CUSTODY OVERVIEW

WHAT THEY DO ??
Introduction Contd.
Introduction to CSD
High trading volumes can cause delayed
settlement transactions & thus liquidity
problems
Physical certificates increase probability of
fraud & forgery
Thus CSDs were set up to immobilize
securities for the whole market
Shifted the focus from physical safekeeping
to the provision of information on
customers’ transactions and securities
holdings
Contd.
Economies of Scale where services
efficiently delivered by a central service
provider
Services provided were:
income collection from issuers
distribution to securities holders
notification of corporate actions and tax
reporting
collection services for national authorities
centralized securities lending service
Contd.
CSD was best placed to match demand with
supply
Little or no Customization provided to client
TRANSFORMATION OF CUSTODY
IN ELECTRONIC AGE
Services Provided by
Custodian
Services Provided by Custodian
Contd.
WHOM THEY SERVE ?
Ø RETAIL
Ø PRIVATE BANKING
Ø CORPORATIONS
Ø INVESTMENT
FIRMS
Ø INSTITUTIONAL
INVESTORS

Ø GLOBAL
CUSTODIANS
INTERMEDIARY Ø
Ø
BROKERS
ASSET
MANAGERS
Demand for Custody Services
(Clients).
Investor Clients Contd.
Investor Clients Contd.
Intermediaries Contd.
CUSTODY SCENARIO IN INDIA
MARKET REGULATIONS
Post 1992, NEAT was introduced (which
operated on a strict price/time priority) to
reduce information asymmetry & High
transaction cost
At investor level, listed companies had to
increase the frequency of their account
announcements
To ensure transferability of securities with
speed, accuracy and security, the
Depositories Act was passed in 1996
Regulations Contd.
This provided for the establishment of
securities depositories and allowed
securities to be dematerialized & NSDL
was launched
Other measures to reduce Transaction Cost
a movement toward electronic trading and
settlement
streamlining of procedures with respect to
clearance of new issues
MARKET REGULATIONS
EQUITY REFORMS RESULTS
Modernization of market with increased
efficiency
Trading has become more transparent
Eliminate risks of bad delivery and
counterfeit shares due to depository
available
The two depositories that are in operation
now ensure faster, cleaner and cheaper
settlement
 DEBT MARKET REGULATIONS
Classified into three segments:
Ø G-sec market
Ø PSU bond market
Ø Corporate bond market
 Focus of debt market reforms on G-sec
 Establishment of primary market for G-sec
 Strengthening of legal, regulatory and
payments infrastructure contributed to
development of secondary market

DEBT MARKET REGULATIONS
CONTD.
Reforms
Ø Auction of Treasury Bills with varying
maturities
Ø Entry of FIIs to Primary & Secondary Market
Ø Introduction of DVP system to accelerate
settlement, enhance transparency,
eliminate risk
Ø Promotion of G-sec by RBI by providing
liquidity support
Ø Active inter bank Repo market development
to boost liquidity
Regulatory Issues
Regulators:
a)SEBI
b)RBI
c)Department of Company Affairs
d)Department of Economic Affairs


SEBI's mandate includes ensuring investor

protection; promoting orderly growth of
security market
Regulatory Issues Contd.
RBI is responsible for primary issues of
Government Securities
Also includes the regulation of all contracts
in G- sec, gold related securities, money
market securities
SEBI is mandated to regulate the trading of
these securities on recognized stock
exchanges in line with the guidelines
issued by RBI
 REGULATORY AUTHORITIES
Regulator Role
SEBI Ensuring investor protection

Promoting growth of security

RBI Primary issue of G-sec
market
Regulation of all contracts in G-
sec, gold related securities,
money market securities

OVERVIEW OF NSDL


Depository Act 1996 passed to ensure

transferability of securities with speed,
accuracy and security
NSDL launched allowing securities to be
dematerialized
Aims at synchronizing settlement of trade and
transfer of securities irrespective of
geographical locations
Eliminates ills associated with paper-based
securities system such as delay in transfer,
bad delivery, theft and forgery
NSDL OVERVIEW CONTD..
NSDL OVERVIEW CONTD..
NSDL OVERVIEW CONTD..

Functions of Depository
ØDematerialization
ØAccount Transfer
ØTransfer Registration
ØCorporate Actions
ØLinkages with clearing system
Ø
NSDL ELECTRONIC LINKAGES
CLEARING CORPORATIONS
Financial Settlements are guaranteed by
CCIl
Settlement guarantee fund ensures
settlement of trades irrespective of default
by trading members
Eliminates counter party risk; thus boosts
investor confidence

 ROLE OF NSE AND CLEARING
HOUSES
The transaction in secondary market pass through
3 distinct phases
Trading: Stock exchange
Clearing: Clearing Corporation determines the
fund & security obligation of trading members
and ensures the trade is settled through
exchange of obligations
Settlement


Clearing corporation, clearing members,

custodians, clearing banks, depositories are
involved in the process of clearing
ROLE OF NSE AND CLEARING
HOUSES CONTD..
Clearing Corporation: responsible for post
trade activities like risk management &
clearing and settlement of trades executed
on a stock exchange
Clearing Members: responsible for settling
their obligations as determined by the
NSCCL by making the funds/ securities
available on settlement day to the clearing
bank/ depositories


ROLE OF NSE AND CLEARING
HOUSES CONTD..
Custodians: settle trades on behalf of
trading members; is required to confirm
whether he is going to settle that trade or
not

Clearing and Settlement
Process
 CLEARING AND SETTLEMENT

N SE

Trade
Details
Pay - out of Pay - out of
securities funds
D E PO S IT O R IE S N SC C L C LE A R IN G B A N K
Pay - in of Pay - in of
securities funds
Notification & Obligatio
affirmation n & pay
in advice Inform
Inform Instructions to of Instructions to Custodia
through make securities securitie make funds
DP available by s available
pay - in time by pay - in time
C U S T O D IA N S
RISKS INVOLVED
Business Risk

Counter Party Risk

Country Risk

Cash Risk

Market Risk

Operational Risk

Settlement Risk

Systemic Risk

Transfer Risk
Risks in Custody
Risks in Custody Contd.
Risks in Custody Contd.
OUTSOURCING
WHY?
Ø Constant threat of tighter
margins
Ø Consolidation of industry players
WHAT?
Ø Fund Accounting and
Administration
Ø Trade Matching and
Confirmation
Ø Back & Middle Office
OUTCOME ?
Ø Increased Profitability due to foll.
Additional services provided
Ø Cash Management
Ø Securities Lending
Ø Compliance Monitoring
Ø Risk Management
Outsourcing
Safe-keeping of assets and Trade
settlements are now considered plain
vanilla services
constant threat of tighter margins on
traditional products and consolidation of
industry players
These competitive factors have led banks to
offer new value-added services such as
cash management
securities lending
compliance monitoring
risk management
proxy voting and corporate actions.
Outsourcing Contd.
So far these diversification strategies have
worked & increased the profitability of
banks
The latest value-added offering is back and
middle office outsourcing which custodians
have identified as a business with
substantial growth prospects
OUTSOURCING REVENUE
POTENTIAL

US
$
Bi
ll
io
ns
Outsourcing Contd.
Outsourcing Contd.
Fund Accounting & Fund Administration
services are outsourced
Fund accounting:
security pricing
general ledger bookkeeping
NAV calculation
data distribution,
Reconciliation and daily, monthly and ad hoc
reporting
Outsourcing Contd.
Fund administration:
statutory reporting
tax compliance
performance measurement
Middle office outsourcing covers trade
matching and confirmation which involves
establishing links between brokers and
custodians
Can also cover cash flow forecasting and
cash position reporting
Outsourcing Contd.
Middle office outsourcing has been driven by
the shift to shorter settlement cycles
Unwilling to invest in new technology that
will improve straight through processing;
fund managers choose to outsource trade
matching and confirmation to a third party