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CSD’s Risk Management in HFT Era

China Securities Depository and Clearing Corporation Limited. CSD’s Risk Management in HFT Era. Dr. DAI Wenhua October 2013. www.chinaclear.cn. Clearing and Settlement Risks Brought by Trading Bust. Food for Thinking. Boom and Bust Brought by HFT. CONTENTS.

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CSD’s Risk Management in HFT Era

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  1. China Securities Depository and Clearing Corporation Limited CSD’s Risk Management in HFT Era Dr. DAI Wenhua October 2013 www.chinaclear.cn

  2. Clearing and Settlement Risks • Brought by Trading Bust • Food for Thinking • Boom and Bust Brought by HFT CONTENTS • How to Solve the Problem China Securities Depository and Clearing Corporation Limited

  3. Boom and Bust Brought by HFT -Boom HFT Pushes Market Boom—Dark Pools, Flash Order, etc. Main Board SME Board Source: TABB Group China Securities Depository and Clearing Corporation Limited

  4. Boom and Bust Brought by HFT -Boom Favourable Factors for HFT—Modern Science& Technology and Digitalization Main Board Securities industry takes the brunt to be dragged into digitalization by waves of HFT, programming trade, data-based automatic regulation, individual information disclosure(micro-blog, text message, etc ). ChiNext China Securities Depository and Clearing Corporation Limited

  5. Boom and Bust Brought by HFT -Boom Favourable Factors for HFT — Push from Rules and Regulations • The US Regulation NMS • The EU MiFID Main Board SME Board ChiNext China Securities Depository and Clearing Corporation Limited

  6. Boom and Bust Brought by HFT -Boom Favourable Factors for HFT—Implications of Regulation NMS and MiFID Main Board • Improve market transparency, fairness and liquidity. • Increase market competition and promote exchanges to be allied and company-oriented. • Improve performance and connectivity of technical platforms. • Promote the connections between clearing and settlement platforms. • Encourage the promulgation of unified market standards. SME Board China Securities Depository and Clearing Corporation Limited

  7. Boom and Bust Brought by HFT -Bust HFT results in trading failures. —Case Studies Main Board SME Board China Securities Depository and Clearing Corporation Limited

  8. Boom and Bust Brought by HFT -Bust New risks emerge from HFT. Unbridled science and technology will jeopardize financial market. Main Board Technology will never be perfect. Unsupervised technology will be dangerously far from perfect and the industry will be confident its technology is safe right up until it isn’t. How many more failures do regulators need to see before they stand up and do something? ——Comment: Unsupervised technology hurts modern markets, Financial Times ,by RT Leuchtkafer，August 23, 2013 SME Board ChiNext China Securities Depository and Clearing Corporation Limited

  9. Clearing and Settlement Risks Brought by Trading Bust Risk Transmission Pathway Participant B … Main Board SME Board Participant C Participant A CSD/CCP … Participant D … China Securities Depository and Clearing Corporation Limited

  10. Clearing and Settlement Risks Brought by Trading Bust • Risk Management for CSD with the Function of CCP • Risk Management for CSD without the Function of CCP • Risk Management for DvPand Non-DvP • Case study (Everbright Fat Finger incident- CCP& non-DvP) Main Board SME Board China Securities Depository and Clearing Corporation Limited

  11. How to Solve the Problem Principles for CSD in CPSS-IOSCO PFMI Central securities depositories and exchange-of-value settlement systems Principle 11: Central securities depositories A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimize and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilized or dematerialized form for their transfer by book entry. Principle 12: Exchange-of-value settlement systems If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other. Main Board SME Board China Securities Depository and Clearing Corporation Limited

  12. How to Solve the Problem PFMI are not Enough. • Different regulatory principles and conditions of different markets • Efforts and timetables to implement PFMI can not be unified. • No risk management mechanisms for CSDs’ new • Hi-tech challenges. Main Board SME Board China Securities Depository and Clearing Corporation Limited

  13. How to Solve the Problem Main Board SME Board China Securities Depository and Clearing Corporation Limited

  14. Food for Thinking • CSD, with the function of CCP or at least having close connections with CCP, should serve as the firewall against risks as the final link in the securities trading chain. • PFMI are comprehensive and systemic in covering risk management system and various institutions. However, PFMI are not detailed enough for CSDs to tackle the new Hi-tech challenges. • CSDs should strengthen exchanges and cooperation. The establishment of the Fifth Task Force by CDCPL is of great necessity. Main Board SME Board China Securities Depository and Clearing Corporation Limited

  15. China Securities Depository and Clearing Corporation Limited (CSDC) Address: No. 17 TaipingqiaoStreet, Xicheng District, Beijing Tel：8610-59378818 Fax：8610-66210938 Post Code：100033 www.chinaclear.cn

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