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Thomas Murray helps institutional investors manage the quality, costs and risks of the post-trade services they must employ when they buy, sell and hold securities and other financial assets in multiple markets around the world. The second of the three principal ways in which the firm assists its clients to do this is by rating on the familiar AAA to C ratings scale the soundness and quality of the services provided to investors by the three most important intermediary institutions in the post-trade area: custodian banks, fund administrators and the central securities depositories (CSDs).
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Investors and custodian banks themselves incur risks in their use of custodian banks in a variety of ways. The custodian may fail to settle a purchase or sale of securities on time, or at all; it may fail to recover securities lent to a third party, or lose cash or securities posted by a counterparty as collateral; it may fail to collect dividend or interest payments, or other entitlements such as a scrip issue; it may miss the deadline for a important corporate action, such as a takeover offer or rights issue; or it may simply over-charge for services such as cash management, foreign exchange execution or securities lending. It is to manage these risks that both custodian banks and investors can commission from Thomas Murray a rating of a custodian bank to assess its service quality against prevailing industry standards.
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The risks posed to investors by central securities depositories (CSDs) are largely unavoidable. In virtually every market, the custodian banks used by investors to look after their assets and settle transactions are obliged to maintain holdings at the CSD and settle transactions by moving assets between accounts at the CSD. Though in some markets the authorities insist the CSD records the names of beneficial owners, it is common practice for custodian banks to make use of nominee or omnibus accounts. This is more efficient, but incurs obvious risks when assets are not earmarked as belonging to a particular investor. Since their custodian banks must use the CSDs, and the value of the assets and of the entitlements attached to them ultimately depend on the accuracy and quality of the records maintained by the CSD, investors are heavily exposed to the quality of the owners of the CSDs, and the systems, processes and procedures employed by CSDs. These vary widely around the world, which is why regulators in some jurisdictions now lay an obligation on investors and their service providers to assess and understand CSD risks. The Thomas Murray CSD rating service enables investors to monitor the risk of loss in nearly 150 CSDs around the world.
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Investors active in any market incur a multitude of risks, of which the creditworthiness and service quality of the custodian banks and central securities depositories (CSDs) holding their assets and settling their transactions are the most obvious. It is less appreciated by investors that they are in fact incurring all of the risks represented by the entire capital market infrastructure of each country where they are invested. These risks include mismatches between the delivery of cash and the assets being bought or sold, lack of synchronicity between the settlement deadlines in one asset class and another, partial or even non-compliance with international standards in settlement and safekeeping, technical shortcomings in payment systems, regulatory loopholes that make it hard to secure unconditional title to assets, exposure to thinly capitalised broker-dealers, lackadaisical registration procedures, inability to vote shares by proxy, the unavailability of information in English about company meetings or resolutions, and a host of other major and minor risks. It is to help investors manage these risks that Thomas Murray developed its capital market infrastructure risk rating service, which offers investors an up-to-date and continuing assessment of all of the risks faced by investors in any one of dozens of markets around the world, and especially those risks that are not covered by custodian banks, fund administrators and CSDs.
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