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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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