aecsd john woodhouse director capital markets, thomas murray the impact of the financial crisis on...

AECSD

John WoodhouseDirector Capital Markets, Thomas Murray

The Impact of the Financial Crisis on CSD Risks

© 2009 Thomas Murray Ltd. PRIVATE AND CONFIDENTIAL


Financial Risk Impact



‘ADVERSE’ CHANGES IN MARKET CAP. BY REGION(Period between 1 August 2008 and 30 June 2009)

Lowest, 33.8

Lowest, 5.0

Lowest, -9.9

Lowest, -24.9

Lowest, 11.2

Highest, -42.5

Highest, -47.2 Highest, -47.7

Highest, -67.9

Highest, -56.2

Mean, -27.7

Mean, -35.8

Mean, -31.9

Mean, -44.4

Mean, -13.5

Mean, -6.1

Lowest, 49.2

Highest, -51.6

Median, -25.3Median, -28.4

Median, -35.6Median, -43.0

Median, -25.0

Median, -12.8

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

Africa America Asia Eurasia W. Europe Middle East



FEE INCOME RESILIENCE AGAINST A FALL IN TRADE VOLUMES & SECURITY VALUES

Fee Type Transactionvolumes down

Securityvalue down

Overall Impacton revenue

Membership Fee

Transaction Fee

Fixed

Mainly Fixed &

% of value

% of value

Custody Fee

Per line of Security

% of security

value held

Those CSDs with a fee structure that includes a mix of Membership fees and Custody fees based upon lines of security, will have a high degree of resilience when both trade volumes and security values are falling.

The higher the ad valorem component of a transaction fee, the higher the revenue exposure to both a fall in transaction volumes and security values.

The fee structure has a significant impact on a CSD’s exposure to revenue volatility and therefore financial risk.

Impact on Fee Revenues

No Impact

Partial Impact - Moderate

Partial Impact - High

High Impact

OBSERVATIONS



CSD Profit Comparison to Previous Year (in %)

2008 2007

W. Europe

2008 2007

Eurasia

2008 2007

Asia

Mean

Mean

Mean

Mean

Mean

2008 2007

M. East - Africa

2008 2007

S. America

Median

Mean

MedianMedian

Median

Mean

MedianMean

MedianMedian

MeanMedian

Mean

MedianMedian

-200.0

-100.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0



Value of Outstanding Governm ent Bonds: Evolution from June 2008 to June 2009 (in %)

Mean

Mean

MeanMean

Mean

USA

Norway

Egypt Bahrain

Australia

Argentina

Latv ia

Nigeria

RussiaM alaysia

MedianMedian

Median

Median Median

-50.00%

-30.00%

-10.00%

10.00%

30.00%

50.00%

70.00%

90.00%

M. East - Africa America Asia Eurasia W. Europe

KuwaitSouth Africa

ECB

Japan

KoreaChina

Ukraine+369%

Kazakhstan

Swede

Pakistan

Canada

ChileM exico



Counterparty Risk Impact



DEFAULT GUARANTEE FUNDS

Factors that adversely impact the size of guarantee funds (GF)

Higher incidence of settlement default

Reduced transaction values and volumesMost CCPs set a rate based on the ‘value of transactions’ which then

determines the underlying size of the GF

A lack of stress testing exposes the size of the fund to be determined by transaction volumes/values (as a proxy for exposure to default), but does not necessarily reflect the underlying exposure.



OBSERVED IMPACTS OF RECENT EVENTS ON GUARANTEE FUNDS

Lehmans default JDCC (off-exchange transactions CCP) reported a claim on the GF of around 20% of its

value The GF was wholly covered by selling securities intended for delivery to LBJ, and JDCC did not request additional

contributions from the participants

HKEX reported a loss of HKD 157 million (~USD 18 million) The loss covered costs incurred by the Hong Kong Securities Clearing Company limited’s (HKSCC) on the close-

out of outstanding Lehman positions. (HKSCC is a subsidiary of the Hong Kong Exchanges and Clearing Limited (HKEX)

HKEX may claim against HKSCC’s GF. The GF value is being enhanced by a review and subsequent increase in some participant contribution rates

Reduced Market Activity A CSD experienced a fall in the value of the fund from around USD 330 million to around

USD 250 million as a result of a fall in transaction volumes.



Set minimum levels consistent with underlying exposure

Conduct regular stress testing to assess exposure

Set contribution rates consistent with:maintaining GF levels consistent with the assessed

exposure and structure.

maintaining a credible strategy to restore the fund if losses have been made or the exposure is assessed to have increased.

POSSIBLE ACTIONS TO MAINTAIN ADEQUATE GUARANTEE FUND LEVELS



Liquidity Risk ImpactShort Selling & Failed Trades



BANS ON SHORT SELLING

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent

Asia Pacific Americas Europe Africa Middle East EurasiaRegion

Ban in place

Ban removed

No Ban applied

Not practised



RESPONSE TO SHORT SELLING

0

2

4

6

8

10

12

14

16

Number

Asia Pacific Americas Europe Africa Middle East EurasiaRegion

Ban imposed

Subsequent actions



Americas The SEC introduced requirements to report new short positions for specified securities (USA).

Asia Pacific The regulator introduced new disclosure and reporting requirements of short sales in the market. (Australia) The regulator introduced a reporting of short selling positions of over 0.25% of outstanding company shares (Japan). IDX introduced new rules to regulate the eligibility of the stocks available for short selling (Indonesia) The regulator revised the volume controls on short selling for a period of 3 months (Taiwan) KRX strengthened the reporting of short sales (Korea) SGX proposed stronger measures on reporting and disclosure of short selling activities (Singapore). The regulator proposed to strengthen the monitoring of short sales (Hong Kong)

Europe Market regulators introduced disclosure of the net economic short position excess of 0.25% of the capital (Belgium, France,

Ireland, the Netherlands, Norway, Switzerland, UK) The regulator further introduced mandatory disclosure if a net short position changes by a further 0.1% of issued share capital

(i.e. at 0.35%, 0.45% etc) (UK) The regulator introduced mandatory reporting of uncovered short selling in excess of 0.25% (Portugal) The regulator introduced a disclosure of short position in excess of 0.01% of the total number of a company’s share (Hungary,

Greece) The regulator proposed to strengthen the short selling rules (Norway)

Middle East NASDAQ Dubai introduced reporting requirements for all short positions (UAE)

RESPONSES TO MANAGE SHORT SELLING EQUITIES



OTHER MEASURES TO LIMIT FAILED TRADES

Countries across the regions introduced various enhanced penalties for trade failure:

Apply, Increase penalty fees related to the value of trade

Change of buy-in mechanism

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