Securities Settlement

Dominique Rambure and Alec Nacamuli

Chapter 11 in Payment Systems, 2008, pp 148-157 from Palgrave Macmillan

Abstract: Abstract On 2 August 2004, in less than two minutes, Citibank issued sell instructions on government bonds from 11 euro-zone countries for a sum of 11 billion euros. The trade involved over 200 instruments on the different electronic trading platforms of MTS, the Italian system which runs the market in euro government bonds. The purchase of government securities, mainly French, German and Italian, generated liquidity through the simultaneous sale of futures contracts, mainly German (Bunds 10 years, Bobl 5 years and Schatz 2 years). Between 20 and 30,000 futures contracts for a value of 100,000 euros each changed hands in a few seconds. This naturally pushed the price down. Half an hour later, Citibank repurchased the government bonds for 4 billion euros, making a profit of 10 million euros through this perfectly legal operation. Six of the 55 principal trading institutions on MTS are reputed to have lost around one million euros. To avoid a repetition, MTS has since imposed limits on the amounts that can be traded within a defined short period of time. Trading such high volumes in such a brief time interval, involving hundreds of diverse instruments (securities, derivatives, and cash) in different countries requires very efficient settlement infrastructures in terms of execution time, resilience and cost so as not to impact the profitability of such an operation, 0.001 per cent in this case.

Keywords: Government Bond; Future Contract; Liquidity Risk; Settlement System; London Stock Exchange (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1057/9780230227217_11

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