In May 2004, eight countries are scheduled to join the enlarged European Union, representing the largest expansion of the union, in terms of scope and diversity, in its history. The countries include the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovenia.
All of the countries have been preparing for membership of the EU for more than a decade in order to meet the criteria which includes a stable democracy, accepting the common rules, standards and policies of EU law and to have a functioning market economy.
“Hungary, Poland and the Czech Republic have been astute in recognising that to achieve European Union membership they have had to adapt their capital markets trading and post-trading environments,” says James Donovan, regional business executive for Europe, Japan, Middle East and Africa, Citibank Global Securities Services. “They have all made good progress on this by improving transparency and encouraging practices that would attract foreign investment.”
Clearly the candidate countries represent a significant opportunity for global custodians as market reforms create new pools of liquidity and open up markets for pension and mutual funds. The ING and Bank of New York European commercial alliance, for example, will target eastern European countries along with Germany, the Benelux and central Europe.
As Donovan points up, free markets are a new concept to these candidate countries and they are adapting their practices to provide the legal, tax and regulatory framework that will attract foreign investors.
In its Blue Book, a guide to the payment and settlement systems in EU member states published in August 2002, the European Central Bank refers to the progress that has been made in the candidate countries to develop modern, robust and efficient market infrastructures. “Real-time gross settlement (RTGS) systems are being introduced, and progress has been made towards implementing systems and procedures allowing the introduction of delivery versus payment (DVP) mechanisms and the effective management of collateral,” says the report.
The aim of such reforms is to ensure that the countries’ payment and securities clearing and settlement systems infrastructure is sufficiently robust to avoid systemic risks and possible contagion effects across the EU in the event of problems and to ensure that the countries’ domestic infrastructures are efficient enough to allow local market participants to compete with other EU market participants.
A number of initiatives point to the progress made in eastern European countries. All EU member countries were required to implement RTGS systems by the end of 1997 and it has become widely accepted as a norm throughout the world. The candidate countries for EU membership have followed this lead. In April 1993 the National Bank of Poland, for example, introduced a real-time gross settlement system, Sorb, for large-value interbank transactions. A new version of the system, called Sorbnet, was completed at the end of 1998. It processes large-value payments, including interbank money market payments, the payment leg of the operations cleared by the National Depository for Securities (KDPW) and large-value customer payments.
In RTGS systems, an exchange for value settlement system is applied to interbank funds transfers. This can eliminate principal risk, rather than simply transferring it to the system’s guarantors. As RTGS enables the final transfer of funds intra-day, subject to the availability of covering funds, the payment leg of a securities transaction can be coordinated with the final transfer of assets, so that the one takes place if, and only if, the other also takes place.
After the division of Czechoslovakia at the beginning of 1993, a new clearing centre was founded in Slovakia, while the former federal Clearing and Settlement Centre remained within the Czech National Bank. The Bank owns and operates Certis, the republic’s interbank RTGS system. Each individual bank in the Czech Republic is identified by a unique bank identifier code, which is an obligatory part of any payment transaction. Additional numerical codes are used to provide more detailed information about the payments.
In Hungary, the large value system, Viber, is separate from that for retail payment systems, ICS. Direct participation in Viber and ICS is through a settlement account with the national Bank of Hungary. Participants in the two systems largely overlap and the core payment systems are closely linked and complement each other. Bulk payments are processed overnight in the ICS using the daily initial liquidity information on a batch-by-batch basis and settlement is carried out in the National Bank of Hungary’ accounting system before Viber opens.
Securities payments are initiated by Keler, the Hungarian central securities depository, on the basis of settlement orders received from the parties involved or from the Budapest Stock Exchange or directly from Keler, which acts as the central counterparty for exchange-traded derivatives. Securities transactions are settled on a DVP basis.
In the recently passed Capital Markets Act, Hungary introduced dematerialisation of shares, with a deadline of 31 December 2004 for all existing physical certificates to be dematerialised. Only a handful of countries globally have fully dematerialised their markets. Hungarian Government debt certificates, however, will remain in paper form. Hungary has implemented an electronic remote trading system on the cash market, which is order-driven without market-makers and features an automated order matching and trade execution system. All orders entered into the trading system are matched according to pre-determined rules and matching as the system is anonymous, the matching does not take account of the party that made the order.
The Czech system of securities settlement differs greatly from Hungary’s in that three independent securities settlement systems handle all securities in the country. One system, SKD, handles the settlement of short-term securities with a maturity of up to one year and two, Univyc and RM-System, settle all other securities.
Poland also has three securities settlement systems. One is designed for securities quoted on the Warsaw Stock Exchange and on CeTO (Central Quotation Table), the the company that organises the OTC market. The KDPW, the National Depository for Securities, acts as a clearing house and depository for both markets. The second system settles Treasury bills issued by the Minister of Finance, where the National Bank of Poland acts as an issuing, depository and settlement agent. The third relates to bills issued by the National Bank of Poland, for which the National Bank of Poland performs the depository and settlement functions. As Hungary aspires to, all types of security in Poland are dematerialised.
Citibank’s Donovan believes that of Poland, Hungary and the Czech Republic, Hungary is the best in terms of settlement effectiveness and the complementarity of the CSD and exchange. “Hungary has a lower rate of failures between the exchange and settlement house because of effective communications systems between the two,” he says.

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