IBM (NYSE: IBM) today announced that Indeval, Mexico’s central securities depository (CSD), is using IBM software to settle securities trades in seconds, reducing the risk of financial losses and shielding the country from fluctuating market conditions. Rapid trade settlement has reduced the amount of cash that banks must have on hand to cover trades by 52 percent and saved Mexican banks more than $240 million in interest in 18 months.
Mexico’s new securities settlement system is the world’s first one that operates a near real-time net settlement model. Other nations central securities depositories worldwide are expected to adopt similar near real-time settlement models.
By using IBM’s decision automation and advanced analytics software, the new securities settlement system, called Dali, settles over $250 billion in securities per day — one fifth of Mexico’s GDP — in near real time. It has provided added stability to Mexico’s financial system by raising liquidity levels while lowering capital requirements for financial institutions.
As the world becomes flatter, the world’s financial markets are becoming interconnected. Instances of instability in one financial system can impact markets worldwide. The process for settling securities trades has a tremendous impact on how global financial markets operate. Central securities depositories (CSDs) are the central hub of financial markets providing services related to the custody and management of securities on behalf of banks and individual investors and settlement of securities transactions.
The inter-dependence of the world’s financial systems was graphically illustrated by the exposure that resulted from the failure of Lehman Brothers in September 2008. That event highlighted the importance of settling securities transactions as quickly as possible to reduce the losses associated with outstanding stock trades. Mexico’s clearing and settlement module delivers continuous and near real time settlement which substantially reducing these risks.
“As the core of the financial infrastructure, it is important that settlement systems be robust to rapidly process volumes of transactions to ward off the negative effects of a financial crisis,” said Jaime Villasenor, Chief Risk Officer at Indeval. “As the largest payment and securities settlement system in the financial sector, Indeval is helping mitigate the risk involved in transactions settlement and diverting the worst effects of the systemic crisis.”
Today, Indeval is settling trades as quickly as possible after they occur, without incurring borrowing costs. In just one minute in a recent settlement cycle, more than $70 billion in stock trades were settled.
“Market participants throughout the world have a renewed focus on closing transactions as soon as possible,” said Arturo Palacios, Senior Operations Manager at Indeval. “There is no doubt that IBM’s software helped provide a higher level of liquidity than would have been possible during the recent crisis.”
Previously, Indeval, like most CSDs around the world, operated a settlement system that required banks to hold liquidity of billions of dollars while securities were being settled. Linking the delivery of securities to their corresponding payment requires depositors to have adequate financial resources available to settle their trades. Financial institutions may have to borrow if they do not have sufficient funds to settle stock and debt trades.
At the heart of Indeval’s Dali securities settlement system, the IBM ILOG CPLEX Optimizers match thousands of transactions simultaneously, so that only net amounts of securities and cash need to be transferred among the participating financial institutions. This tremendously reduces the amount of cash and securities the institutions need to have on hand to settle the transactions.
“Indeval is changing securities trading and is an example to other central depositories around the world. The application of advanced analytics using speed, robustness and reliability of CPLEX to process complex securities transactions reduces risks for banks and saves on costs. Mexico’s financial stability impacts not only its own citizens but also the world’s financial system,” said Eduardo Gutierrez, Software Director, IBM Mexico & Latin Caribbean Region.
In recognition of its excellence in operations research, Indeval won the 2010 Edelman Award from INFORMS (Institute for Operations Research and the Management Sciences).
For more information, please visit http://www.ibm.com/software/websphere/optimization/advanced-analytics/