Institutional investors which own assets in overseas markets take on more than the risk of the custodian bank that is responsible for holding and servicing their assets. In almost every market, custodians are either obliged or opt to settle transactions on behalf of clients by moving securities between custodian bank accounts at a central securities depository (CSD) against cash moved between custodian bank accounts at the central bank. In most markets the electronic accounts maintained by the CSD are also the ultimate record of ownership, determining not only title to the assets but entitlement to dividends and voting rights. This means investors are exposed to the risk of loss of ownership, or ownership rights, in assets held in CSDs. The Thomas Murray CSD ratings enable institutional investors to assess and monitor the risk of loss in nearly 150 CSDs around the world.
It is an independent assessment by Thomas Murray of the structure, processes and procedures of a central securities depository (CSD), which concludes with the establishment of a rating on the familiar AAA to C ratings scale. A high rating (AAA) indicates that a CSD minimises the risks to investors of holding and settling securities and cash through its facilities. Ratings based on information alone are proprietary, and shared with subscribers to the Thomas Murray market infrastructure monitoring service. Public ratings are commissioned by CSDs, and based on a full due diligence review by Thomas Murray.
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A “proprietary” rating is prepared for all CSDs monitored by Thomas Murray. This is based on information gathered from various sources by Thomas Murray as part of its market infrastructure monitoring service, and distributed as a matter of routine to all subscribers to that service. All information is confirmed, whenever possible, directly with each CSD. If a CSD wishes to obtain a public rating, on the other hand, Thomas Murray analysts supplement the data collected for the “proprietary” rating with a full due diligence review. This begins with the CSD checking and updating the information Thomas Murray holds already. Once that is complete, Thomas Murray analysts meet the management, staff and internal auditors of the CSD, their external auditors, the local market regulator, the local central bank, and a group of local market participants, with the aim of verifying the information submitted by the CSD. A rating report is then prepared. Its contents, and a separate management report identifying areas of weakness and strength, is shared with the management of the CSD. Following discussions with the management, the report and rating are finalised and published.
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A Thomas Murray ratings review assesses anything that exposes investors to the risk of loss when holding securities through the CSD, or settling transactions between accounts at the CSD. The review examines all processes used to hold and service assets in custody with a CSD, or settle trades in them.
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Information affecting the six main risks posed to investors which hold assets or settle trades through a CSD - asset commitment, liquidity, counterparty, financial, operational and asset servicing risk – is updated continuously as a routine aspect of the market infrastructure monitoring service provided by Thomas Murray. Any change likely to affect any of the risks in a CSD is identified, validated with local banks and the CSD itself, assessed for its impact on users of the CSD and then communicated to subscribers to the service. Significant changes prompt adjustments to the “outlook” for a CSD rating, and may eventually result in a rating upgrade or downgrade. CSD ratings are also based on the findings of periodic due diligence visits by Thomas Murray analysts to particular CSDs.
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Certainly investors can use CSD ratings to compare CSD risk across multiple markets. This is because the particular methods used by a CSD to hold assets or settle transactions are less important than what the rating measures: the methods used to minimise the exposure to loss of assets or transaction failure, whether they are caused by operational shortcomings at the CSD or by a counterparty using the CSD. However, it is important for investors to remember that the procedures, processes and ownership of CSDs do differ substantially between markets. For example, different CSDs will use different methods to minimise the risk of settlement failure. Some use automated stock borrowing, others buy-ins or the blocking of securities or cash. The international CSD industry is also evolving in ways that can change the risk profile of a CSD dramatically. Traditionally, the vast majority of CSDs were monopolies run as market utilities, which used surpluses to reduce or rebate fees to user-members or user-owners, but many have demutualised and now engage in commercial activities or areas only tangentially related to the securities markets. Some have broadened their membership criteria beyond relatively low-risk banks. In some parts of the world, notably Europe, CSDs are merging with each other, or forming links to facilitate the transmission of assets across borders. This is why Thomas Murray monitors developments at CSDs closely, and adjusts ratings accordingly.
If you would like to purchase any of these services, or find out more about them, please contact:
Jim Micklethwaite at jmicklethwaite@ds.thomasmurray.com or call him on +44 (0)20 8600 2300
