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Thomas Murray Maintains the Central Securities Depository Rating for the Depository Clearing Company at A+ with Stable Outlook |
21st Dec, 2009 |
LONDON - Thomas Murray has maintained The Depository Clearing Company's (DCC) rating as A+, which means low risk. The outlook is Stable. The rating is made up of the following components:
The overall rating of 'A+' reflects the significant effort made by DCC during the past year in minimising risk. As a result, three of the six risk components have been upgraded. Liquidity Risk and Counterparty Risk have been upgraded from 'A' to 'A+' and Financial Risk has been upgraded from 'A+' to 'AA-'.
The key contributing developments have been as follows:
DCC has developed an Enhanced Speedy Settlement Scheme (ESSS) with Citibank, ING and Deutschebank and further expansion of the scheme is planned. The ESSS arrangement involves DCC establishing security sub-accounts with custodians, to support near immediate direct transfer of securities between DCC and custodian clients on the book of the custodian. The success of the scheme is demonstrated by the reduced volume of transfers via the registers which as a consequence makes FOP transfers less dependent on the registrars and significantly reduces the time and cost of transfer for securities. Nevertheless it is seen as a temporary arrangement that provides a more efficient method of transferring securities for US overseas investors pending their acceptance of the safer and more effective DVP transfer arrangements.
USD and RUB settlement of the RTS classic market for quote driven and non-anonymous trades, and off-exchange OTC transactions has been rationalised through DCC's DVP net cash settlement multiple batch process. In comparison to FOP settlement, the DCC DVP and RTS CCP DVP settlement arrangements offer higher settlement efficiency and a lower cost and simpler settlement process and also reduce liquidity and counterparty risk. Furthermore, DCC DVP and RTS CCP DVP usage has been increasing.
DCC has continued to provide strong financial management during a period of difficult global financial conditions, maintaining a net profit similar to that achieved in the previous year and increasing its capital through retained earnings. The system redevelopment project, DEPO/X became operational on 14 Dec 2009 and there are no other planned investment commitments that might make a claim on DCC's financial resources. The level of DCC's capital, its ongoing profitability and strong cash reserves position together with a USD 50 million insurance coverage, has demonstrated that DCC is financially strong and accordingly Financial Risk has been upgraded from A+ to AA-.
Other key developments contributing to DCC's improved risk profile over the last twelve months were:
| (i) | the successful testing of the upgraded DRP arrangements in October 2009 that included some participants and the settlement chamber; |
| (ii) | the successful introduction of DEPO/X which offers new functionality to execute instructions on-line, increases system flexibility through customisation, and increases the system capacity through a scalable platform; and |
| (iii) | the review of all business processes and subsequent mapping of process risks through a set of documented control measures. This is planned to lead to ISO9000/9001/2000 accreditation. |
Although the outlook is regarded as 'Stable', which indicates that there are no imminent developments that may change the A+ rating at this stage, DCC has other activities underway that are likely to have a positive impact towards reducing its risk profile in the future. These include:
| (i) | a comprehensive programme to improve governance around the internal risk management framework and tighten internal controls |
| (ii) | the initiation of a project to develop a BCP response capacity based upon British Standard 25999; and |
| (iii) | a market inclusive approach underway to support the further development of SWIFT type message formats in Russia. |
Simon Thomas, CEO and Chief Ratings Officer of Thomas Murray said: "Thomas Murray has noted the on-going changes that have taken place at DCC and the efforts made by DCC in some key risk areas, which has led to an upgrade in several of the risk components. DCC has promoted the adoption of DVP settlement in the Russian market although its DVP systems continue to be used sparingly by American investors. DCC also provides an alternative FOP option that is faster and less expensive through the ESSS arrangements. These developments help demonstrate DCC's strong management commitment to further reduce its risk profile and minimise the risk exposure faced by market participants".
Mikhail Laufer, President of The Depository Clearing Company, said "The Depository Clearing Company is pleased with the outcome of the rating review and the upgrade in three of the six risk components. DCC has worked diligently in the last year to address those areas of risk and has continued to strengthen its processes and procedures and further minimise custody and settlement risk. The improvement in the ratings should provide our participants with ongoing confidence in DCC".
For further information contact:
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John Woodhouse |
Boris Cherkasskiy |
About Thomas MurrayThomas Murray is a specialist custody rating, risk management and research firm specialising in the global securities services industry. Thomas Murray was established in 1994. The Company tracks and analyses over 250 custodians globally and monitors the risk of over 100 capital market infrastructures. The Company has a strong position as a provider of public and private ratings and risk assessments on global custodians, domestic custodian banks and capital market infrastructures. About the Depository Clearing Company (DCC)DCC was established on 29 October 1993 under the Federal Commission on Securities Market project sponsored by US AID. It began operations in 1993. DCC provides depository, settlement and some clearing services for equities traded on the RTS Classic Market, RTS Stock Exchange and the MICEX Stock Exchange. It is supervised by the Federal Service for Financial Markets of the Russian Federation. |
DefinitionsPublic Rating. This assessment has been compiled from information provided by third parties and the CSD and has been verified by Thomas Murray analysts during an on-site visit to the CSD. The report has been reviewed by the CSD. The ratings that have been assigned to the risks that are reviewed in the report have been determined by Thomas Murray analysts and approved by the Thomas Murray Rating Board. The ratings have been assigned in accordance with the process outlined in the published methodology as developed by Thomas Murray and on the basis of information confirmed by Thomas Murray analysts during a site visit to the CSD. |
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Publication DateThe publication date represented here is December 2009. This is the date that the assessment report has been reviewed. The report is updated on an on-going basis throughout the year as new information is received and should be read in conjunction with the relevant newsflashes issued since the publication date. Risk Exposure DefinitionsAsset Commitment Risk - The period of time from when control of securities or cash is given up until receipt of countervalue. This risk concerns the time period during which a participant’s assets, either cash or stock, are frozen within the CSD and payment system pending final settlement of the underlying transaction(s). Following settlement, the risk period is extended until the transfer of funds and stock becomes irrevocable. It excludes any periods when assets, cash or stock, are committed to a market participant including brokers, banks and custodians, not caused by CSD processing. Liquidity Risk - The risk that insufficient securities and or funds are available to meet commitments; the obligation will be covered some time later. This is where for certain technical reasons (e.g., stock out on loan, stock in course of registration, turn round of recently deposited stock is not possible) one or both parties to the trade has a shortfall in the amount of funds (credit line) or unencumbered stock available to meet settlement obligations when due. These shortfalls may lead to settlement ‘fails’ but do not normally lead to a default. Counterparty Risk - The risk that a counterparty (i.e., a participant) will not settle its obligations for full value at any time. This is simply the total default of a direct participant of the CSD. This is the event when a participant is unable to meet its financial liability to other participants. This risk only goes as far as direct participants of the CSD and excludes clients of direct participants that default on liabilities to such participants, even if such a default should systemically cause the direct participant to subsequently default. Asset Servicing Risk - The risk that a participant may incur a loss arising from missed or inaccurate information provided by the depository, or from incorrectly executed instructions, in respect of corporate actions and proxy voting. This risk arises when a participant places reliance on the information a depository provides or when the participant instructs the depository to carry out an economic transaction on its behalf. If the depository fails either to provide the information or to carry out the instruction correctly then the participant may suffer a loss for which the depository may not accept liability. The depository may provide these services on a commercial basis, without statutory immunity, or it may provide the service as part of its statutory role, possibly with some level of protection from liability. This risk is likely to become much higher when international securities are included in the service. Financial Risk - The ability of the CSD to operate as a financially viable company. This risk concerns the financial strength of the depository and if its financial resources are sufficient to meet the on-going operation of the organisation. This risk also includes where the CSD may act as central counterparty, or otherwise acts in a Principal capacity. Operational Risk - The risk that deficiencies in information systems or internal controls, human errors or management failures will result in losses. The risk of loss due to breakdowns or weaknesses in internal controls and procedures. Internal factors to be considered in the assessment include ensuring the CSD has formalised procedures established for its main services. The CSD should have identified control objectives and related key controls to ensure operation and proper control of established procedures. Systems and procedures should be tested periodically. There should be external audit processes in place to provide third-party audit evidence of the adequacy of the controls. |
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