Transcript Thomas Murray's presentation

ISSUES FOR AMEDA DEPOSITORIES IN
MANAGING RISK IN THE CURRENT
ENVIRONMENT
April 2010
Agenda
 TM Depository Risk Definitions & Country Categories
 Risk Comparisons: AMEDA vs Rest of the World with
Key Issues
Page 2
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Risk Definitions
 Asset Commitment Risk - The period of time from when control of securities or cash is
given up until receipt of countervalue.
 Liquidity Risk - The risk that insufficient securities and or funds are available to meet
commitments; the obligation will be covered some time later.
 Counterparty Risk - The risk that a counterparty (i.e., a participant) will not settle its
obligations for full value at any time.
 Asset Servicing Risk - The risk that a participant may incur a loss arising from missed or
inaccurate information provided by the depository, or from incorrectly executed
instructions, in respect of corporate actions and proxy voting.
 Financial Risk - The ability of the CSD to operate as a financially viable company.
 Operational Risk - The risk that deficiencies in information systems or internal controls,
human errors or management failures will result in losses.
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PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Country Categories
Page 4

Middle East Countries and CSDs
African Countries and CSDs
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Bahrain – CDS
Egypt – MCDR
Israel – TASECH
Jordan – SDC
Kuwait – KCC
Lebanon – Midclear
Morocco – Maroclear
Oman – MDSRC
Palestine – CDS
Qatar – Qatar Exchange
Saudi Arabia – Tadawul
Tunisia – Sticodevam
UAE – DFM
UAE Nasdaq Dubai
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Kenya – CBK
Mauritius – BOM
West Africa – DCBR
Zambia – LuSE
Zambia – BoZ
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Additional CSDs in Country Average

AMEDA CSDs Under preparation
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Lebanon – CBL
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Ghana – GSD
UAE - ADX
Kenya – CDSC
Mauritius – CDS
Nigeria – CSCS
South Africa – Strate
Additional CSDs in Country Average
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Overall Risk
Rating
AAA
Key Issues
AA+
 What is the role of market infrastructure, and CSDs in
particular in protecting investors against the next
Lehmans or Madoff?
AA
AA-
 What lessons have been learnt from the financial
crisis?
A+
 If market infrastructure is to take on more responsibility
for asset protection, should their business model
change?
A
ABBB
Key Variants: AMEDA vs ROW
BB
 Some AMEDA markets are still in the emerging zone
and are yet to adopt the more recent standards of best
market practice
B
CCC
 Overall systems and approach to risk mitigation is less
sophisticated than in developed markets
CC
 However, most CSDs weathered the global financial
storm well both from a revenue and a risk perspective
C
Average Rating - ACSDA
Average Rating – EU/EEA
Average Rating – Eurasia
Page 5
Average Rating – Asia Pacific
Average Rating – Africa
Average Rating – Middle East
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Asset Commitment Risk
Rating
AAA
AA+
Key Issues
AA
 RTGS (normally with optimisation cycles) is now
common in developed market settlement systems
AA-
 Often combined with overnight and or daytime batch
routines to maximise liquidity efficiency
A+
 This flexibility gives participants the choice of
optimising liquidity or asset availability
A
ABBB
Key Variants: AMEDA vs ROW
BB
 Still a prevalence exists for batch processing rather
than real time processing
B
 Most central banks are using RTGS but not linked real
time to SSS (8 CSDs have linkage)
CCC
 Significant blocking or prefunding in contrast to other
regions.(10 CSDs block securities on Trade Date)
CC
C
Average Rating - ACSDA
Average Rating – EU/EEA
Average Rating – Eurasia
Page 6
Average Rating – Asia Pacific
Average Rating – Africa
Average Rating – Middle East
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Liquidity Risk
Rating
AAA
Key Issues
AA+
 Pressure on liquidity has intensified, and margin and
collateral requirements may have tightened. Has this
been an issue for AMEDA markets?
AA
AA-
 Widespread bans or restrictions on short selling
A+
 Tightening of credit leads to higher funding costs
A
Key Variants: AMEDA vs ROW
A-
 No AMEDA markets banned short selling (mainly
Europe & AP)
BBB
 Some AMEDA markets
management processes
BB
B
developed
fails
 Some AMEDA markets lack a critical mass of issued
securities under custody leaving a significant proportion
of the market physical
CCC
 Some restrictions on credit facilities for foreign
investors and the lack of a developed interbank lending
market
CC
C
Average Rating - ACSDA
Average Rating – EU/EEA
Average Rating – Eurasia
Page 7
lack
Average Rating – Asia Pacific
Average Rating – Africa
Average Rating – Middle East
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSDs & the Global Financial Crisis
Short Selling Bans By Region
35
30
Number of countries
25
Ban in place
20
Ban removed
No Ban applied
15
Not practised
10
5
0
Asia Pacific
Americas
Europe
Africa
Middle East
Eurasia
Region
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PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Counterparty Risk
Rating
AAA
Key Issues
AA+
 Counterparty Risk is now back on top of the agenda for
institutional investors
AA
 How do CSDs that commingle CSD and CCP roles in
the same legal entity manage to ring-fence the CCP
risk?
AA-
A+
 How have risk models been adapted since the global
financial crisis? Has surveillance been improved? Has
stress-testing been developed?
A
ABBB
Key Variants: AMEDA vs ROW
BB
 Few CCPs exist in the region (3) in contrast to Europe.
Most AMEDA markets have a guarantee fund in place
B
 Still a lack of true DVP especially for off-market/ clientside settlement in some AMEDA markets
CCC
CC
 Real-time monitoring of participants’ exposures (and
their collateralisation) is uncommon in AMEDA markets
C
Average Rating - ACSDA
Average Rating – EU/EEA
Average Rating – Eurasia
Page 9
Average Rating – Asia Pacific
Average Rating – Africa
Average Rating – Middle East
 Stress testing is rare.
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Broker Capital
Broker Capital Requirement (in USD)
45,000,000
40,000,000
Number of countries
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
Morocco
Kenya
Lebanon
Kuwait
Bahrain
Tunisia
Qatar
Jordan
Oman
Israel
Egypt
Palestine
Nigeria
Saudi Arabia
United Arab
Emirates
0
Region
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PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Guarantee Fund vsTurnover
Guarantee Fund vs Exchange Average Daily Turnover (2008 figures in USD)
300,000,000
1,800,000,000
Guarantee Fund
1,600,000,000
Turnover
250,000,000
1,400,000,000
1,200,000,000
1,000,000,000
150,000,000
800,000,000
100,000,000
Turnover
Guarantee Fund
200,000,000
600,000,000
400,000,000
50,000,000
200,000,000
0
0
CDS
CDS
CDSC
Bahrain Mauritius
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CSCS
KCC
Maroclear MCDR MDSRC Nasdaq
Dubai
PRIVATE AND CONFIDENTIAL
SDC
STRATE Tasech
© 2010 Thomas Murray Ltd.
Asset Servicing Risk
Rating
AAA
Key Issues
 An expanding business sector for CSDs - gaining
ground on custodians
AA+
AA
 Does the removal of commercial banking capital from
asset servicing disadvantage market participants and
investors?
AA-
A+
 How have markets ‘de-risked’ corporate actions
processing?
A
A-
Key Variants: AMEDA vs ROW
BBB
 Not all AMEDA members are involved in Asset
Servicing to a degree that they are taking on risk
exposure
BB
B
 Where AMEDA members are engaged in Asset
Servicing, some have relatively low capital backing this
business
CCC
CC
 Few AMEDA members have moved up the value chain
enough to threaten to compete with their participants
(Only one offers proxy voting)
C
Average Rating - ACSDA
Average Rating – EU/EEA
Average Rating – Eurasia
Page 12
Average Rating – Asia Pacific
Average Rating – Africa
Average Rating – Middle East
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Corporate Actions
CSD Participation In Corporate Actions
(As at July 2009)
35
Number of countries
30
25
Not Involved in CAs
20
Only Mandatory Cas
15
Involved in CAs
10
5
0
Asia Pacific
Americas
W. Europe (incl.
EU)
Africa
Middle East
Eurasia
Region
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PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Financial Risk
Rating
AAA
Key Issues
AA+
 Adequacy of financial resources was a key concern
during the recent financial crisis
AA
 Many CSDs’ profit margins slumped in 2008/9. How
have CSDs responded in the short and medium-term?
AA-
A+
 How have business models adapted to the crisis and
what lessons have been learnt?
A
A-
Key Variants: AMEDA vs ROW
BBB
 Massive diversity in financial resources amongst
AMEDA members
BB
B
 AMEDA members’ profit margins not as hard-hit as
ECSDA and ACG
CCC
 Still, few AMEDA members have real diversity in
revenue streams
CC
 Some independent CSDs in the region susceptible to
horizontal or vertical consolidation
C
Average Rating - ACSDA
Average Rating – EU/EEA
Average Rating – Eurasia
Page 14
Average Rating – Asia Pacific
Average Rating – Africa
Average Rating – Middle East
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Capital vsTurnover
Capital vs Exchange Average Daily Turnover (2008 figures in USD)
250,000,000
1,800,000,000
1,600,000,000
200,000,000
1,400,000,000
1,200,000,000
Capital
1,000,000,000
800,000,000
Turnover
150,000,000
Capital
Turnover
100,000,000
600,000,000
400,000,000
50,000,000
200,000,000
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PRIVATE AND CONFIDENTIAL
STRATE
STICODEVAM
SDC
Midclear
MDSRC
MCDR
Maroclear
KCC
CSCS
CDSC
0
CDS Mauritius
0
© 2010 Thomas Murray Ltd.
Capital vs Profit
Capital vs Profit of CSDs (2008 figures in USD)
200,000,000
150,000,000
Capital
Net Profit
100,000,000
50,000,000
0
CDS
Mauritius
Page 16
CDSC
CSCS
KCC
Maroclear
MCDR
MDSRC
PRIVATE AND CONFIDENTIAL
Midclear
SDC
STRATE
© 2010 Thomas Murray Ltd.
Operational Risk
Rating
AAA
Key Issues
AA+
 Adequacy of controls and procedures to maximise
asset safety more important than ever
AA
 Globally, DRP/BCP facilities have been greatly
strengthened since 9/11
AA-
A+
 Standardised messaging being more widely adopted
by market infrastructure (e.g. SWIFT in Link-Up)
A
A-
Key Variants: AMEDA vs ROW
BBB
 Although ISO certification becoming more prevalent,
external operational audits (e.g. SAS70) are still rare
amongst AMEDA CSDs
BB
B
 Relatively low level of 15022 messaging adoption
limiting cross-border STP. Only 7 CSDs have SWIFT –
used mainly for cash settlement with CB.
CCC
CC
 DRP/BCP strategies in some markets still need further
development.
C
Average Rating - ACSDA
Average Rating – EU/EEA
Average Rating – Eurasia
Page 17
Average Rating – Asia Pacific
Average Rating – Africa
Average Rating – Middle East
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.