_SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS_ reduced equipment and telecommunications costs and has facilitated the trend to move away from the physical delivery of instruments. This is not only a more efficient mechanism but also a safer one as it eliminates the movement of paper and thus reduces associated risks such as those relating to lost, stolen, or altered documents In an immobilized system, physical certificates are held in secure vaults and provide the essential support for book-entry maintained ownership positions of market participants. In a dematerialized system, physical securities do not exist as they are replaced by book-entry records. In such systems the individual investor has an interest right in a pool of fungible securities.

Key issues to be addressed when contemplating the elimination of physical delivery relate to the legal framework and the attitudes of investors. A legal framework which is appropriate for paper-based systems does not readily accommodate immobilization or dematerialization. Normally, amendments to laws are required, and depending on the legal system of the country, this can take a long time and should be taken into account. In many situations, individual investors have more confidence in a system which allows them to hold physical securities despite the associated risks. In moving to book-entry based systems, it is frequently necessary to wean investors away from this practice by providing an initial option to hold securities in either format as well as the option to change from one fornat to the other. A market strategy based on incentive pricing coupled with the dematerialization of all new issues can then be used to progressively move toward full dematerialization.

**Figure 1. Number of CSD Organizations**

<!-- Start of picture text --> 140<br>120~~~~~~~~~~~~2<br>100 x - :<br>80<br>60 .. ..<br>40<br>0 ,2 _ __ _ __<br>20<br>1950 1960 1970 1980 1990 1999 2000*<br>* Includes 20 operational and/or planned CSDs.<br>Source: Thomas Murray, "Evaluating Local Market Custody Arrangements"<br><!-- End of picture text --> A second important improvement initiative, closely related to that described above, is the establishment of central securities depositories/registries (CSDs) (see Figure 1). These institutions are created to facilitate the smooth and efficient operation of book-entry systems. CSDs provide key services including securities ownership recordkeeping and custody of physical certificates in irnmobilization regimes. However, in some systems there are still requirements for post-settlement processing such as the updating of share registers and the issue of replacement certificates. CSDs usually perform the clearing agent function and sometimes they also provide dividend and interest payments services. These institutions are normally private firms with a non-profit objective and are constituted as Self Regulatory Organizations (SROs) under the oversight of the securities market regulator. The use of the word "central" can be misleading, as there can be several depositories in a country rather than only one. The number of depositories depend on the complexity and size of the market. Nevertheless, today there is a trend towards centralizing all the securities clearance and settlement activity of a country in one single CSD with possibly a number of linked sub-depositories.

A gross settlement system requires a critical mass of marketable securities and system-wide liquidity for its efficient operation. Systemic risk in gross settlement systems is low as transactions are not executed unless there are securities and funds in the accounts of the counterparties. The relatively recent and 10