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Page 1 © 2009 Thomas Murray Ltd. Wholesale vs Retail Safekeeping Models AMEDA Leadership Forum Alexandria, Egypt, 27-29th April
Page 2 © 2009 Thomas Murray Ltd. Retail Model All domestic accounts held at the first level Each beneficial owner has their own account at the CSD The CSD acts as central registrar – the notary that grants legal title. (Other registration functions can be carried out by third party registrars e.g. Calling AGMs, paying dividends etc. Genuine nominee accounts only allowed for foreign participants Also known as the Direct Holding model Structure results in millions of accounts at the CSD No intermediaries required. Participants act as Account Operators to maintain details across millions of accounts CSD and Central Registrar Beneficial owner Foreign nominee Beneficial owner Foreign nominee Beneficial owner Beneficial owner Beneficial owner Beneficial owner Beneficial owner
Page 3 © 2009 Thomas Murray Ltd. Wholesale Model No restriction on the number of levels Beneficial owner is the one at the bottom of the chain Intermediaries are licensed depositories that often act via “nominee accounts”. These are omnibus accounts that allow efficient settlement but offer lower levels of protection Also known as the Indirect Holding model Typically only several hundred accounts at the CSD Settlement Depository Beneficial owner Foreign nominee Beneficial owner Intermediary Nominee Beneficial owner
Page 4 © 2009 Thomas Murray Ltd. Advantages of the Retail model Allows CSD to act as central registrar giving leverage to provide added value services (e.g. asset servicing, tax, issuer services, portfolio valuations) Ownership is very clear – no reliance on intermediaries records. No long holding chains. Equivalent of designated segregation Eliminates any legal uncertainties re: nominee status, omnibus accounting Effectively registration on settlement rather than books close registration Market behaviour more transparent for regulatory surveillance
Page 5 © 2009 Thomas Murray Ltd. Disadvantages of the Retail model It is a domestic model only. It does not work for cross border business. Foreign institutions want to operate via nominee accounts. Netting at the beneficial owner level may require a more sophisticated netting algorithm or netting efficiency is diminished. The wholesale model is more efficient across the interface between the custodians and the CSD in that custodians operate omnibus accounts and only limited reconciliations are required. Retail model potentially allows CSD to dis-intermediate custodians. It therefore requires very good corporate governance to succeed. Does not allow the intermediary to internalise settlements and therefore offer a cheaper solution. Increases operational risk within the CSD.
Page 6 © 2009 Thomas Murray Ltd. Embeds role of intermediary and discourages custodian disintermediation More operationally efficient for custodians/ easier for sub-custodians to provide a good service More efficient across the interface between the custodians and the CSD e.g. reconciliations, makes for timelier reporting Cheaper for participants and their clients (accounts and settlements) Facilitates higher netting efficiency Allows for internalisation of settlement (reduces settlement costs) Advantages of the Wholesale model
Page 7 © 2009 Thomas Murray Ltd. Voting (split/partial voting or re-registration required) Significant shareholding declarations Corporate actions – especially those requiring physical documents Taxation – requires separate omnibus account for each tax status Lack of securities segregation Legal uncertainties on holding of intangibles by intermediaries or nominee concept Loss-sharing/liens in an omnibus structure Disadvantages of the Wholesale Model
Page 8 © 2009 Thomas Murray Ltd. Examples Wholesale USA France Belgium UK (Mixed) S Africa Italy (with restrictions) Retail Sweden Norway Greece Turkey India China Brazil Saudi Arabia Limited Levels Spain Romania Kazakhstan Russia There is no prescribed best market practice in terms of the wholesale or retail model Unidroit should resolve the issues around the wholesale model. Limited levels are not best market practice in Thomas Murray’s view, they represent a compromise.
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