Market Data and Ratings

What is market infrastructure?

Transactions in securities involve more than buyers and sellers and their banks. Moving cash and securities between accounts means using inter-bank payments systems, some of which settle transactions in “central bank money” (i.e. between accounts at the central bank) and some of which settle transactions in “commercial bank money” (i.e. between accounts at commercial banks). These payment systems are part of the “infrastructure” which buyers and sellers and their agents use to exchange cash and securities. While cash moves between bank accounts, securities are moved – in the vast majority of jurisdictions - between accounts at a central securities depository (CSD), whose ownership and control can vary from commercial banks, through central banks, to a stock exchange. CSDs are helpful because most securities are no longer held in physical form and locked in a safe or a bank vault, but “dematerialised” and held in digital form. So CSDs too are part of the “infrastructure” which buyers and sellers and their agents use to exchange cash and securities. But even before securities that are purchased or sold leave or land in an account at a CSD, they may pass through a central counter-party (CCP) clearing house. A CCP reduces the risk the parties to a trade pose to each other, and further reduces counterparty risk by netting buy and sell transactions between the same counterparties down to a single net payment or receipt. This makes CCPs part of the “infrastructure” too. While payments systems, CSDs and CCPs are designed to reduce the level of risk in securities trading, they do not eliminate it completely. Indeed, it is as important for investors to understand the differences between the procedures, practices and policies of different parts of the infrastructure in different markets as it is for them to understand the risks posed by the custodian banks they use.

What sort of risks does market infrastructure pose for an investor?

In any securities transaction, the buyer takes the risk that the seller will not deliver the securities, while the seller takes the risk that the buyer will not deliver the cash. Infrastructure is designed to reduce that risk, but both payment systems and CSDs can still sometimes oblige investors to give up control of securities before receiving cash, and cash before receiving securities. This is why market participants advocate simultaneous delivery of securities against cash payment, or what is commonly abbreviated to “delivery versus payment” (DvP). But losing control of an asset for a time is not the only risk posed by infrastructure. CCPs do not eliminate counter-party risk, but merely mitigate it by asking members to subscribe to a fund and to post collateral against their commitments. There is a risk that these resources will be insufficient to cover the losses accruing to investors if a major counterparty fails. A CSD may also go bankrupt, or cause an investor to miss a valuable corporate action, such as a dividend payment, rights issue or option to vote on a corporate merger. Then there are also the risks common to all forms of infrastructure: systems failure, incorrect entry of information, human error, terrorist attacks, natural disasters, and so on. It is important for investors to understand how the different parts of the infrastructure in each market manage these risks.

Why are those risks not covered by custodian banks?

Most investors rely on a global custodian. But it is the sub-custodians in the local markets that settle trades on behalf of global custodians in local markets, through the accounts they maintain with local payments systems and CSDs – and global custodians do not cover sub-custodian risk. A typical global custody contract provides that the customer bears the risk of loss arising from the use of sub-custodians, who have no contractual relationship with the underlying investor. If a local CSD does not offer DvP, it is hard to maintain that the sub-custodian is liable for losses when a counterparty fails to deliver cash or securities. This is the most important single reason why it is essential for investors to understand the processes and procedures by which payment systems and CSDs operate in local markets, and how they change over time.

How can market infrastructure risks be managed?

Thomas Murray understands the design, ownership, structure, processes and procedures of 147 CSDs in 96 markets around the world, which it publishes in the form of depository service risk assessments. It publishes – and continuously updates – detailed securities market profiles, or guides to the local market systems, laws, regulations, rules, processes and procedures for the trading, clearing, settlement and custody of securities in more than 100 markets. Thomas Murray also prepares capital market infrastructure risk ratings, which assess the riskiness of local capital market infrastructures using the familiar AAA to C ratings scale. Investors can subscribe on-line to all three of these services. A subscription package includes a daily surveillance service, in which any changes affecting risks posed by local market infrastructures are communicated to subscribers in the form of a news flash.

What information does a typical depository risk assessment contain?

The goal of a depository risk assessment, as its name suggests, is to assess the risks posed to the safety of assets by CSDs. This is why each assessment focuses on the risks associated with the processing of securities transactions through a CSD. The Thomas Murray methodology measures seven separate risks. They are:
- Asset Commitment Risk: the period when cash or securities are in a CSD, but not yet exchanged
- Liquidity Risk: that the exchange of cash and securities will fail because the cash or securities are not available
- Counterparty Risk: that a counterparty defaults on its obligations
- Asset Servicing Risk: that the value of entitlements is lost because of error or failure by a CSD
- Financial Risk: that the CSD suffers catastrophic financial failure
- Operational Risk: that operational shortcomings by the CSD cause loss to users
- CSD on CSD Credit Risk: the increase in the riskiness of a CSD when it links to another CSD, as opposed to the risk of transferring assets between them

All of these risks vary widely between markets, so the Thomas Murray depository risk assessments take into account local differences. Though a CSD can be readily understood as a facility that holds securities in digital form and transfers them by electronic book-entry, this is rarely all a CSD does. In some markets it may not even do both asset safekeeping and transfers. In many markets there are separate CSDs for fixed income and equity instruments. Some are linked to or owned by CCPs or exchanges. Many co-operate with CSDs in other jurisdictions, or have even merged with them to create a multi-market offering. CSDs are often engaged in additional activities, such as trade matching, securities lending, proxy voting, corporate actions notifications and cash payments. Several have expanded into new fields such as insurance, mutual funds or OTC derivatives. Because CSD risks change over time, subscribers to the Thomas Murray depository risk assessment reports also benefit from regular updates on planned changes and their implications for CSD risk, including daily news flashes.

Read more about the Central Securities Depository Risk Assessments here.

What information does a typical securities market profile contain?

The Securities Market Profiles are a guide to local market rules for the trading, clearing, and settlement of securities globally. Guides on over 100 markets are available and updated daily. The profiles include structural diagrams on how the markets operate, and the information is supported by intraday newsflashes notifying you of any confirmed changes in the market. Sections of the report are:
- Country details
- Stock market details
- Other markets where securities are traded
- Settlement guidelines
- Local market administrative organisations
- Registration procedures
- Market entry requirements/investment restrictions
- Stock lending/repo market
- Safekeeping/post settlement guidelines
- Dividend/income entitlements
- Corporate actions
- Cash management
- Proxy voting
- Taxation
- Market changes
- Payment system
- Banking and exchange holidays
- G30 compliance

Read more about the Securities Market Profiles here.

What is a capital market infrastructure risk rating?

The Thomas Murray Capital Market Infrastructure Risk Ratings are designed to capture all of the post-trade risks to which investors are exposed when buying or selling securities in local markets, none of which are covered by global custodians. They make use of six of the seven risks measured by the Depository Risk Assessments – Asset Commitment, Liquidity, Counterparty, Asset Servicing, Financial, and Operational risk – to derive an “overall” risk rating that uses the standard AAA through C rating scale.

Read more about the Capital Market Infrastructure Risk Ratings here.

How does Thomas Murray obtain its information about local market infrastructures?

Thomas Murray analysts visit local markets regularly, all year round. They also maintain relationships with over 200 banks, CSDs, CCPs, exchanges and payments systems, which supply Thomas Murray with detailed information about their own markets. This information is verified and normalised by Thomas Murray, and used to inform securities market profiles, depository risk assessments and capital market infrastructure risk ratings.