more likely to yield safe and efficient CSDs that support securities market development and financial stability.

Cornerstone 1—Sound Legal and Regulatory Framework
- A sound legal and regulatory basis defines rights and obligations of the CSD, participants, participants’ customers, custodians, and service providers.
- Laws/regulations should address authorization, oversight, supervision, regulation, rights/interests in financial instruments, settlement finality, netting, immobilization and dematerialization, delivery versus payment, collateral arrangements, default procedures, and resolution of a CSD.
- CSD rules, procedures, and contracts should align with the legal framework and international standards.
- The legal framework must define mandates for authorities including information and enforcement powers.

Cornerstone 2—Effective Supervision and Oversight
- Regulation, supervision, and oversight by one or more financial sector statutory authorities are necessary to ensure CSDs address public interests and the PFMI.
- Central banks and securities regulators commonly share oversight responsibilities: securities regulators focus on orderly functioning of the securities market, central banks on payment systems, monetary policy linkages, and financial stability.
- Cooperation among authorities is essential where multiple authorities are responsible or multiple CSDs operate. Good practice includes memoranda of understanding, information-sharing, routine and ad hoc information provision, and regular technical and policy meetings.
- Conflicts of interest arise if the central bank is both owner/operator and overseer; these should be addressed by transparency, equal application of requirements, and separate reporting lines for operations and oversight departments.
- When the central bank owns a CSD, stakeholder interests can be addressed via stakeholder board representation, user committees, and public consultations.
- Cross-border CSD integration reduces national supervisory capacity; strategies include:
  - Recognize a foreign CSD under central bank law and/or securities market law.
  - Partake in joint oversight and supervision with the home regulator.
  - Partake in joint crisis management arrangements to ensure timely information in a crisis.

Cornerstone 3—Coordination and Cooperation among All Stakeholders
- Successful implementation requires involvement of relevant public authorities and the private sector (stock exchange, banks, custodians, broker-dealers, other stakeholders).
- Authorities should set up a project structure outlining roles and responsibilities through decision-making and implementation.
- A National Payments Council or similar forum, often led by the central bank, is useful to facilitate communication among stakeholders (central bank, securities regulator, banking supervisor, ministry of finance/treasury/economics, bankers’ association, commercial banks, nonbank financial institutions, clearing houses, payment service providers, stock exchange, CSDs, end-users).

### Outcomes of Decision Making—Four Models
- Authorities must balance safety and efficiency and find trade-offs based on market characteristics and operator strength.
- Authorities may opt for different models; the decision tree in Annex 1 combines seven considerations as a tool.

Model A — Single CSD, private sector operator with full or majority stake
- Can suit all market sizes; efficiencies via economies of scale and scope.
- Private sector operator must promote public interests through sufficient financial and human resources, observance of international standards, good reputation, and high integrity.

Model B — Single CSD, public sector majority stake
- Well suited for small markets; public operator steps in temporarily to support market development and stability in absence of a strong private operator.
- Safety addressed through dominant public operator; efficiencies via economies of scale and scope.

Model C — Multiple CSDs, all private sector operated
- Suited for large, liquid markets with strong private sector.
- Efficiencies via competition among private operators and legal framework ensuring level playing field.
- Safety pursued through strong operators meeting public interest criteria.

Model D — Two or more CSDs: at least one public, others private
- Suitable for all market sizes except the smallest; requires strong public and private operators.
- Efficiencies via links and competition among private CSDs; recommended that public and private CSDs do not service the same securities.
- Safety ensured by operators meeting public interest criteria.

- Model E (multiple public CSDs) is theoretically possible but generally not recommended; efficiency gains favor centralizing settlement and safekeeping in one public entity.

### Country Cases (selected examples)
India (Model D)
- One CSD for government securities: Public Debt Office system of the Reserve Bank of India (RBI); cash leg settles in the RBI RTGS system; securities leg in the Subsidiary General Ledger Account maintained by the RBI.
- Two private CSDs for corporate securities: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL); interoperability via a real-time link.
- NSDL ownership: NSE 24 percent; remaining shares mainly commercial banks.
- CDSL promoter: BSE with 24 percent stake; CDSL listed on June 30, 2017, reducing BSE stake to 24 percent.
- Securities and Exchange Board of India regulates and supervises stock exchanges under the Securities and Exchange Board of India Act of 1992.
- NSE introduced electronic trading post-1992 liberalization; dematerialization increased efficiency.
- RBI announced measures to enable seamless movement of securities between the RBI ledger and NSDL/CDSL.

Kyrgyz Republic (Model D)
- Two CSDs: one for government securities fully owned and operated by National Bank of the Kyrgyz Republic; one for corporate securities as a for-profit Joint Stock Company (JSC) since 1997 with shareholders including commercial banks, brokers, the Kyrgyz Stock Exchange (KSE), and others.
- Initial plans to create a single CSD run by the private sector were not pursued due to insufficient maturity and capacity (e.g., cash settlements through commercial bank accounts; corporate securities settlement could take up to three days because of communication between the 18 private registrars and the CSD).
- Decree in 2016: Government State Property Department to take at least 33.4 percent shareholding in KSE and at least 50 percent in the JSC CSD to enhance risk profile and financial capacity.
- Measures include requiring investors to deposit sufficient funds at least one day in advance and holding securities in the CSD subregister; further measures to bring JSC CSD into full compliance with international standards.

Lithuania (Model A)
- Single CSD established in 1994 (Central Securities Depository of Lithuania, CSDL).
- Initial ownership: National Stock Exchange 8 percent, government 32 percent, Bank of Lithuania (BOL) 60 percent.
- 2004: Stock exchange and government sold stakes to Nasdaq OMX (32 percent to Nasdaq OMX Helsinki Oy and 8 percent to Nasdaq OMX Vilnius); BOL kept 60 percent.
- BOL reduced stake to zero in January 2013 and ceased board participation; thereafter BOL involved at arm’s length as regulator/supervisor.
- Post-2012 merger between BOL and Lithuanian Securities Commission created two BOL units responsible for oversight and prudential supervision.

Mexico (Model A)
- 1995: Two CSDs merged into single CSD Indeval operated by the Mexican Stock Exchange.
- Banco de Mexico (BdM) retained a 2.43 percent shareholding in Indeval and a board seat as an independent member.
- BdM and the National Banking and Securities Commission (CNBV) have supervisory and oversight mandates under the Payment System Law and Securities Market Law.
- Indeval modernized in 2008 to enable settlement in near real time (two-minute cycles with a netting algorithm); many participants have SPEI accounts.
- Under the Securities Market Law, MOF grants a concession to operate as a CSD with conditions including sufficient financial capacity, nondiscriminatory access and fees, and appropriate custody and settlement service levels; MOF may revoke the concession for breaches.

Philippines (Model D)
- Government securities held in state-owned Registry of Scriptless Securities (RoSS) operated by Bureau of the Treasury (BTr), an agency of the Department of Finance.
- RoSS supports cash settlement through PhilPaSS (RTGS) owned/operated by Bangko Sentral ng Pilipinas (BSP).
- Corporate securities held in Philippine Depository and Trust Corporation (PDTC), a majority-owned subsidiary of Philippines Dealing System Holding Corp.; PDTC settles equities traded on the PSE; cash leg settled through eight commercial banks.
- BSP jointly supervises PDTC with the Securities and Exchange Commission; RoSS is not supervised/overseen by BSP and Securities and Exchange Commission.
- Historical plans for a single CSD were not realized; authorities are reconsidering the structure amid potential role changes for PSE or BSP.

Rwanda (Model B)
- Single CSD owned and operated by National Bank of Rwanda (BNR); holds both government and private securities.
- Decision for single public CSD based on market size and nascent Rwanda Stock Exchange (RSE) resources.
- Rwanda Integrated Payment Processing System (2011) led to one platform supporting RTGS, ACH, and CSD operations with RTGS linkage for delivery versus payment.
- RSE has no trading platform; posttrade transactions are posted manually; plans for RSE to use a trading platform under East African Community regional initiative.
- Capital Markets Authority (CMA) regulates capital markets per Capital Market Act of 2011; oversight of CSDs by CMA is not explicit, but memorandum of understanding between BNR and CMA facilitates collaboration.

Tanzania (Model D)
- Two CSDs: Government Securities System (GSS) owned/operated by Bank of Tanzania (BOT) for treasury bills and bonds; Dar es Salaam Stock Exchange (DSE) operates CSD for equities and corporate bonds and keeps a copy of the Treasury bonds register.
- GSS linked to Tanzania Interbank Settlement System (RTGS) for delivery versus payment.
- DSE established in 1994, operational in 1998; demutualized and self-listed in 2015 and commenced selling shares in 2016; DSE is establishing the CSD as an independent, wholly owned subsidiary to be licensed by Capital Markets and Securities Authority.
- A link between the two CSDs was created in 2002 to facilitate settlement of government securities traded on the DSE; plans to replace manual procedures with an electronic link to improve time, cost, and accuracy.
- East African Community members agreed to link stock exchanges’ CSDs via a hub-and-spoke regional CSD in Arusha (Tanzania), though setup/operation costs can be high for low-volume transactions and legal/regulatory frameworks need development.

*Source: IMF.*

### References

### howtonote1901 - References

### References
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- Committee on Payment and Settlement Systems (CPSS). 2005. Central Bank Oversight of Payment and Settlement Systems.
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### Annex 1. Decision Tree Combining Safety and Efficiency Considerations — Key elements
- Source: IMF.
- Decision tree start node: START
- Consideration 1: Does the market have potential for efficiencies for all types of securities?
- Consideration 2: Can these efficiencies be realized through CSD links?
- Consideration 3: Can these efficiencies be realized through competition?
- Consideration 4: Is private operator able to promote public interests?
- Consideration 5: Has private operator sufficient financial and human resources?
- Consideration 6: Is private operator able to comply with international standards?
- Consideration 7: Has private operator good reputation?
- Public-sector question repeated in branches: Is public sector willing or able providing financial support?
- Branch outcomes / models:
  - Model A — Single Central Securities Depository (CSD) with full or majority ownership of private sector
  - Model B — Single CSD with full or majority ownership of public sector
  - Model C — Multiple CSDs, all with full or majority ownership of private sector
  - Model D — Multiple CSDs: one with full or majority ownership of public sector and one or more with full or majority ownership of private sector
  - Model E — Multiple CSDs, all with full or majority ownership of public sector
- Conditional logic notes preserved from diagram:
  - Questions 4–7 are evaluated “FOR EVERY TYPE OF SECURITIES MARKET” on some branches.
  - Some branches evaluate conditions “for all securities markets” or differentiate “for one” versus “for other securities market(s).”

*International Monetary Fund | January 2019*

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_Source: https://www.imf.org/-/media/files/publications/howtonotes/howtonote1901.pdf_