Professional Documents
Culture Documents
Working Paper
2007
ABSTRACT
This paper presents an Operations Management analysis of the Mexican central securities
depository (INDEVAL) carried out with the objective of devising a whole new business and
operations model for the company. INDEVAL’s main function is to serve not only as a
depository institution but also as a reliable means for the clearing and settlement of securities
transactions (Securities Settlement System). Therefore, information systems and technology are
the basis for its operations. At a high scope, the analysis implied defining a mission, vision, and a
corporate strategy. At a business strategy level, it implied specifying business lines and the
modelling and design of business processes, while keeping focus on the corporate strategy. In
addition, a series of key constraints were considered for this work: (i) improvement of straight-
through-processing (STP) in all operations, (ii) promotion of the reuse of components and
artefacts, (iii) increment of process flexibility, and (iv) pursue of low maintenance costs. Thus,
the model and the methodology presented in this work represent a useful benchmark for those
interested in improving operations in those companies which are part of a financial system.
1. INTRODUCTION
The Operation of a CSD may be divided in core functions and support services. Core functions
represent the basic operation of the CSD and at the same time are those that help to fulfill the
main objectives of the organization [Padoa-Schioppa, 2001].
Core Functions:
Safekeeping: This includes securities in dematerialized form (book-entry only) or in physical
form immobilized within the CSD.
Custody: Supporting deposits and withdrawals involves the relationship between the transfer
agent and/or issuers and the CSD. It also manages corporate actions processing such as
dividend, interest and principal payments, as well as including proxy voting.
Clearing: Process that calculates the mutual obligations of the participants in net terms for
the exchange of values and cash.
Settlement: The conclusion of an operation by which the seller transfers the securities to the
buyer and the buyer transfers the money to the seller (a settlement may be final or
provisional).
A CSD may offer additional services in addition to those considered as core functions. These
services include Securities Lending and Borrowing, Information management, and repurchase
agreements processing (repo management). However, there are risks and responsibilities
regarding these services that must be taken into consideration when analyzing and evaluating
each market.
In Mexico, the stock exchange is compounded by 152 issuers and has a market capitalization
estimated at 171 US billion; meanwhile the money market is the biggest and most important
sector, it represents the 99.9% of the financial operations and is considered the most profitable for
the investors [Gil-Diaz, 2005]. Since 1987, INDEVAL has been the Mexican Central Depository
of securities, providing custody, safekeeping, clearing, settlement and book entry-transfer
services for the Mexican financial industry. In a daily average, INDEVAL settles more than 160
billion dollars in transactions related with capital and money markets which include equity,
corporate bonds, debt instruments issued by Mexican Banks, and Government Securities
(according to statistics published by the Central Bank).
The Law does not preclude the existence of other depositories. Nevertheless, this happens in
Mexico and in other countries. A single clearing-settlement institution is recommended when
titles are negotiated in different stock markets and the securities have the same characteristics
[INDEVAL & ITAM, 2005]. Examples of this situation are the Canadian Depository of
Securities and IBERCLEAR in Spain.
In order to understand the role of INDEVAL in the financial industry, it is necessary to observe
the relationships with the financial participants in the Mexican market. In Figure 1.1 the relation
between the diverse participants of the Mexican financial market is depicted.
International
$
Securities
Central Bank
$
$
$
(Banxico)
$ $
Financial
$
$
$
Intermediaries
Clearing House Clearing House Derivatives Exchange
(CCV) (Asigna) (Mexder)
All securities are listed at the National Registry of Securities and Intermediaries (RNVI). This
registry is regulated by the National Banking and Securities Commission (CNBV). INDEVAL
centralizes the transfer of all debt instruments, including government securities, and equities
listed in the RNVI and traded on the Mexican securities market (Mexican Stock Exchange
(BMV) and OTC market). Foreign issued securities that are traded on the Mexican market
which may not be listed in the RNVI are also eligible for transfer within INDEVAL.
The Bank of Mexico (Banxico) is the central bank and acts as depository for federal government
securities within its facilities. Nonetheless, it sub-deposits all of these at INDEVAL for electronic
safekeeping and centralized negotiation. The Central Bank developed the clearing algorithm that
is currently compensates all debt and money market trades (Procoval). Trading in capital market
is cleared at the clearing house of capital (CCV). The derivatives trade takes place at the
derivatives market (Mexder) and their operations are cleared in their own clearing house
(Asigna).
INDEVAL´s current structure and system platform is saturated due to the constant increase in
transactions at the financial market, the issue of new instruments and new needs faced by
participants. This situation urgently called for an operations analysis and a redesign of the system
in order to maintain and to significantly improve the business processes and to deliver a better
service.
Moreover, the current situation called for devising a whole new business and operations model
for the company. At a high scope this implied defining a mission, vision, and a corporate
strategy. At a business strategy level, this required the specification of business lines and the
design of business processes, while keeping focus on the corporate strategy.
Business processes were designed and modelled in order to ensure that corporate strategy is
aligned with business lines and products. In addition, a standard notation that is intuitive was
implemented according to Business Process Modelling Notation standards (BPMN). BPMN
provides a lean representation of complex process semantics and provides a common language
between technical users and business users [Proforma, 2003].
The definition of the business establishes the scheme for the design of the operational model.
In order to develop the new system, several elements were taken in consideration as inputs for an
analysis that had as an outcome the business definition. These elements can be observed in figure
2.1.
Business
de finition
st ructu re
Directors and
managers ANÁLISIS
Analysis
proposa ls
Legal implicatio ns
O bject
an
Vision
Objective Objective
Ar
Bu sine ss Business
qu
Pro cess
pl
Processes level
em
The business model level establishes the logic the company must follow to achieve the business
strategy. At this level, the business architecture is defined as well as the business lines and
functions required to fulfil the intention of the company.
Finally, the last level is constituted by the implementation of processes that ensures the company
operation. These processes support the functions of the business.
INDEVAL had to identify and take advantage of its forces and the business opportunities to fulfil
their objectives. Moreover, it was necessary to identify and avoid external threats with the
improvement of strategic operations that reduce their weaknesses.
On one hand, forces and opportunities allow the diversification and deepening in the business.
Conversely, the growth of the institution is limited by weaknesses and threats.
Forces
The main force of INDEVAL is its unique position in the Mexican financial system. This
position allows the access and a direct relation with all agents, as well as great access of
information unlike other intermediaries like stock brokers and negotiation mechanisms.
Weaknesses
The lack of deepening and anticipation in new business lines improvements, could be translated
in to risks of losing strategic positions in the Mexican Financial System. This weakness is due to
a constant increase in transactions at the financial market, the issue of new instruments and
emerging needs faced by participants.
Opportunities
The sprouting of new direct participants, like investment funds, the operation of common
securities in the financial markets (mortgage bonds) and the creation of a counter party for money
market represents significant huge opportunities for INDEVAL. Additionally, it is important to
mention that the central bank is giving permission for trading money market securities.
Threats
Increment in the amount of operations beyond the capacity of INDEVAL, resulting in the
creation of new depositories.
3. BUSINESS DEFINITION
Mission
Provide safekeeping, custody, clearing and settlement of securities for the financial system, in a
scope of high confidence and security. Satisfy customer needs through transparency, efficiency
and high standards of quality in all services. In order to fulfill this mission, INDEVAL must lean
in a solid financial state, appropriate technology, the adoption and development of the best
practices of the industry and human capital.
The concepts expressed in the previous interjections acquire knowledge by means of the
following figure:
C onfid en ce
Secur ity
Hum an Capital
Str ong finan ci al state
Appr opiate Techn ol ogy
Best Practices
Vision
INDEVAL must develop and anticipate its operation against the growth and extension of the
Mexican Financial System. It must be internationally recognized as the central depository of
securities that offers the best relation between cost and quality in services.
Planning Horizon
FIGURE 3.2: INDEVAL VISION
Acount
Modification
S. D. INDEVAL
Market
Operations
Securities and
Settlement
Participants
System
Modifications
This system operates according to the flow of instructions and the communication between
business lines. Though this form of operating could handle the large flow of operations from the
market, the system was complicated, generating slow process times and a large ratio of error.