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Depository Risk Controls Jim Micklethwaite 21 April 2006

Depository Risk Controls Jim Micklethwaite 21 April 2006. Thomas Murray. Contents. Contents. Introduction to Thomas Murray Capital Market Infrastructure ‘Classic Model’ Depository Risks Conclusion AMEDA White Label Site. Thomas Murray. Introduction to Thomas Murray.

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Depository Risk Controls Jim Micklethwaite 21 April 2006

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  1. Depository Risk Controls Jim Micklethwaite 21 April 2006

  2. Thomas Murray Contents Contents • Introduction to Thomas Murray • Capital Market Infrastructure ‘Classic Model’ • Depository Risks • Conclusion • AMEDA White Label Site

  3. Thomas Murray Introduction to Thomas Murray Thomas Murray has four principal businesses surrounding its primary research, analysis and information group • NETWORK MANAGEMENT AND INFORMATION SERVICES • Agent bank network management support/outsourcing • Evaluation and risk rating of local markets • Surveillance of network arrangements • RATINGS AND ASSESSMENTS • Global custody ratings • Domestic custody ratings • Market and CSD risk ratings PRIMARY RESEARCH, ANALYSIS AND INFORMATION • ALTERNATIVE INVESTMENTS • Private and public rating of service providers • Evaluation, selection and monitoring of service providers • Request for Proposal Tool • INVESTOR SERVICES • Global custody reviews for institutions • Private custody risk ratings and operational benchmarking Data management e-platform

  4. Thomas Murray CMI ‘Classic’ Model ‘Classic’ Capital Market Infrastructure Model Stock Market ‘Exchange’ Risk and Reward CCP/ Clearing House ‘Centralise and Manage’ Risk Central Depository ‘Minimise’ Risk Payment System

  5. Thomas Murray Depository Risks • Asset Commitment Risk - Minimising processing times • Liquidity Risk - Managing ‘temporary’ fails • Counterparty Risk - Managing full defaults • Asset Servicing Risk - Managing corporate actions servicing • Financial Risk - CSD’s financial security • Operational Risk - Manage internal controls and systems Depository Risks

  6. Thomas Murray Depository Risks • Asset Commitment Risk - Real-time securities and cash transfers - Intraday finality in settlement system (with legal basis) • Liquidity Risk - 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 Summary Risk Containment Strategies

  7. Thomas Murray Depository Risks • Counterparty Risk - DVP (market AND client-side) - Central Bank funds - Settlement assurance (CCP, collateral, guarantee fund) - Strict participation criteria - Surveillance of participant volumes/ risk modelling • Asset Servicing Risk - Multiple sources (‘Official’ + verification) - Timely, accurate and comprehensive event notification - Timely, accurate and comprehensive event processing - Proactive client servicing - Straight-Through-Processing - Clear statement of liability Summary Risk Containment Strategies

  8. Thomas Murray Depository Risks • Financial Risk - ‘Adequate’ capital (FSA states GBP 5m+) - Operationally profitable - Comprehensive insurance - Any principal activity fully collateralised - Limited commercial activity • Operational Risk - Comprehensive controls and procedures - External operational audits - Limit manual processing - Asset segregation - Secure and efficient interfaces - DRP/BCP procedures Summary Risk Containment Strategies

  9. Thomas Murray Depository Risks Country CSDOverall Assessment (AAA to C) Egypt MCSDA- Jordan SDC A- Kuwait KCC N/R Lebanon Midclear A Morocco Maroclear A- Mauritius CDS A+ Oman MDSRC BBB Tunisia STICODEVAM A- UAE (DIFC) DIFX N/R AMEDA Member Risk Assessments

  10. Thomas Murray Depository Risks • Does a risk-free CSD exist? Mitigating one risk may trigger another. Risk Counterbalances Risk Containment Mechanism+- RTGS Asset Commitment Liquidity Credit FacilitiesLiquidity Financial Netting Liquidity Counterparty Central Counterparty Counterparty Financial Pre-fundingLiquidity/ Counterparty Asset Commitment

  11. Thomas Murray Depository Risks • Conclusions • International standards (ISSA, G30, CPSS-IOSCO) set the ‘base-line’ for risk mitigation • No ‘one size fits all’ approach. Strategies must account for local realities. • Risk minimisation strategies require constant evolution. • Risk solutions may need to be tailored for negative ‘side-effects’. • Must communicate how risk is managed. Transparency is critical.

  12. Thomas Murray AMEDA WLS AMEDA White Label Site • Aim is to share information between AMEDA members • Access to current TM information - full Data, summary Reports and Newsflashes. • Requires each AMEDA member to sign an agreement to authorise the release of their information to other AMEDA members. • Private, secure zone established exclusively for AMEDA members to upload AMEDA specific information, notices and run data collection exercises. • Option to upload AMEDA specific documentation • Created and administered by TM for the benefit of AMEDA members.

  13. Thomas Murray AMEDA WLS AMEDA White Label Site

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