Latin American Capital Markets

196 RUBEN LEEtheir securities transactions through a common interface using standardized access,thus reducing the risks associated with cross-border settlementHub and SpokesEuroclear promoted a hub and spokes model in 1999, although it was subsequentlydiscarded (Euroclear 1999).The proposal had two key aims. First, it would transformEuroclear into the main point of entry to every European CSD for international fundmanagers, custodian banks, and broker-dealers. Second, it would allow Euroclear toact as a central information-processing unit for local banks and broker-dealers doingbusiness with international counterparts through their local CSDs. In addition to itsrole of linking the spokes, the hub was intended to serve as the primary crossbordersettlement provider for global intermediaries. This business would require ahigh concentration of both assets and counterparts to guarantee the greatest possiblesettlement efficiency, facilitated by integrated credit and collateral managementand enhanced custody services.The spokes were to settle high-volume, domestic, retail-driven securitiestransactions, which could include the domestic transactions of global capital marketparticipants.The spokes would have the prime relationship with their respective domesticmarkets and, therefore, be responsible for the supply and quality of securitiesinformation to the whole system. They would also have a key role in securities issuanceand communications with issuers, registrars, and tax authorities. The spokeswould act as the primary depositories for securities issued by domestic issuers.Theyalso would provide their participants with settlement and custody services in foreignsecurities through their linkages with the hub.The hub and spokes model was anticipated to have a number of benefits. Itwould be a single interface for each market participant to a single settlement infrastructurecovering the European capital markets. It would generate cost savings forusers from the availability of the single settlement feed. It would provide a gateway tonon-European capital markets and counterparts. It would foster timely and efficientrelationships with local markets (including issuers, registrars, and tax authorities). Highsettlement efficiency would yield a reduction in credit and collateral needs and financingcosts. The model would have low setup and operating costs. And it wouldhave reduced overall settlement risk. Among the criticisms of the proposal, somethought it would diminish the perceived value of the national European CSDs; thatthe high-profit institutional business would be handled by the hub, while the nationalCSDs (the spokes) would be left with the low-profit retail business; and that the costsavings were overestimated.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub