- a high-tech country?
Finland is traditionally
known as a country of beautiful women, thousands of lakes and saunas. These
clichés are still true, although in the 90's Finland has created herself
another image. Finland has rapidly developed in the areas of high technology
and information technology. The country has skilfully adapted to and implemented
these technologies, and in some cases acted as a pioneer. Everyone knows Nokia,
but there are only few who are aware of the high level of Finnish clearing and
settlement technologies. The Finnish Central Securities Depository Ltd (APK)
uses a real-time gross settlement system for debt instruments (called the RM-system)
and has electronic connections to Bank of Finland's system of payment transactions.
The APK benefits from the company's high technological level and is thus better
able to meet growing domestic and international demands. Since this year APK's
customers have been able to use an efficient two-way link infrastructure for
trade settlement on German and French markets.
Structure of the RM-system
in a nutshell
The RM-system contains the following functions as logical and separate entities:
trade settlement, deliveries and custodian services. The system is centralised,
i.e. there is only one book-entry register provided by the APK, in which account
operators / clearing parties function.
The APK has currently the following instruments in its selection: bonds, commercial
papers, treasury bills, municipal papers and certificates of deposit. Issuing
of book-entries is easy and fast. Issues are carried out according to the DVP
principle and trading of issues takes place in real time.
T+0; trade settlement, delivery
RTGS-features were included in the RM-system already in 1993. Since then, several
updated and improved versions of the system have been introduced.
Entry and confirmation:
Trades are handled as separate transactions in the APK's trade-by-trade settlement
and implementation system. In DVP-process payment follows immediately after
securities are transferred from one book-entry account to another, which means
that trading parties are not subject to any credit risks. The process takes
place in real time and is therefore free of risks. Additionally, no collateral
is required for the APK. Clearing parties enter both their own and their clients'
deals. It is possible to enter a deal to take place immediately (T+0) or on
any other delivery date in the future. After a trade entry has been made, the
APK's system checks that the buyer's and seller's data are identical. If that
is the case, the system confirms the trade. A confirmed trade cannot be cancelled
by the decision of solely one party.
The APK's clearing system examines, which of the concluded trades in each book-entry
account can be processed separately or together with other trades. The following
aspects are taken into consideration in the evaluation: cash deposits transferred
by clearing parties to the APK's Bank of Finland payment transfer account for
the payment of concluded trades, together with proceeds to be received from
the sales of securities from the account. If the account holder's money transferred
to the APK's Bank of Finland payment transfer account together with the money
to be received from viable trades are enough to pay for all purchases, the system
will process both purchases and sales simultaneously. Similarly, all viable
trades entered in other accounts as well as viable trades having chained with
waiting-to-be-settled trades are processed simultaneously. Each trading party
bears the responsibility for fulfilling trading requirements, even when a particular
trade is part of follow-up sales or purchases. It is justified to claim that
the settlement of chained trades functions well, since 100 per cent of all trades
in the RM-system take place always on the agreed settlement date.
Handling of payments
Payments between various
financial institutions are handled via the APK's
Bank of Finland payment transfer account. Payments between various banks are
made using so-called central bank money, which means that the APK as a clearing
entity is not subject to any banking risks. The APK maintains cash deposits
paid for or received from concluded trades on behalf of the buyer or the seller.
A clearing party or an investor can choose either a gross principle, in which
each trade is paid separately or a net principle, in which trade payments entered
in the system for each delivery date are netted. Thus, each trading party gets
only one payment obligation or receivable on each day.
of the RM-system
Finland is the only Nordic country having a membership both in the EU and the
EMU. Transferring to use the euro as a clearing currency at the beginning of
1999 went well. Due to favourable decision-making on the national level, Finnish
money markets have become more international. Market participants have currently
new possibilities to carry out international operations successfully, as the
settlement infrastructure enables them to have a simple and automated access
to the European core markets. Also other Nordic market participants are able
to use, if they wish, the APK as a gateway in their operations targeted at the
central markets of the EMU area. The requirement for this is naturally that
the market participant has made a contract with an existing RM-clearing party
/account operator or that the market participant acts as a clearing party /
How does linked settlement
function in practise?
The domestic settlement of the RM-system is linked seamlessly to international,
euro-denominated settlement transactions processed in the system. The APK keeps
book-entries that have been transferred abroad in a so-called omnibus account
of a foreign central securities depository. Trade messages are sent via the
SWIFT-network between various central securities depositories. The settlement
of cross-border trades in the RM-system is processed almost in real time. The
only restriction is the time needed for sending messages via the SWIFT-network,
which normally takes a few minutes. Trades and transfers to Germany and France
are handled according to the Free of Payment -principle.
An example of handling
a cross-border settlement transaction
A cross-border Free of Payment transaction is handled phase by phase. Links
operate in both directions. In the example below, a Finnish clearing party transfers
Finnish book-entries to a foreign party. The settlement process has the following
A Finnish party enters a settlement transaction (= a trade transaction with
no clearing price) in a normal way to the APK's RM-system. The party identifies
the name and the account number of the recipient party of the foreign central
securities depository (hereinafter FoCSD). The transaction is processed in the
RM-system in the same way as Finnish transactions. Book-entries are transferred
into the FoCSD's omnibus account on a settlement date as soon as the sender
has a sufficient amount of book-entries in his book-entry account.
As the settlement transaction has been completed in the APK's RM-system, the
APK's system sends a SWIFT-message to the FoCSD informing that book-entries
have been transferred to the FoCSD's omnibus account. The name of the foreign
clearing party to whom the book-entries belong is also mentioned.
The FoCSD issues a corresponding book-entry in its own system in order to register
the ownership and holding of book-entries in the omnibus account. At the same
time, the foreign party's (the receiver's) book-entry account is credited by
the FoCSD through transferring issued book-entries to the party's account.
When the FoCSD has completed the transaction in its own system, the FoCSD will
send (with some exceptions) a SWIFT-message to the APK confirming that the transaction
has been completed in the FoCSD. After receiving this message from the FoCSD
the APK has the certainty that the transaction has been completed in both central
If a Finnish party would
transfer a German or a French book-entry to a German or a French party, the
handling process would contain the same phases. The only exception would be
that the FoCSD would not need to launch an issue in phase 3, since the German
or French book-entries would already exist in the APK's omnibus account in the
Door open to Europe
Through the APK its clearing parties are able to have access to two major European
clearing centres. On the domestic market the APK's clearing parties are able
to settle trades with foreign securities in accordance with the DVP principle,
i.e. the same principle used in the settlement of domestic trades. Investors
can keep both domestic and foreign book-entries in the same book-entry account
in the RM-system.
APK's clearing parties can
use the ECB approved German securities transferred through this link as collateral
for central bank loans in Finland. This service works in both directions as
defined in the agreement between the APK and DBC. Thus, Finnish securities accepted
to the link can similarly be used as collateral in Germany.
Issuers benefit from using
the link, since there are potential investors not only in Finland but also in
Germany and France. Issues must be denominated in the euro. Consequently, the
liquidity of book-entries increases as domestic and foreign investors are able
to maintain an effortless flow of communication. Payments of proceeds and refunds
of principal are handled quickly through the TARGET system.
How to become a user
of the APK's services?
1) Opening of an account
The easiest way is to open a book-entry account in some Finnish entity that
acts as a clearing party and account operator in the APK's RM-system. A requirement
for this is to have an agreement with the entity maintaining the book-entry
2) Becoming a clearing
The entity seeking to become a clearing party shall submit an application to
the APK. The APK's Board of Directors shall then make a decision on the acceptance
of the application. In the same context the clearing party shall apply for the
right to become an account operator. After the acceptance the clearing party
/ account operator shall make an agreement with the APK on following the rules
and using the system. Details concerning practical matters shall be agreed upon
with the APK. The APK shall create the clearing party into the system and shall
inform all other clearing parties of the matter. The whole process takes a few
weeks. According to the authorisation given to it, the clearing party / account
operator can open and maintain book-entry accounts and make entries on its own
and its customers' behalf.
Finnish Central Securities Depository Ltd