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G-30 Self AssessmentG-30 Self Assessment CDS “A Case Study”CDS “A Case Study”
Bruce ButterillBruce ButterillVice-President, Product ManagementVice-President, Product Management
The Canadian Depository for Securities LimitedThe Canadian Depository for Securities LimitedNovember, 2003November, 2003
G-30 Self AssessmentG-30 Self Assessment CDS “A Case Study”CDS “A Case Study”
Bruce ButterillBruce ButterillVice-President, Product ManagementVice-President, Product Management
The Canadian Depository for Securities LimitedThe Canadian Depository for Securities LimitedNovember, 2003November, 2003
2November 2003 - p. 2
On The Agenda….On The Agenda….On The Agenda….On The Agenda….
Introduction Why Self-Assess? A Self-Assessment Program Stage 1: Original Content Review Stage 2: Content Organization & Document Map Stage 3: Abridged Content Stage 4: Content Summaries Stage 5: Assessment Metrics Stage 6: Self Assessment Framework Issues
3November 2003 - p. 3
IntroductionIntroductionIntroductionIntroduction
Various organizations are “competing” to set a standard for securities markets to pursue:
Group of Thirty CPSS/IOSCO Recommendations
CPSS/IOSCO Assessment Guide ISSA
We are left with the reality of having to interpret the objectives, rationalize the content, interpret the priorities, assess our status and plan for global harmony
4November 2003 - p. 4
Introduction Introduction (cont’d.)(cont’d.)Introduction Introduction (cont’d.)(cont’d.)
In our opinion, the Group of Thirty Report is not necessarily the authoritative reference source:
Regulators and central banks may find the CPSS/IOSCO report more relevant
There is no clear consensus of support for the G-30 Report in total
But, it cannot be ignored. Instead, we must consider all of the intellectual inputs as we go through a self-assessment process
5November 2003 - p. 5
Why Self-Assess?Why Self-Assess?Why Self-Assess?Why Self-Assess?
We need to be able to respond authoritatively to various stakeholders including media agencies, regulators, industry stakeholders and other interested parties
Acquired knowledge contributes to the body of intellectual property being compiled by other industry organizations
We need a baseline to establish planning priorities
6November 2003 - p. 6
Why Self-Assess?Why Self-Assess?(cont’d.)(cont’d.)
Why Self-Assess?Why Self-Assess?(cont’d.)(cont’d.)
Our stakeholders expect us to pursue global best practices
We must understand the issues and gaps in order to develop the business case for change
7November 2003 - p. 7
A Self-Assessment ProgramA Self-Assessment ProgramA Self-Assessment ProgramA Self-Assessment Program CDS embarked on a self-assessment path early in 2003 In high level terms, here is how we proceeded:
G-30
CPSS/IOSCO ASSESSMENT
CPSS/IOSCO ISSA
STAGE 1: ORIGINAL CONTENT REVIEW
STAGE 2: CONTENT ORGANIZATION
STAGE 3: ABRIDGED CONTENT
STAGE 4: CONTENT SUMMARIES
STAGE 5: ASSESSMENT METRICS
STAGE 6: ASSESSMENT, GAP ANALYSIS, ACTION PLAN
ORIGINAL REPORTS
8November 2003 - p. 8
Stage 1: Original Content Stage 1: Original Content ReviewReview
Stage 1: Original Content Stage 1: Original Content ReviewReview
Comprehensive review of original reports Review all background materials Interviews with key stakeholders
9November 2003 - p. 9
Stage 1: Original Content Stage 1: Original Content IssuesIssues
Stage 1: Original Content Stage 1: Original Content IssuesIssues
G-30 document is lengthy and complex– It tends to “ramble” across issues– Is very prescriptive
CPSS/IOSCO document is well-organized– More practical in nature– Relatively brief– Contains assessment criteria
ISSA report is very brief– Is a sub-set of others
10November 2003 - p. 10
Stage 2: Content OrganizationStage 2: Content OrganizationStage 2: Content OrganizationStage 2: Content Organization The key is to organize the information around key processes and industry infrastructure Key report content can be “mapped” to organized content structure Develop a ‘process chain’ which can be used and recognized as a logical grouping of objectives/recommendations We chose the following process map:
CCP/ Netting
Settlement Securities Lending
Business Recovery
Legal & Regulatory
Governance & Access
Matching
Demat./ Immob.
Asset Servicing
Transparency & Reporting
Corporate Actions
Settlement
Payment
Tax
Foreign Ownership
Map Abridged Content
11November 2003 - p. 11
Stage 2: The Document MapStage 2: The Document MapStage 2: The Document MapStage 2: The Document Map
Topics/headings selected to accommodate global source material categories
Process chain reflects logical data/information/processing flows
ISSA
No material
ISSA
R 1,6
ISSA
R 7,8
ISSA
R 2
ISSA
R 4
ISSA
R 3
ISSA
R 4
ISSA
R 3,5
ISSA
R 8
CPSS/IOSCO
R 16,17
CPSS/IOSCO
R 13,14
CPSS/IOSCO
R 1,18
CPSS/IOSCO
R 9,11
CPSS/IOSCO
R 12
CPSS/IOSCO
R 6,12
CPSS/IOSCO
R 5
CPSS/IOSCO
R 2,3,7,8,10
CPSS/IOSCO
R 4
G-30
No material
G-30
R 10,17,18,19
G-30
R 9,14,15
G-30
R 12,13
G-30
R 8
G-30
R 1,2,3
G-30
R 7
G-30
R 2,3,4,5,11
G-30
R 6,16
CORPORATE ACTIONS, TAX, FOREIGN OWNERSHIP
MATCHING, SETTLEMENT, PAYMENT
SUB-CATEGORIESSUB-CATEGORIES
TRANSPARENCY & REPORTING
GOVERNANCE & ACCESS
LEGAL & REG.
BUSINESS RECOVERY
ASSET SERVICING
DEMAT./ IMMOB.
SECURITIES LENDING
SETT.CCP/NETTING
PROCESS CHAIN DIMENSIONSPROCESS CHAIN DIMENSIONS
12November 2003 - p. 12
Stage 3: Abridged ContentStage 3: Abridged ContentStage 3: Abridged ContentStage 3: Abridged Content
Edit source documents and map to “process chain”
Use original content, but re-organized Filter out “filler” content in original reports Edit source materials and formats for easier
reference and generalized, ongoing use Define the format for status reporting and
action planned reporting Define the basic framework for content
creation which can be used in whatever distribution/communication format desired
13November 2003 - p. 13
Stage 3: Abridged ContentStage 3: Abridged Content(cont’d.)(cont’d.)
Stage 3: Abridged ContentStage 3: Abridged Content(cont’d.)(cont’d.)
Compile all materials into a logical architecture
Define the administrative management for the completion and maintenance of the knowledge base
Recommend content population alternatives and tasks
14November 2003 - p. 14
Abridged ContentAbridged ContentExampleExample
Abridged ContentAbridged ContentExampleExample
SOURCE REFERENCE MATERIAL
GROUP OF THIRTY
G-30 RECOMMENDATION 1
ELIMINATE PAPER AND AUTOMATE COMMUNICATION, DATA CAPTURE, ANDENRICHMENT
Infrastructure providers and relevant public authorities should work with issuersand securities industry participants to eliminate the issuance, use, transfer, andretention of paper securities certificates without delay.
All market participants should seek to automate elements of the process, such asconfirmations and trade allocations, that introduce other forms of paper into thesecurities processing transaction flow as technology safely allows.
All market participants should use electronic communication to transmitinformation for all instruments and transaction types. They should also identifyopportunities to streamline processes by avoiding duplicative recording of data andmanual addition of supplementary information at each stage of the value chain.
Such action should be subject to proper investor protection over assets held inelectronic form. There is no greater assurance of ownership or control frommaintaining paper, and it should be possible to overcome the contrary perceptionsof some retail investors through education and by ensuring a sound legal basis forall paperless securities in each jurisdiction. Dematerialization of securitiescertificates—converting all paper ownership records into electronic format is thepreferred solution. However, in practice immobilization—where ownership isrecorded through electronic book entry and the underlying paper certificate is keptin a central security depository—realizes many of the benefits of dematerialization.
Therefore, if immobilization can be achieved more quickly and efficiently thandematerialization, it is an acceptable step on the way to full dematerialization.
All market participants should seek to automate elements of the process thatintroduce other forms of paper, such as confirmations and trade allocations, intothe securities processing transaction flow as available technology safely allows,from issuance through to asset servicing.
Means of electronic capture, storage, and transmission of documents should be used totheir fullest extent to avoid the need for physical documents to serve as evidence oftransactional activities and asset ownership
PROCESS CATEGORY DEMATERIALIZATION/IMMOBILIZATION
SUB CATEGORY
CDS OWNER
15November 2003 - p. 15
Stage 4: Content SummariesStage 4: Content SummariesStage 4: Content SummariesStage 4: Content Summaries
The organized content is now summarized into 4 categories:– Operational implications– Risk management implications– Legal & regulatory implications– Cross-border implications
The result is an abbreviated set of objectives and direction
16November 2003 - p. 16
Content SummaryContent SummaryExampleExample
Content SummaryContent SummaryExampleExample
SOURCE MATERIAL SUMMARY
PROCESS CATEGORY DEMATERIALIZATION/IMMOBILIZATIONSUB CATEGORYCDS OWNER Bruce Butterill
OPERATIONAL IMPLICATIONS Dematerialization is the elimination of physical paper used for issuance, use, transfer, and
retention of securities certificates. It includes:o Prospectus, selling memoranda, corporate actions documentation, subscription
agreementso Confirmations and contractso Beneficial ownership declarations, tax authority certifications and omnibus
certifications
Standards are required for all of the above.
Additionally, the elimination of paper should include other forms of paper introduced into theprocess chain, such as confirmations, allocations, trading, settlement, transfer, assetservicing (corporate actions, rights and decisions, etc.) related to asset ownership.
Immobilization achieves many of the benefits of dematerialization providing that major tradingparticipants use the book-entry settlement and custody facilities.
Client assets must be segregated to protect against claims of third parties.
Participant reconciliation must be regular and audited regularly.
Solutions must be cost-effective.
Dematerialization/immobilization facilitates securities lending
G-30 regards partial immobilization, where participants can withdraw physical certificates asunsafe and inefficient.
The use of electronic communication, based on standards is a corollary. Standards includeISO 15022 and 15022 (XML) for numbering, counterparty identification and transaction datareferences. ISO 9362 (counterparty identification) is also required.
All messaging must be network agnostic, but conform to standards.
A national authority should be set up to defines and enforce use of standards.
All participants must harmonize internal data standards to global standards.
17November 2003 - p. 17
Stage 5: Assessment Metrics Stage 5: Assessment Metrics Stage 5: Assessment Metrics Stage 5: Assessment Metrics
The starting point is the CPSS/IOSCO Assessment Guide– This must be addressed at a minimum, as
regulators will use this template Additional metrics were drawn from:
– Internal resources– Global surveys (e.g. AGC)– Thomas Murray Review– National stakeholder groups
Metrics were grouped against source material summaries
18November 2003 - p. 18
Assessment MetricsAssessment MetricsExampleExample
Assessment MetricsAssessment MetricsExampleExample
ASSESSMENT CATEGORY: DE-MATERIALIZATION SUB-CATEGORY: N/A
GOAL KEY METRICSComplete de-materialization of allsecurities issues
% of securities dematerialized Describe eligible securities Are securities fungible? Can de-materialized securities be re-
certificated? Is a nominee registration used?
Complete immobilization of all securities % of securities immobilized Describe eligible securities Are securities fungible? Can immobilized securities be re-
certificated? Does the CSD use third party vaulting
facilities? Is a nominee registration used?
19November 2003 - p. 19
Stage 6: Self AssessmentStage 6: Self AssessmentStage 6: Self AssessmentStage 6: Self Assessment
Objective assessment of current status vs. objectives using key metrics
The temptation is to be optimistic:– Desired state vs. actual state– Assumed that planned initiatives are in
place– Tendency to de-emphasize importance of
some issues where non-compliance exists Needs “clinical” evaluation with external input
20November 2003 - p. 20
Stage 6: Self AssessmentStage 6: Self Assessment(cont’d.)(cont’d.)
Stage 6: Self AssessmentStage 6: Self Assessment(cont’d.)(cont’d.)
Engage internal expert resources– Process is instructive
This is not a negative exercise Consistent style is important, as results will
be transparent
21November 2003 - p. 21
Framework Framework Framework Framework
Hyper-linked references from index to:– Edited source material– Status reports– Action planned reports
..\CDS CD 2\_REPORT INDEX\REPORT INDEX.doc
22November 2003 - p. 22
Issues Issues Issues Issues
Resource availability/constraints• Internal & external
Deadlines• Imposed by regulators• Expected by organizations such as G-30,
CPSS/IOSCO Consistency of content
• Multiple authors will require disciplined editing & formatting
23November 2003 - p. 23
Issues Issues (cont’d.)(cont’d.) Issues Issues (cont’d.)(cont’d.)
Change management• Ongoing updates
Administration • Technical requirements & resource
availability
G-30 Self AssessmentG-30 Self Assessment CDS “A Case Study”CDS “A Case Study”
Bruce ButterillBruce ButterillVice-President, Product ManagementVice-President, Product Management
The Canadian Depository for Securities LimitedThe Canadian Depository for Securities LimitedNovember, 2003November, 2003
G-30 Self AssessmentG-30 Self Assessment CDS “A Case Study”CDS “A Case Study”
Bruce ButterillBruce ButterillVice-President, Product ManagementVice-President, Product Management
The Canadian Depository for Securities LimitedThe Canadian Depository for Securities LimitedNovember, 2003November, 2003
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