Swiss National Bank (SNB) The SIX Swiss Exchange-SECOM-SIC link (Swiss Value Chain)

The SIX Swiss Exchange-SECOM-SIC link (Swiss Value Chain)

Delivery versus payment in securities settlement

Since 1996, a linkage has existed between the securities settlement system SECOM of the SIX SIS Ltd (www.six-sis.com/sec/cm), the trading system of the SWX Swiss Exchange (www.swx.ch) and SIC. The linkage between these systems makes it possible to guarantee the “delivery versus payment” principle in securities settlement. This, in turn, eliminates the settlement risk in securities transactions. The settlement risk implies the risk that the seller of securities delivers these without receiving payment or, conversely, that the buyer of securities makes payment without receiving delivery. The settlement risk is one of the major causes of systemic risk, i.e. of the possibility that the inability of a participant to fulfil his or her obligations on the due date will lead to other participants or financial institutions likewise not being able to meet their obligations on the due date. Such an inability to pay or deliver can cause considerable liquidity or credit problems and consequently threaten the stability of the financial markets.

The SWX Platform – SECOM – SIC Link

The Delivery versus Payment in Securities Settlement Systems report (www.bis.org) published by the Bank for International Settlements in 1992 provides a detailed survey showing the risks involved in securities settlement can be reduced.

An example

The following example illustrates the way in which the three systems SECOM, SWX Platform and SIC are linked with one another in order to guarantee delivery versus payment in securities settlement. Bank A buys 100 securities for CHF 20,000 on the stock market from Bank B. Immediately afterwards SIX Swiss Exchange sends the two parties a confirmation, and the relevant information to SECOM, where this transaction data is kept until settlement. As a rule, securities transactions are settled three days after the trade has been concluded. On the settlement day, SECOM checks whether Bank B holds at least 100 of the securities sold in its custody account with SIX SIS Ltd. If that is the case, 100 securities are reserved and a payment instruction to SIC is automatically released. SIC then checks whether Bank A has sufficient reserve balances. Should Bank A in fact hold at least CHF 20,000 in reserve balances, this amount is credited to Bank B's reserve account. At the same time, SIC notifies SECOM that the payment has been carried out. SECOM then transfers the reserved securities from the custody account of Bank B to that of Bank A and notifies both parties that settlement was successful.