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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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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


Csd s risk management in hft era

  • 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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

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


Csd s risk management in hft era

How to Solve the Problem

Main Board

SME Board

China Securities Depository and Clearing Corporation Limited


Csd s risk management in hft era

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


Csd s risk management in hft era

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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