ISSUES FOR AMEDA DEPOSITORIES IN MANAGING RISK IN THE CURRENT ENVIRONMENT

1. ISSUES FOR AMEDA DEPOSITORIES IN MANAGING RISK IN THE CURRENT ENVIRONMENT April 2010

2. TM Depository Risk Definitions & Country Categories Risk Comparisons: AMEDA vs Rest of the World with Key Issues Agenda

3. Risk Definitions • Asset Commitment Risk - The period of time from when control of securities or cash is given up until receipt of countervalue. • Liquidity Risk - The risk that insufficient securities and or funds are available to meet commitments; the obligation will be covered some time later. • Counterparty Risk - The risk that a counterparty (i.e., a participant) will not settle its obligations for full value at any time. • 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. • Financial Risk - The ability of the CSD to operate as a financially viable company. • Operational Risk - The risk that deficiencies in information systems or internal controls, human errors or management failures will result in losses.

4. Country Categories African Countries and CSDs • Kenya – CDSC • Mauritius – CDS • Nigeria – CSCS • South Africa – Strate Additional CSDs in Country Average • Kenya – CBK • Mauritius – BOM • West Africa – DCBR • Zambia – LuSE • Zambia – BoZ • AMEDA CSDs Under preparation • Ghana – GSD • UAE - ADX • Middle East Countries and CSDs • Bahrain – CDS • Egypt – MCDR • Israel – TASECH • Jordan – SDC • Kuwait – KCC • Lebanon – Midclear • Morocco – Maroclear • Oman – MDSRC • Palestine – CDS • Qatar – Qatar Exchange • Saudi Arabia – Tadawul • Tunisia – Sticodevam • UAE – DFM • UAE Nasdaq Dubai • Additional CSDs in Country Average • Lebanon – CBL

5. Rating AAA AA+ AA AA- A+ A A- BBB BB B CCC CC C Average Rating - ACSDA Average Rating – Asia Pacific Average Rating – Africa Average Rating – EU/EEA Average Rating – Middle East Average Rating – Eurasia Overall Risk Key Issues • What is the role of market infrastructure, and CSDs in particular in protecting investors against the next Lehmans or Madoff? • What lessons have been learnt from the financial crisis? • If market infrastructure is to take on more responsibility for asset protection, should their business model change? Key Variants: AMEDA vs ROW • Some AMEDA markets are still in the emerging zone and are yet to adopt the more recent standards of best market practice • Overall systems and approach to risk mitigation is less sophisticated than in developed markets • However, most CSDs weathered the global financial storm well both from a revenue and a risk perspective

6. Rating AAA AA+ AA AA- A+ A A- BBB BB B CCC CC C Average Rating - ACSDA Average Rating – Asia Pacific Average Rating – Africa Average Rating – EU/EEA Average Rating – Middle East Average Rating – Eurasia Asset Commitment Risk Key Issues • RTGS (normally with optimisation cycles) is now common in developed market settlement systems • Often combined with overnight and or daytime batch routines to maximise liquidity efficiency • This flexibility gives participants the choice of optimising liquidity or asset availability Key Variants: AMEDA vs ROW • Still a prevalence exists for batch processing rather than real time processing • Most central banks are using RTGS but not linked real time to SSS (8 CSDs have linkage) • Significant blocking or prefunding in contrast to other regions.(10 CSDs block securities on Trade Date)

7. Rating AAA AA+ AA AA- A+ A A- BBB BB B CCC CC C Average Rating - ACSDA Average Rating – Asia Pacific Average Rating – Africa Average Rating – EU/EEA Average Rating – Middle East Average Rating – Eurasia Liquidity Risk Key Issues • Pressure on liquidity has intensified, and margin and collateral requirements may have tightened. Has this been an issue for AMEDA markets? • Widespread bans or restrictions on short selling • Tightening of credit leads to higher funding costs Key Variants: AMEDA vs ROW • No AMEDA markets banned short selling (mainly Europe & AP) • Some AMEDA markets lack developed fails management processes • Some AMEDA markets lack a critical mass of issued securities under custody leaving a significant proportion of the market physical • Some restrictions on credit facilities for foreign investors and the lack of a developed interbank lending market

8. CSDs & the Global Financial Crisis Short Selling Bans By Region

9. Rating AAA AA+ AA AA- A+ A A- BBB BB B CCC CC C Average Rating - ACSDA Average Rating – Asia Pacific Average Rating – Africa Average Rating – EU/EEA Average Rating – Middle East Average Rating – Eurasia Counterparty Risk Key Issues • Counterparty Risk is now back on top of the agenda for institutional investors • How do CSDs that commingle CSD and CCP roles in the same legal entity manage to ring-fence the CCP risk? • How have risk models been adapted since the global financial crisis? Has surveillance been improved? Has stress-testing been developed? Key Variants: AMEDA vs ROW • Few CCPs exist in the region (3) in contrast to Europe. Most AMEDA markets have a guarantee fund in place • Still a lack of true DVP especially for off-market/ client-side settlement in some AMEDA markets • Real-time monitoring of participants’ exposures (and their collateralisation) is uncommon in AMEDA markets • Stress testing is rare.

10. Broker Capital Broker Capital Requirement (in USD)

11. Guarantee Fund vsTurnover Guarantee Fund vs Exchange Average Daily Turnover (2008 figures in USD)

12. Rating AAA AA+ AA AA- A+ A A- BBB BB B CCC CC C Average Rating - ACSDA Average Rating – Asia Pacific Average Rating – Africa Average Rating – EU/EEA Average Rating – Middle East Average Rating – Eurasia Asset Servicing Risk Key Issues • An expanding business sector for CSDs - gaining ground on custodians • Does the removal of commercial banking capital from asset servicing disadvantage market participants and investors? • How have markets ‘de-risked’ corporate actions processing? Key Variants: AMEDA vs ROW • Not all AMEDA members are involved in Asset Servicing to a degree that they are taking on risk exposure • Where AMEDA members are engaged in Asset Servicing, some have relatively low capital backing this business • Few AMEDA members have moved up the value chain enough to threaten to compete with their participants (Only one offers proxy voting)

13. CSD Role in Corporate Actions CSD Participation In Corporate Actions (As at July 2009)

14. Rating AAA AA+ AA AA- A+ A A- BBB BB B CCC CC C Average Rating - ACSDA Average Rating – Asia Pacific Average Rating – Africa Average Rating – EU/EEA Average Rating – Middle East Average Rating – Eurasia Financial Risk Key Issues • Adequacy of financial resources was a key concern during the recent financial crisis • Many CSDs’ profit margins slumped in 2008/9. How have CSDs responded in the short and medium-term? • How have business models adapted to the crisis and what lessons have been learnt? Key Variants: AMEDA vs ROW • Massive diversity in financial resources amongst AMEDA members • AMEDA members’ profit margins not as hard-hit as ECSDA and ACG • Still, few AMEDA members have real diversity in revenue streams • Some independent CSDs in the region susceptible to horizontal or vertical consolidation

15. Capital vsTurnover Capital vs Exchange Average Daily Turnover (2008 figures in USD)

16. Capital vs Profit Capital vs Profit of CSDs (2008 figures in USD)

17. Rating AAA AA+ AA AA- A+ A A- BBB BB B CCC CC C Average Rating - ACSDA Average Rating – Asia Pacific Average Rating – Africa Average Rating – EU/EEA Average Rating – Middle East Average Rating – Eurasia Operational Risk Key Issues • Adequacy of controls and procedures to maximise asset safety more important than ever • Globally, DRP/BCP facilities have been greatly strengthened since 9/11 • Standardised messaging being more widely adopted by market infrastructure (e.g. SWIFT in Link-Up) Key Variants: AMEDA vs ROW • Although ISO certification becoming more prevalent, external operational audits (e.g. SAS70) are still rare amongst AMEDA CSDs • Relatively low level of 15022 messaging adoption limiting cross-border STP. Only 7 CSDs have SWIFT – used mainly for cash settlement with CB. • DRP/BCP strategies in some markets still need further development.