Risk Committee Update: December 2024

Dominican Republic  

Thomas Murray’s Risk Committee met to review in detail CEVALDOM, the Central Securities Depository (CSD) of the Dominican Republic. This was part of a public risk assessment in which a group of three analysts visited the market and spent nearly a week meeting with CEVALDOM and market stakeholders.

The Dominican Republic is a small market with trading volumes averaging USD 2,534 per month during 2024 and value of assets under custody by CEVALDOM of USD 48.7 billion at September 2024. It operates a unique market with restricted foreign investor participation as currently, international investors can only access the market through existing local brokers. The market is overwhelmingly dominated by public debt securities, which constitute over 99% of total operations, while the equity market remains nascent, having only emerged two years ago. 

The market is characterised by predominantly over the counter (OTC) operations utilising  SWIFT messaging for communication. The settlement cycle varies by asset type, with public debt transactions settling same day and equity transactions completing within two business days (T+2). Transactions settle on a gross basis with several intra-day batches using a delivery versus payment (DVP) mechanism.

A significant recent innovation is the implementation of a comprehensive fails management system. This mechanism provides advanced solutions for handling transaction failures, including the ability to recycle failed orders until 10:00am the following day. When transactions cannot be resolved, the system activates a securities borrowing and lending process and includes a guarantee fund to mitigate potential financial risks

CEVALDOM operates a fully segregated accounting model for local investors, but is considering the use of omnibus accounts for foreign investors accessing the market via ICSDs or global custodians in the future. The CSD supports the payment of government debt interest and maturities and has strong operational risk mitigators in place such as internal and external audits, cybersecurity policies and business continuity and disaster recovery plans.

Kazakhstan  

The KASE Clearing Center JSC (KACC) is part of the Kazakhstan Stock Exchange (KASE) group. Thomas Murray’s Risk Committee also met to discuss the risk grades of KACC as part of a public Central Counterparty (CCP) risk assessment process. The Central Asian financial market features a relatively new CCP that has been operational for just over a year after being spun out of the KASE into a separate subsidiary. This emerging financial infrastructure presents a unique approach to market clearing and settlement, distinguishing itself from more established Western models. 

The CCP provides clearing services across multiple financial domains, including stock markets, foreign exchange, and derivatives trading. This diversification reflects the market's ambition to create a comprehensive and flexible financial infrastructure. Despite its youth, the organisation shows a high level of organisation and stability, with well documented rules,policies and procedures, management and staff with suitable expertise and a focus on continuous staff training and skill development. 

The organisation demonstrates significant technological capabilities, with a robust IT infrastructure that prioritises operational resilience. Comprehensive disaster recovery procedures and strong cybersecurity measures highlight the region's commitment to building a secure financial ecosystem. However, the institution is still in a development phase, with ongoing efforts to refine their risk management models and improve efficiency.

United States  

Cash correspondent banks play a critical role in global financial systems, but their importance in the U.S. is distinct due to the scale, reach, and dominance of the U.S. dollar in global markets.The Risk Committee also reviewed some of the cash correspondent banks in the market. The North American financial landscape continues to evolve, with financial institutions strategically expanding their market presence and diversifying their service offerings. The market shows a strong focus on government securities, bonds, and futures trading, with a significant emphasis on local brokerage services. 

Recent strategic acquisitions have reshaped the market, with institutions expanding their commercial banking capabilities and market share. The clearing infrastructure remains sophisticated, particularly in futures and treasury markets, with significant concentration among key financial institutions. 

The market faces ongoing challenges, including maintaining comprehensive reconciliation processes and adapting to changing financial regulations. There's a notable trend towards consolidation and expanded financial services, reflecting the dynamic nature of the North American financial ecosystem. 

Saudi Arabia and Kuwait 

Finally, the Risk Committee also reviewed the banks and market infrastructures in Saudi Arabia and Kuwait with no major changes in terms of market players providing custody, although the Middle Eastern financial markets are experiencing significant transformations. In Saudi Arabia, there's a notable shift in investor composition, with retail investor participation declining and foreign institutional investors gaining ground. The market demonstrates dynamism through substantial initial public offering activity and ongoing efforts to modernise post-trade infrastructure. 

Kuwait is actively developing its financial ecosystem by introducing innovative digital solutions. This includes platforms for virtual meetings and streamlined account opening processes for financial institutions. The market is in the process of implementing a Central Counterparty (CCP) and expanding the range of financial instruments available to market participants. 

A Month of Global Democratic Engagement

Ghana's electoral commission declared John Dramani Mahama winner of Saturday, December 7th’s presidential election with 56.55% of the vote, according to provisional results from a voter turnout of 60.9%. His rival, Mahamudu Bawumia, conceded defeat on Sunday. Mahama, a former president, is making a comeback after serving from 2012-2016.

Romania's constitutional court annulled the first round of the presidential election conducted on December 8th, citing concerns over the correctness and legality of the process. The decision cancels a second-round run-off between far-right candidate Calin Georgescu and centrist Elena Lasconi. The court's ruling comes amid allegations of Russian interference, including evidence of cyber-attacks on election websites and suspicious activity on social media platform TikTok, where Georgescu largely ran his campaign. The government must now restart the electoral calendar.

As the year draws to a close, Chad will hold its presidential election on December 29th, a crucial democratic moment for the Central African nation. The election comes against a backdrop of complex political dynamics, with voters preparing to cast their ballots and potentially chart a new course for their country's leadership. International observers will be closely monitoring the electoral process. 

Capital Markets – Global Economic Landscape

In the US, investors are closely monitoring the Federal Reserve's potential pivot on interest rates, with expectations growing for rate cuts in 2024. Small-cap and technology stocks are showing renewed momentum, driven by optimistic signals about an economic soft landing and potential monetary easing.

European markets were cautiously optimistic by mid-December, with attention focused on the European Central Bank's monetary policy decisions and ongoing geopolitical tensions. The STOXX 600 index reflected measured gains as investors balanced recession concerns with potential economic stabilisation.

Asia-Pacific markets have been demonstrating resilience, with Japanese and Chinese markets responding to mixed economic indicators. Investors are weighing the implications of China's economic recovery efforts and potential stimulus measures against ongoing global economic uncertainties.