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Fez, Morocco 25 April 2012

Asset Safety Risk. Fez, Morocco 25 April 2012. Thomas Murray’s definition: ‘ The risk that assets held in custody at the CSD may be lost or misappropriated, either due to a default or an omission, misuse, or breakdown of controls (legal, operational or other )’.

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Fez, Morocco 25 April 2012

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  1. Asset Safety Risk Fez, Morocco 25 April 2012

  2. Thomas Murray’s definition: ‘The risk that assets held in custody at the CSD may be lost or misappropriated, either due to a default or an omission, misuse, or breakdown of controls (legal, operational or other)’. Risk that assets may not be clearly identifiable or that book-keeping records may be inaccurate. Risk that assets could be mis-appropriated or misused. Risk that assets may be commingled with that of an insolvent party. Risk that assets may be frozen or their ‘portability’ inhibited. Risk that the legal framework may be inadequate to protect assets. What is Asset Safety Risk and Why is it Important? • Events such as Lehmans, Madoff, MF Global and other defaults have highlighted the importance of asset recoverability/portability. • Although losses were mainly in cash and collateral, institutional investors’ concerns go through the value chain, even to securities held in custody at the CSD.

  3. Principles Institutions Negotiable Direct Investor Exposure Sub Custodian Capital Market Infrastructure CSD Pension Fund Global Custodian Sub Custodian Asset Manager Sub Custodian CSD Thomas Murray Data Services Business • Risks mitigated by : • contractual terms between custodian and investor • financial strength of custodian • proper segregation and identification of investor's assets • operational controls of custodian • on-going monitoring of global custodian • ** A matter of choice ** • Risks mitigated by : • standard participation agreement • local legal framework • financial strength of CSD • proper segregation and identification of investor's assets • operational controls of CSD • ** No choice **

  4. Segregation of securities Nominee concept Bankruptcy Law Liens on assets Bearer or registered securities Immobilised or dematerialised securities Reconciliation and audit of book-entry portfolios Vault audits and control Account control Cash deposits Asset Safety Risk Criteria

  5. Level of segregation: CSD from participant Direct participant from indirect participant (client) Client by client (i.e. designated segregation) Legal basis for segregation Market compliance with law Segregation of collateral Segregation within settlement processing Segregation – Risk Elements

  6. Nominee convention Legal weight of records: CSD vs custodian vs registrar. Account freezes on insolvency affecting portability of assets; Creditor Ranking: Client’s vs general creditors’ claims in pooled accounts Legal Framework – Risk Elements

  7. Dematerialised/immobilised vs physical Registered vs bearer Law on forms of new issues Law on listed securities being in registered form Forms of Securities- Risk Elements

  8. Participant to CSD - Transfers reconciliation frequency and automation Participant to CSD – Balances reconciliation frequency and automation CSD to registrar – Balances and transfers reconciliation frequency and automation Reconciliation break frequency and resolution timeframe Book-entry system audit – Proportion of positions verified periodically by internal and external auditors Vault audit - Proportion of positions verified periodically by internal and external auditors. Authentication of certificates. Reconciliation & Audit - Risk Elements

  9. CSD lien on securities held in or transferred through it CSD lien on cash held in or transferred through it (if applicable) Extent of lien on accounts: direct participants’ assets vs indirect, limits on values. Reason for liens Process for exercise of lien – court order, notice period, best execution Liens - Risk Elements

  10. Controls and Procedures: Automated / manual processes Audit of controls Control exceptions Account Access: Which parties have access? Triggered by instructions only – exceptions? Matched? Vault controls Account Control - Risk Elements

  11. Only applicable where CSD is holding or transferring cash CSD counterparty credit rating Paying agency services- Gap between pay-in and pay-out Cash held on or off-balance sheet Cash account segregation Cash Deposit - Risk Elements

  12. An accurate picture of the recoverability of assets in a worst-case scenario is high on the agenda for many institutional funds. Asset safety exposures are rarely fully intermediated by custodians Risks vary by market, by CSD and by asset class Best principles – Transparency, Control and Reserve TM reacting by introducing Asset Safety Risk into CSD assessments. Questionnaires to be issued in September 2012 with completed analysis by May 2013 for CSD12. Conclusions

  13. Thank You

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