Transcript Slide 1

AECSD
Risk Issues for CSDs in 2010 – Examination of
Role in Information Dissemination
John Woodhouse
Group COO & Director Capital Markets, Thomas Murray
Risk Issues for CSDs
Contents
 Risk Issues – how Eurasia fares
 Counterparty Risk – continues to maintain focus
 Asset Servicing Risk Rating Profile for Eurasia
 Developments in the Provision of C.A. Information - Last Two Years
 Information Disclosure – TM Transparency Criteria
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PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Risk Issues for CSDs
Risk Issues – Key issues across the globe
•
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Key Developments:

Global: Short selling has been banned in many countries since 2008. The ban has been removed in some markets but still
remains in Austria, Belgium, Denmark, France, Iceland Ireland, Luxembourg, Portugal, Japan, Korea. Tighter reporting
requirements for short positions are also in place in most markets.

France: The settlement cycle is expected to be shortened from T+3 to T+1.This modification aims to reduce the risks
associated with short selling, and will include all instruments including the French Debt.

Qatar: The cash settlement of the electronic transactions is now carried out by the central bank which replaced the risk
exposure in one single clearing bank by the use of central bank funds.

Korea: The Banking Act has been revised and from November 2010, the restrictions on banks providing loans to foreign
investors for securities investment purposes will be abolished.

Czech Republic: In July 2010, CDCP (formerly UNIVYC) became a fully operational CSD, harmonising the Czech market
practices with the EU markets; and the transfer of records from the Central Securities Registry (SCP) database to CDCP
was completed.

Canada: Although 90% of the securities are immobilised or dematerialised, initiatives are underway to introduce a “book
entry only” service by 2014 to eliminate physical securities.
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Risk Issues for CSDs
Risk Issues – Key Issues in Eurasia
•
Key Developments:

Russia: FFMS is planning to tighten the regulation of registrars. The stricter requirements on registrars’ activities will apply
additional procedures and measures to registrars and is expected to prolong the time for the registration process.
FFMS is also planning to introduce a CSD concept in Russia (on the basis of Crest in the UK). The functions between the
CSD and the registrars will be split for listed and unlisted securities. The CSD will execute the functions for listed securities,
which the FFMS has called the 'tradable part', while the registrars will undertake the function for unlisted securities or 'nontradable part'.
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
Kazakhstan: In November 2009, the KASE merged with the Regional Financial Center of Almaty (STF RFCA) which resulted
in some changes such as the implementation of repo transactions and the reduction of the settlement cycle for STF RFCA
trades from T+3 to T+0.

Bosnia and Herzegovina: In March 2010, CRS extended the cash settlement deadlines. The market deadline for posting
funds into the liquidity reserve was extended from 12.00pm on T+1 to 12.00pm on T+2, and the remaining net funds are
required to reach the account of CRS by 9.00am on T+3 instead of the previous 1.00pm on T+2.

Belarus: The CSD in Poland (KDPW) signed a Memorandum of Understanding (MoU) with the Republican Central Securities
Depository of Belarus (RCSD), in order to set up an operational link between the two entities and list Belarusian companies
at the Warsaw Stock Exchange (WSE).

Ukraine: In October 2009, the private joint stock company AUSD became the legal successor of the IRSU and is now
providing depository, clearing and settlement services in compliance with Ukrainian legislation.
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Counterparty Risk Issues
Counterparty Risk Issues – Key Issues across the globe
• Key Developments:
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
Poland: The CSD is to create a new subsidiary which will assume the role of CCP in 2011.

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.

Denmark, Finland, Sweden: CCP services were launched in the NASDAQ OMX Nordic markets in October
2009. The appointed CCP is EMCF but competitive clearing is expected in the future with two more CCPs
(EuroCCP and SIX x-clear). An interoperability programme between the three CCPs is underway.

Greece: The post trading services framework is to be unbundled in September 2010, with the introduction of a
clearing membership structure to consolidate the risk exposure at the clearing member level rather than at the
level of individual brokers.

Kenya: Settlement caps based on the activities of market participants were introduced in January 2010.
Participant contributions to the guarantee funds are expected to significantly increase next year.

Japan: Issuance of a roadmap to reduce settlement risks for government bonds trades. Reduction of
settlement cycle and expansion of the use of the CCP (JGBCC)
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Counterparty Risk Issues
Counterparty Risk Issues – Key Issues in Eurasia
• Key Developments:

Russia :
Following changes of the clearing rules at DCC, participants can now settle DVP transactions on a real-time
basis throughout the day until 7.00pm.
In February 2010, MICEX introduced new modes of trading in the stock market, where MICEX acts as the
CCP for all transactions conducted under the new modes including the main trading mode, the REPO trading
mode and the negotiated transactions mode. The transactions of the new modes will be conducted with the
most liquid shares from the composition of the MICEX Index and bonds with a high credibility rating.
MICEX also introduced a CCP for its derivatives markets in June 2010.
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PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Counterparty Risk Issues
Rating
Counterparty Rating Market Comparisons
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
Absolute Rating - Highest Rating Public CSD
Average Rating - Highest Rated Regions
Average Rating - Eurasia
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TM Rating of 10 Eurasian CSDs
Gap between top and bottom
rated Eurasian CSDs
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
Counterparty Risk Issues
Eurasia: Comparison of Exchange Market Capitalisation
(December 2007 – June 2010)
Serbia
MICEX - Russia
RTS - Russia
Kyrgyzstan
Kazakhstan
Georgia
Croatia
Sarajevo
Banja Luka
Armenia
-80.00%
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-60.00%
-40.00%
-20.00%
PRIVATE AND CONFIDENTIAL
0.00%
20.00%
40.00%
© 2010 Thomas Murray Ltd.
CSD Role in Corporate Actions
 Corporate Actions:
 Event
initiated by a public company’s board of directors that gives an entitlement to holders of
the company’s securities.

Information on the event is key to a successful corporate action
 Asset Servicing:
 Service
provided by custodians or CSDs related to securities administration activities such as
processing corporate actions, proxy voting and tax reclaims.

Weighting varies dependent on extent of services provided by the CSD:
 33% where CSD covers full service range
 23% where CSD provides a reduced range of services or is not recognised as the primary source of information
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PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Corporate Actions
Asset Servicing Risk Factors:

Receipt of Information



Dissemination of Information





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Instruction received from participant
Manual vs electronic, follow-up, time constraints, corrections permitted
Execution of Instructions


Information disseminated to participants
Mode of dissemination, timeliness, liability
Receipt of Instructions


Information received from issuer, registrar, exchange
Manual vs automated, ‘guaranteed’ vs best endeavours
Processing of instruction
Type of processing, provide confirmation/report, timeliness, liability
Proxy Voting
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Corporate Actions
CSD Average Rating per Region
(Excluding Central Banks)
AAA
10
AA+
9
AA
8
AA-
7
A+
6
A
ASR
Overall
5
A-
4
BBB
3
BB
2
B
1
CCC
0
August 2010
Asia Pacific
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America
W.Europe (incl
E.U.)
Africa
PRIVATE AND CONFIDENTIAL
Middle East
Eurasia
© 2010 Thomas Murray Ltd.
CSD Role in Corporate Actions
Rating
Asset Servicing Rating Market Comparisons
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
Absolute Rating - Highest Rating Public CSD
Average Rating - Highest Rated Regions
Average Rating - Eurasia
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TM Rating of 7 Eurasian CSDs
Gap between top and bottom
rated Eurasian CSDs
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Information Processing
Corporate Actions Developments in the Last Two Years
• Information Processing:
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
USA: The CSD in collaboration with SWIFT, has launched its new model of corporate action messages on the
basis of ISO corporate action message formats. The new model of messages establishes a framework of the
eXtensible Business Reporting Language (XBRL), which allows issuers to directly distribute the corporate
action announcements in the financial markets on an electronic basis.

Brazil: In January 2010, the market regulator introduced new rules of information requirements to the issuer
companies listed at the exchanges to be included in shareholder meeting announcements. This provides the
shareholders with the facilities to access the relevant information and documents in relation to the
shareholder meetings which enhances market transparency for participants.
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Information Processing
Eurasia: Information Processing
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Type of CAs
Information Processing Involvement
Level of Liability
Bosnia CRS
Dividends, Capital Increase/Decrease
Obliged to announce CAs via its website
and in English
No legal responsibility for any errors it
makes.
Croatia SKDD d.d
Dividends, Capital
Increase/Decrease, Splits, Tender
Offer, GMs
CA information received from issuers by
post, email, fax or physical letter.
Distribution of CA information via
proprietary system and web
Liable for late or incorrect distribution of CA
information
Kazakhstan CSD
Dividends, Interest, Redemptions.
Mergers, Consolidations and Splits
more rarely.
CA information received from registrars
and manually input into CSD system. For
international issues, the information is
received via SWIFT from Clearstream.
Liable for direct losses where it has failed to
correctly process CA information
Russia DCC
Dividends, Interest, Redemptions,
Bonus issues, Splits, Consolidations,
Repurchase offers
Ca information is received by paper or
fax from issuers or by EDI or fax from
registrars. CA information is then
distributed to participants via EDI,
SWIFTnet or email, and posted on DCC's
website
Liable for incorrect information: direct losses
and errors caused by third parties.
Russia NDC
Dividends, Interest, Redemptions,
Bonus issues, Splits, Consolidations,
Repurchase offers
CA information is largely received in
physical form or via EDI. Distribution to
participants is via EDI or email, and
posted on NDC's website.
Liable for incorrect information: direct losses
and errors caused by third parties.
Serbia CSD&CH
Dividends, Interest, Redemptions,
Take-over bids, Issuance of
shareholders books
Notification of CA information via internet.
Liable for losses due to errors, omissions or
fraud
Ukraine AUSD
Dividends, Interest, Splits, Mergers,
GMs
CA information published in websites
authorised by the regulator
Liable for operational errors
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Information Disclosure
CSD Governance & Transparency
• Governance & Transparency Risk:
The risk of loss due to poor governance and management arrangements
and inadequate disclosure of information.

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Directors and management have a responsibility to ensure the market has
adequate and timely information on a fair and equivalent basis.
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Information Disclosure
CSD Information Disclosure
• TM Rating Information Criteria:
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
Corporate Information is readily available to market participants according to the IOSCO
recommendations on the disclosure of information.

Statistical information is produced in a timely manner and is made available to participants
and the wider market interests.

A forum is available for all market participants to receive information and provide their input
to management.
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Information Disclosure
TM Rating Information Criteria
•
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Corporate Information:

Annual reports and annual accounts

Plan and budget for the coming year

CSD Code of Conduct

Risk management methodology and processes

Participant rules and regulations

Audit policy

Information on the external auditing of operational controls

Information on relevant capital market laws or CSD law

Statement on CSD’s liability for errors, omissions or late execution

Statement on controls CSD operates

Technical operational information

Compliance with IOSCO guidelines

Publication of AGC questionnaire
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Information Disclosure
TM Rating Information Criteria
•
Statistical Information:


Assets under custody

Settlement data

Buy-in data

Fails rates

Concentration information

Corporate action events

Participant criteria and surveillance information

Information on its operational performance

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Data related to services it operates

Computer availability/unavailability

Computer utilisation

DRP test results

Claims received/paid

Staff responsiveness measures
Risk management measures
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.
CSD Role in Information Disclosure
TM Rating Information Criteria
• Forum to Receive Information:
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
User Group arrangements

Participant representation on internal committees/working groups

Account management/client relationship meetings

Feedback mechanisms
PRIVATE AND CONFIDENTIAL
© 2010 Thomas Murray Ltd.