Transcript No Slide Title

Thomas Murray
Risk Developments for CSDs
John Woodhouse
AMEDA Conference
Tripoli
29 November 2010
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© 2008 Thomas Murray Ltd.
Thomas Murray
Agenda
I. Global Trends
A) CSD Consolidation
B) Evolving Roles of CSD
1) Utility vs Commercial Motivation
2) Investor CSDs and Issuer CSDs
II. Recent Developments
A) New CCPs
B) Regulation
C) Taxation
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Agenda
III. Risk Rating Methodology
IV. Africa and Middle East Countries Market Comparisons
V. Regional Developments
A) Changes in Regulation
B) Taxation
C) Liquidity Settlement Improvements
D) Technological Developments
E) Linking markets
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© 2008 Thomas Murray Ltd.
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I. Global Trends
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I. Global Trends
A) CSD Consolidation
The trend of consolidation amongst CSDs has continued since 2006:
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In 2006 there were 31 countries with at least 2 domestic CSDs, in 2010 this figure is 27.
Bank Indonesia is considering exiting the business.
•
24 of these are Central Banks, down from 27 in 2006 (Latvia, Slovakia, Ukraine exited).
Trend has been for central banks to exit the business but will this continue?
•
Consolidations include NCSD (Sweden and Finland) into Euroclear, UNIVYC/SCP into
CDCP (Czech Rep), TSCD and DIDC into TDCC (Taiwan).
•
Exchange consolidations do not necessarily pre-empt CSD consolidations. In Australia and
Spain, the CSDs are under the same holding company but are still operationally and
systemically separate.
•
In the UAE, NASDAQ Dubai and DFM began a consolidation process in December 2009.
Effective from 11 July 2010, all of NASADQ Dubai’s equities started to settle through DFM.
•
In October of this year, Singapore Exchange (SGX) entered into a consolidation process
with the Australian Securities Exchange (ASX). The combined group will operate under the
name “ASX-SGX Limited”.
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However, in some markets new CSDs are being created e.g. New Zealand with NZCDC.
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I. Global Trends
B) The Evolving Roles of CSDs
1) Utility vs. Commercial Motivations
•
In recent years, CSDs around the world have been moving into value added services and
‘non-traditional’ revenue streams, such as:
- Courier services (i.e. delivery of physical documentation, including certificates) e.g.CREST
Counter Service
- Ownership record keeping for other real-estate property (e.g. Denmark and Mexico)
- Consulting services (e.g. Euroclear, BME Consulting (Spain))
- Outsourcing
•
In 2005, CDS in Canada realised in excess of 33% of its total revenue (in excess of CAD 33
Million) from non-core/non-traditional (clearing, settlement and depository) activities
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I. Global Trends
1) Utility vs. Commercial Motivations
With increasing frequency, CSDs are providing:
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OTC Pre-Matching services to their markets.
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a range of Outsourcing services including back office services, corporate actions processing
as well as systems management and operations, e.g. Euroclear Finland, CDS (Canada) and
TSD (Thailand).
•
an expanded range of Information Services including; corporate events, proxy services,
reference data and even pricing information, e.g. VP (Denmark), CDS (Canada), DTCC
(USA).
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Securities Lending services ranging from lending securities as principal, to matching up
borrowers and lenders, to the provision of transaction and loan management services, e.g.
KSD (Korea), SIX SIS (Switzerland).
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I. Global Trends
1) Utility vs. Commercial Motivations
With increasing frequency, CSDs are providing:
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expanded Corporate Actions Processing for their markets, thus allowing their participants to
capitalise on economy of scale opportunities and focus on more commercially oriented
activities. (Many CSDs around the world)
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Responsibility for Securities Numbering has increasingly come under the purview of CSDs.
A significant number of the recognised national numbering agencies are now CSDs. Among
the CSDs performing this function are DECEVAL (Colombia), CDS (Canada), Indeval
(Mexico), NDC (Russia), TSD (Thailand), and MCDR (Egypt).
•
Mutual Fund Services including account maintenance and transaction processing, e.g. VPS
(Norway), Midclear (Lebanon), SIX SIS (Switzerland).
•
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I. Global Trends
Value Added Services
Traditional Services
Bermuda, Bolivia, Costa Rica, Ecuador, El
Salvador, Guatemala, Jamaica, Panama,
T&T, Uruguay, Venezuela
Chile, Colombia, Peru, Egypt, Russia,
China,
Canada, UK, Japan, Singapore, Sweden,
Finland, Denmark, Malaysia, South Africa
France, Germany, Italy, Poland, Hong
Kong, Australia, Thailand, Brazil, Mexico.
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OTC Derivatives
Funds Servicing
Collateral Mgmt
Issuer Services
Investor Services
Proxy Voting (active)
Cash Settlement
CCP
Structured Pdts
Info. Services
Paying Agent
Courier Services
Central Registrar
Securities Lending
Fails Management
Sec. Numbering
Corp. Actions
Clearing
Matching
Safekeeping
Settlement
USA, Norway,
Euroclear,
Clearstream
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I. Global Trends
B) The Evolving Roles of CSDs
2) Issuer CSDs and Investor CSDs (post T2S competitive scenarios)
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Two new roles have been prescribed for CSDs in a post T2S environment: Issuer CSDs and
Investor CSDs. Most European CSDs are preparing to adopt both roles.
•
Issuer CSDs will compete to safekeep and service issues from different countries. Under the
terms of T2S membership, CSDs will have to make securities they hold available to other
CSDs.
•
Investor CSDs will support local market participants’ cross-border investment needs by
holding accounts in other CSDs (i.e. become custodians for them).
•
Successful adopters will become something akin to a custodian/ICSD. Consequently, CSDs
are being encouraged by the ECB to compete with custodians in these areas as well as
other added value services.
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II. Recent Developments
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II. Recent Developments
A) New CCPs
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Explosion of MTFs has resulted in a growth in diversity of CCPs. There are currently about
10 operational [cash-market] CCPs in Europe. Of these, around 5 are actively competing
with each other (LCH.Clearnet, Eurex, EMCF, EuroCCP, x-clear).
Competition has been fierce with clearing fees declining by over 50% in the last 2 years.
The fear is that with very little profit or cost margins left to cut, CCPs will compete on risk (i.e.
cutting margins). From anecdotal evidence, this ‘race to the bottom’ may already have
started.
The European Code of Conduct on Clearing and Settlement prescribed a mode of
‘interoperability’ between market infrastructure entities which would allow CCPs to enter new
markets.
Of the nearly 50 interoperability requests, only a handful have come to fruition (London,
Germany , Switzerland, Sweden/Finland).
However, several markets have (or are planning to have) multiple, competing CCP including
UK, Italy, Switzerland and NASDAQ OMX Nordic (Sweden, Finland, Denmark, Iceland).
Stock-lending activity is being driven onto regulated markets where it can be cleared and
guaranteed by CCPs.
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II. Recent Developments
A) New CCPs
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Since the Lehmans default, there has been widespread governmental pressure to increase the
influence of CCPs to centralise and manage counterparty risk.
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NYSE Euronext announced it will end its contracts with LCH.Clearnet and create its own CCPs
in London and Paris to clear its tradeflow by late 2012.
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Poland: The CSD is to create a new subsidiary which will assume the role of CCP in 2011.
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Chile: CCLV to be introduced as a CCP for on-exchange transactions.
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Spain: The market regulator issued a clearing, settlement and registry system reform which
includes the future introduction of a CCP in the market. Furthermore, LCH.Clearnet started
operating as a CCP for government debt and repos in August 2010 with settlement taking place
at Euroclear Bank or Clearstream.
•
Thailand: CCP functions for the equities cash-market moved from the TSD (the depository) to
Thailand Clearing House (TCH) in February 2010, although both are under the Stock Exchange
of Thailand (SET) holding company
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Sri Lanka: The Colombo Stock Exchange is considering the development of a CCP for equities
and corporate debt.
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New Zealand: The NZX launched a CCP for on-exchange trades in September 2010.
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II. Recent Developments
B) Regulation
• Prior to the global financial crisis, regulation on the financial markets was reasonably light. Now
there is a move to re-regulate the market, particularly to control the investment banks and bring
riskier products and markets under the rule of CCPs.
• The risk is that regulators will be over-zealous (e.g. US) and inconsistent in their new regulatory
structures, producing conflicting regulatory environments in what is a global financial system.
• In the US under the Volcker rule, banks will have two years to wind down proprietary trading after
regulators write detailed rules on what constitutes proprietary trading (possibly this year). But some
banks have already begun to take action with JP Morgan Chase closing its commodity trading unit
in London/New York.
• The OTC Derivatives Market Act of 2009 in the US mandates that certain swaps must be centrally
cleared and the US Congress wants to move all OTC Derivatives onto formalised trading platforms
and clearing houses. In Europe, CESR is currently in consultation with the market over similar
moves which may be included in a CCP Directive.
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II. Recent Developments
B) Regulation
• Prior to the global financial crisis, the major ‘regulation’ (although it was technically a voluntary
code) affecting CSDs in Europe, was the EU Code of Conduct on Clearing and Settlement. This
set standards for CSDs for price transparency, access and interoperability, and unbundling and
accounting separation. The first and third provisions have been successful in promoting fair
pricing, but the interoperabililty standard has failed to facilitate greater competition in the clearing
and settlement landscape.
• Although short-selling bans have been widely imposed globally (and CESR is formulating uniform
short-selling rules for Europe), we have recently seen bans in Italy, India and Greece.
• Basel III regulation seeks to avoid systemic failures in the banking system by increasing capital
ratios (although these will not kick in until 2019).
C) Taxation
• Government have made changes to taxation regimes to rein in fiscal deficits.
• There has been a significant number of DTT and TIEAs signed in recent months in order to boost
cooperation, curb tax evasion and increase fiscal revenue.
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III. Risk Rating Methodology
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III. Risk Rating Methodology
The core principles behind the Thomas Murray CSD Ratings are:
they are calculated from domestic and foreign investors’ perspectives (i.e. the risks that the
investor incurs when using the depository).
•
they take account of the general infrastructure in the market that the CSD has a direct interaction
with, such as stock exchanges, trading platforms, CCPs/Clearing Houses, payments systems and
the general regulatory environment.
•
they are a benchmark against best market practice globally, not against regional or local market
practice.
•
they are a point-in-time rating. Planned or developing services, systems, procedures or any other
changes do not affect the Rating, but may influence the Outlook.
•
the Ratings rely on accurate, measurable and verifiable information from the CSD and their
participants.
•
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III. Risk Rating Methodology
Risk Components :
Risk
Weight
Weight if ASR not applicable
Asset Commitment Risk
11.1%
16.6%
Liquidity Risk
11.1%
16.6%
Counterparty Risk
11.1%
16.6%
Asset Servicing Risk
33.3%
N/A
Financial Risk
16.7%
25.1%
Operational Risk
16.7%
25.1%
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III. Risk Rating Methodology
Asset Commitment Risk
Asset Commitment Risk - The period of time from when control of securities or
cash is given up until receipt of countervalue.
This risk concerns the time period during which a participant’s assets, either cash or
stock, are committed within the CSD and payment system pending final settlement of the
underlying transaction(s). Following settlement, the risk period is extended until the
transfer of funds and stock becomes irrevocable. It excludes any periods when assets,
cash or stock, are committed to a market participant including brokers, banks and
custodians, not caused by CSD processing.
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III. Risk Rating Methodology
Asset Commitment Risk - Criteria
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Minimising processing times maximises the availability of assets, particularly for transfer of
assets off-shore (e.g. cross-border collateral movement, repatriation of funds)
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Processing speed (real-time, intraday batches, overnight batches)
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Market deadline for securities / funds positioning
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Finality in settlement system (with legal basis)
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Pre-funding markets (e.g. Russia), or long blocking periods
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Same day fund provision
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III. Risk Rating Methodology
Liquidity Risk
Liquidity Risk - The risk that insufficient securities and or funds are available to
meet commitments; the obligation will be covered some time later.
This is where for certain technical reasons (e.g., stock out on loan, stock in course of
registration, turn round of recently deposited stock is not possible) one or both parties to
the trade has a shortfall in the amount of funds (credit line) or unencumbered stock
available to meet settlement obligations when due. These shortfalls may lead to
settlement ‘fails’ but do not normally lead to a default.
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III. Risk Rating Methodology
Liquidity Risk - Criteria
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Optimising asset liquidity now paramount in large markets. Managing late settlements
effectively and quickly reduces ‘indirect’ losses
Netting (with legal basis) / optimisation
Multiple processing cycles
Stock lending
Credit facilities
Fails management (fines, buy-ins)
High levels of immobilisation / dematerialisation
Fast registration / central registrar
Proportion of securities held within the depository
Matching arrangements
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III. Risk Rating Methodology
Counterparty Risk
Counterparty Risk - The risk that a counterparty (i.e., a participant) will not
settle its obligations for full value at any time.
This is simply the total default of a direct participant of the CSD. This is the event
when a participant is unable to meet its financial liability to the CSD and possibly
other creditors. This risk only goes as far as direct participants of the CSD and
excludes clients of direct participants that default on liabilities to such participants,
even if such a default should systemically cause the direct participant to subsequently
default.
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III. Risk Rating Methodology
Counterparty Risk - Criteria
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Managing defaults is critical to reducing direct loss of Principal and Systemic risks through
participant interdependence.
DVP (market AND client-side)
Central Bank, same-day funds
Settlement assurance (CCP, collateral, guarantee fund)
Strict participation criteria
Participant concentration
Surveillance of participant volumes / risk modelling
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III. Risk Rating Methodology
Asset Servicing Risk
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.
This risk arises when a participant places reliance on the information a depository
provides or when the participant instructs the depository to carry out an economic
transaction on its behalf. If the depository fails either to provide the information or
to carry out the instruction correctly then the participant may suffer a loss for which
the depository may not accept liability. The depository may provide these services
on a commercial basis, without statutory immunity, or it may provide the service as
part of its statutory role, possibly with some level of protection from liability. This
risk is likely to become much higher when international securities are included in
the service.
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III. Risk Rating Methodology
Asset Servicing Risk - Criteria
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Managing corporate actions effectively perhaps the biggest potential risk exposure.
Reliable ‘official’ source
Multiple information sources allowing for verification/’data scrubbing’
Timely, accurate and comprehensive event notification
Timely, accurate and comprehensive event processing
Pro-active client servicing
Straight-Through-Processing
Clear statement of liability
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III. Risk Rating Methodology
Financial Risk
Financial Risk - The ability of the CSD to operate as a financially viable
company.
This risk concerns the financial strength of the depository and if its capital is
sufficient to meet the on-going operation of the organisation.
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III. Risk Rating Methodology
Financial Risk - Criteria
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Ongoing financial stability of the CSD as a business.
Net capital
Operationally profitable
Financial flexibility – fee setting
Comprehensive insurance
Any principal activity fully collateralised/ managed
Limited commercial activity
Limited liability (exclude indirect losses)
Ability to borrow or attain financial resources
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III. Risk Rating Methodology
Operational Risk
Operational Risk - The risk that deficiencies in information systems or
internal controls, human errors or management failures will result in
losses.
The risk of loss due to breakdowns or weaknesses in internal controls and
procedures. Internal factors to be considered in the assessment include ensuring
the CSD has formalised procedures established for its main services. The CSD
should have identified control objectives and related key controls to ensure
operation and proper control of established procedures. Systems and
procedures should be tested periodically. There should be external audit
processes in place to provide third-party audit evidence of the adequacy of the
controls.
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III. Risk Rating Methodology
Operational Risk - Criteria
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Internal controls and procedures should be adequate to control operational risk exposures
Comprehensive controls and procedures
Extent of Internal and External operational audits
Limit manual processing / internal STP
Secure and efficient interfaces – external STP
DRP/BCP procedures
Automated and comprehensive reporting
Ongoing staff training
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III. Risk Rating Methodology
Rating Scale
Scale
AAA
Extremely Low
AA+
AA
Very Low
AAA+
A
Low
ABBB
Acceptable
BB
Less than Acceptable
B
Quite High
CCC
High
CC
Very High
C
Extremely High
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III. Risk Rating Methodology
Publicly Rated CSDs
Seven CSDs have been publicly rated:
• NDC (Russia)
• DCC (Russia)
• Monte Titoli (Italy)
• CDS (Canada)
• MCDR (Egypt)
• DCV (Chile)
• TASECH (Israel)
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IV. Africa and Middle East Countries Market Comparisons
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Rating
Overall
Rating
Africa and Middle East Market Comparisons
ACR
LR
CR
ASR
FR
OR
Rating
AAA
AAA
AA+
AA+
AA
AA
AA-
AA-
A+
A+
A
A
A-
A-
BBB
BBB
BB
BB
B
B
CCC
CCC
CC
CC
C
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C
Average Proprietary Rating - Africa
TM Rating for Chile (DCV)
TM Rating for Russia (NDC)
Average Proprietary Rating - MENA
TM Rating for Egypt (MCDR)
TM Rating for Russia (DCC)
TM Rating Italy (Monte Titoli)
TM Rating for Israel (TASECH)
TM Rating for Canada (CDS) Page 34
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Africa and Middle East Market Comparisons
Rating
Rating
AAA
AAA
AA+
AA+
AA
AA
AA-
AA-
A+
A+
A
A
A-
A-
BBB
BBB
BB
BB
B
B
CCC
CCC
CC
CC
C
Average Rating - Highest Rated Regions
Average Rating - Africa
TM Rating of CSDs in MENA region
Average Rating – Middle East
TM rating of CSDs in African region.
Absolute Rating - Highest Rating Public CSD
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C
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Rating
Overall
Rating
Africa and Middle East Market Comparisons
ACR
LR
CR
ASR
FR
OR
Rating
AAA
AAA
AA+
AA+
AA
AA
AA-
AA-
A+
A+
A
A
A-
A-
BBB
BBB
BB
BB
B
B
CCC
CCC
CC
CC
C
C
Average Proprietary Rating - Africa
Average Proprietary Rating - Middle East
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Rating for African markets
Rating for Middle Eastern markets
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V. Regional Developments
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V. Regional Developments
A. Changes in Regulation
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Kenya’s Capital Markets Authority “”has in the pipeline new regulations for an over-the-counter
(OTC) bond trading model, which would allow investors to trade without intermediaries.
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Also, the Kenyan parliament has passed tough anti-money laundering legislation including
provisions to identify, trace, freeze, seize and confiscate the proceeds of crime. The Financial
Reporting Centre and the Assets Recovery Agency were created.
•
The Egyptian Financial Supervisory Authority (EFSA) approved new regulations aimed at
improving market liquidity. The package of measures included:
*New rules for Exchange Traded Funds (ETF);
*Reviewing the process of calculation of capital adequacy of the companies in intra-day trading,
*New rules for approving the agendas of shareholder meetings
*Setting new rules for OTC trading
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EFSA also announced its plans to introduce sukuk (Islamic bonds) in the market.
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Qatar & UAE introduced legislation allowing foreign investors to acquire 100% of local
coys.
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V. Regional Developments
B) Taxation
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There have been a series of tax reforms across the world. In Africa, Botswana, Nigeria and
Zimbabwe have introduced or are planning to implement changes to their local tax structures.
•
Following the G-20 meeting in London, there has been a surge in double taxation treaties
across the world. More than 30 DTTs have been signed, ratified, entered into force or become
effective in the last year, involving a member of the region.
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V. Regional Developments
C) Liquidity Settlement Improvements
Changes included:
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In Zambia the central bank permitted the extension of intra-day overdrafts issued by
custodian banks to non-resident investors.
•
In South Africa, STRATE made adjustments to the SBL regulations to introduce more
flexibility in the market and increase settlement liquidity.
•
The Moroccan authorities approved draft legislation for the implementation of SBL. The
securities eligible for lending and borrowing include listed equities, commercial paper and
treasury bills.
•
The Casablanca Stock Exchange (CSE) also made adjustments to the management of fails.
The CSE toughened the rules on sanctions to defaulting participants. Changes included
adjustments to the pricing mechanism for buy-ins and to the recycling of suspended trades.
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V. Regional Developments
D) Technological Developments
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Bahrain Stock Exchange (BFX) announced the creation of an Islamic Finance division, Bait
Al Bursa, from 19 October 2010. The new division will be managed electronically via ETayseer for automating Murabaha transactions. The new platform will be compliant with
Shariah rules.
•
The Egyptian Exchange (EGX) will use a Trading Surveillance System (TSS). This new
technology will facilitate an effective maintenance of an orderly market.
•
In late 2009 the Nairobi Stock Exchange (NSE) introduced an electronic Automated Trading
System (ATS) for the trading of debt securities. The system is linked with the depository
system of the Central Bank of Kenya and (CDSC).
•
STRATE implemented a new centralised communication hub facilitating the sending and
receiving of messages between several clients in May of this year.
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V. Regional Developments
D) Technological Developments
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Maroclear implemented a new IT platform in September 2010 with the following features:
*
Same-day turnaround for external trades, subject to the completion of settlement from
the buy side;
* Real-time settlement for over the counter (OTC) trading;
* Separation of the on-exchange and OTC platforms;
* Gross settlement for broker-to-broker trading;
* Automation of processes including registration;
* A dedicated platform for Repo transaction management;
* A real-time tool to check balances and trade status;
* Segregation of accounts by client at CSD level;
* Future implementation of SWIFT.
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V. Regional Developments
D) Technological Developments
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The Qatar Exchange adopted the Universal Trading Platform (UPT), which includes:
*
*
*
*
*
*
*
*
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Continuous trading phase, including an opening and closing auction;
Inductive Matching Opening Price (IMP);
Algorithmic auction closing for orders (Closing Price depends on the Closing Auction);
Trading-At-Last (TAL) phase after the closing auction;
“Stop” orders at the call phase to act as market stabilisers;
“Market to Limit and Stop” order in the Auction phase and the continuous phase.
New validity parameters and conditions;
Safeguards, including dynamic thresholds, reference price and price range
The Bank of Zambia implemented the Zambian Inter-Bank Payment and Settlement System
(ZIPSS) for the cash settlement of on-exchange trades during Q2 2010.
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V. Regional Developments
E) Linking markets
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The Capital Markets Authority (CMA) in Kenya announced its plan to make it possible for
publically issued securities to be traded on platforms other than the approved Securities
Exchanges.
•
The Egyptian Stock Exchange (EGX) and the London Stock Exchange (LSE) have plans to
allow their customers to access both trading systems via the Financial Information
Exchange (FIX).
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Egypt’s Central Securities Depository (MCDR) joined the Link Up Markets as the second
non-European member in March 2010.
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