1. Director, Capital Markets
CSD Capitalisation
Ana Giraldo
Director, Capital Markets
17th May 2016
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2. Agenda Background Capitalisation Standards
Statistics on Capital vs CPMI-IOSCO Principle
TM Methodology to Determine Capital Levels
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3. Adverse market conditions
Background
These CSDs used to maintain a relatively stable level of capital to be able to support operations and future investments and rebate back to participants any excess profit
Not for profit CSDs
Similarly, for profit CSDs were under pressure by shareholders to maximise dividend payments and minimise reserves. Some of them, actually paid 100% of dividends (e.g. DCV Chile)
For-profit CSDs
The market in Egypt in 2011 was closed for over a month badly affecting the revenue of MCDR.
The Greek market was also closed for days in 2015 impacting ATHEXCSD’s profits and revenues
Adverse market conditions
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4. Statistics (end of 2014) 4 © Thomas Murray Data Services 2016
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5. Capitalisation Standards
What are the known regulations/standards related to CSD capitalisation?
CPMI-IOSCO PFMIs - Principle 15
A CSD should have a capital level enough to cover any General Business losses.
A CSD should have a capital level of at least 6 months of current operating expenses to cover any recovery or wind-down.
1st point is hard to quantify as each CSD would have to do their own internal analysis, which makes it quite difficult if they comply or not. 2nd point is straight forward and anyone should be able to calculate the ratio and find out if the CSD is compliant.
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6. Capitalisation Standards
What are the known regulations/standards related to CSD capitalisation?
European CSD Regulation - Article 47
Capital, together with retained earnings and reserves of a CSD, shall be proportional to the risks stemming from the activities of the CSD. It shall be at all times sufficient to:
(a) ensure that the CSD is adequately protected against operational, legal, custody, investment and business risks so that the CSD can continue to provide services as a going concern;
(b) ensure an orderly winding-down or restructuring of the CSD’s activities over an appropriate time span of at least six months under a range of stress scenarios.
CSDR is almost exactly the same as CPMI IOSCO except that it details slightly the risks of losses that the capital should cover
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7. Liquid Net Assets vs Operational Expenses
The chart represents the ratio of the capital vs the monthly op. expenses. Therefore the red line (at 6 months) is the limit to comply with the principle.
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8. Liquid Net Assets vs Operational Expenses
Asia: Very capitalised CSDs brings the avg up (Bangladesh, Taiwan), lowest is Japan with 17 months covered.
Europe (include Eurasia) : highest is Euroclear with 81 months (very large capital of almost 4 billion USD). Slovakia covers just 6 months, Italy 8.
Middle East / Africa: Highest is Nigeria with 92 (very high capital). Lowest Turkey with 7.6.
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9. How to determine Capital level for CSDs?
TM Methodology
How to determine Capital level for CSDs?
Methodology adapted from BASEL III for banks using Risk Weighted Assets (RWA).
Comparison between 30 CSDs and various Stress Scenarios to determine what “ratio” will be equivalent to each rating.
Ratio =
The RWA approach enables to determine Capital levels based on the size of the CSD and the potential risk it bears.
Capital RWA
TM has developed a methodology to assess the Capital level of CSDs by adapting the BASEL III one applicable to evaluate banks’ capital. The bank one uses RWA based on banks’ risk, the main ones being Credit risk and Market risk. TM adapted it for CSDs using the risk associated to their business, e.g. asset servicing, operational, asset safety.
The ratios vary from 0 to 30%, e.g. 30% would be AAA, 12% AA-, 3% BBB.
Obviously, by reversing the formula, TM can determine what level a capital should have if they wish to have a AA rating for example.
RWA = Risk Weight * Assets
Risk weight represents the risk calculation is a coefficient based on TM Risk Rating (Operational, Asset Safety and Asset Servicing), the CSD liabilities for its core services and, when applicable, the risk related to other non-core activities (e.g. CCP, Securities Lending, Trustee services) Assets calculation is a coefficient based on the value of AUC, settlement turnover and corporate actions processed.
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10. How to calculate RWA for CSDs?
TM Methodology
How to calculate RWA for CSDs?
Key Risks
Operational
Asset Safety
Asset Servicing
Assets
Settlement
AUC
Corporate Actions
Risk Weighted Assets
Liabilities
Gross negligence
System Error
Direct vs Cons. Losses
Other Risks
Legal
Sec. Lending
Other Businesses
Contagion
RWA will be calculated using 4 variables, each of them will be scored to come up with a final figure (which will then be compared to the Capital amount as explained above).
Assets determines the size of the CSD, i.e. the transactions/corporate actions processed, the assets under custody.
For Other Risks: example would be having a CCP, being part of a group with risky businesses, any risks related to outsourcing some of the operation.
Each variable is scored, e.g. Liabilities are scored from 1 to 10 and determines the potential claims against the CSD, i.e. the less risk there is the closer to 1 it will be. E.g. if a CSD is liable for consequential losses the score will be close to 10, if it is just liable for bad faith it will be close to 1.
Same for Key risks, a CSD with low operational risk, i.e. high level of automation / sound DRP/BCP / good audit controls etc, will have a lower score.
For Size, the score is also from 1 to 10, the large CSDs that process many transactions and maintain lots of assets will have a high score compared to the small ones. e.g. USA would have 10, Latvia 1.
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11. An example for NSD Russia
TM Methodology
An example for NSD Russia
Key Risks
Operational
Asset Safety
Asset Servicing
Assets
Capital USD 280 million
AUC:USD 500 billion
Corporate Actions
280/1386 = 20%
(AA+)
Liabilities
-Under Russian civil law, NSD is liable for all direct and indirect losses
Other Risks
-Limited purpose bank
-Trade repository
-Securities lending
RWA will be calculated using 4 variables, each of them will be scored to come up with a final figure (which will then be compared to the Capital amount as explained above).
Assets determines the size of the CSD, i.e. the transactions/corporate actions processed, the assets under custody.
For Other Risks: example would be having a CCP, being part of a group with risky businesses, any risks related to outsourcing some of the operation.
Each variable is scored, e.g. Liabilities are scored from 1 to 10 and determines the potential claims against the CSD, i.e. the less risk there is the closer to 1 it will be. E.g. if a CSD is liable for consequential losses the score will be close to 10, if it is just liable for bad faith it will be close to 1.
Same for Key risks, a CSD with low operational risk, i.e. high level of automation / sound DRP/BCP / good audit controls etc, will have a lower score.
For Size, the score is also from 1 to 10, the large CSDs that process many transactions and maintain lots of assets will have a high score compared to the small ones. e.g. USA would have 10, Latvia 1.
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12. Thank You
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