Page 1 Thomas Murray © 2008 Thomas Murray Ltd. Page 1 International Capital Market Infrastructure Experience and Practices 5 th International Conference.

Page 1

Thomas Murray

© 2008 Thomas Murray Ltd.Page 1

International Capital Market Infrastructure Experience and Practices

5th International Conference of the Association of Eurasian CSDs (AECSD)

Almaty , Kazakhstan

2 October 2008

Page 2

Thomas Murray


Agenda

Introduction – Thomas Murray

Best Market Practice and Standards

Market trends

The Evolving Roles of CSDs

Corporate Actions

Lehman’s Default Response

AECSD Market Comparisons

Page 3

Thomas Murray


Introduction – Thomas Murray

Page 4

Thomas Murray


Thomas Murray – Who are we?

• Established in 1994• Based in London, U.K, Ontario Canada.• Originally created to assist investment managers and pension funds in selecting global

custodians• Transitioned to working with global custodians in selecting domestic custodians• Produced the first international CSD Guide in 1997• Developed depository risk ratings service in 2000/2001• Developed capital market infrastructure risk ratings 2003• Launched Public CSD Ratings in 2005

• Multinational staff from: Australia, Canada, China, Colombia, France, Ireland, Mauritius, New Zealand, Philippines, Poland, United Kingdom, Ukraine, Uzbekistan,

• Total professional staff: 40+

Introduction

Page 5 © 2006 Thomas Murray Ltd.

Thomas Murray has three principal business lines: Ratings, Data Services and Advisory

ADVISORY SERVICESInvestor Services:•Global custody reviews•Alternative investment supplier reviews•Specialist support

Network Management support for banks:•Due diligence support•Agent bank evaluation and selection

Overseas advisory services for Governments and Exchanges:•Capital market structural advice and workshops

SECURITIES MARKET DATA MANAGEMENT SERVICES•Delivery of capital market and CSD ratings and securities market data•Daily Market Newsflashes•Data management technology

CUSTODIAN BANK, CAPITAL MARKET AND CSD RATINGS•Global and domestic custody ratings •CSD and capital market ratings•Custodian monitoring

GLOBAL CUSTODIAN RATINGRepo r t fo r CUSTODIAN Bank

Copyright © 2007 Thomas Murray Ltd Page 2

WATCHSTABLEOutlook

AAGlobal Custody Rating

OVERALL ASSESSMENT

The Custodian Bank Group regards securities services as a core business and manages it globally under the umbrella of Custodian Bank Securities Services (CBSS). CBSS offers Investor Services (IS) – including global custody, fund administration, performance analysis and custody and clearing services for broker dealers. There has been significant effort to build out the IS management team in London, Luxembourg and Dublin over recent years and to expand the central CBSS management team.

IS offers global custody, fund administration and performance analytics to the UK, Europe and the Middle East for traditional funds from its operational centres in London, Luxembourg and Dublin. The scope of the Thomas Murray global custody rating covers global custody and fund accounting for UK clients. IS demonstrates a strong global custody capability overall, offering all the core global custody services from the London hub, as well as having a very strong fund accounting product provided from the Dublin and Luxembourg hubs.

In 2006, assets under custody increased by 12% to reach USD 1,1120 billion as at the end of the year. Non-UK assets represented 73% of the total asset value at the end of 2006. CBSS continues to invest in and develop its global custody business. In 2006, CBSS extended its market coverage with 9 new markets, and now services 97markets. New products launched included a principal securities lending programme and transition management service. CBSS is planning the launch of a contractual tax service in 2007.

The strategy for IS in 2007 is to develop the business in Asia. The existing Custodian Bank presence in the Asia-Pacific region will be built on and new centres opened. The custody and fund administration businesses of Custodian Bank in the Asia-Pacific region will be integrated into CBSS. Custodian Bank is already a significant participant in the Nordic Region through two subsidiaries there. The North American subsidiary, which currently operates autonomously in the North American market, will be rebranded as CBSS in 2007 and the business will be integrated in 2008.

As part of the ongoing process re-engineering, further offshoring to the centre in The Philippines will be implemented in 2007. A second offshore location in China is being implemented to provide contingency for The Philippines. Further operational outsourcing opportunities, to build on the Dartington (lift out completed in 2005) and BourtonAsset Management (lift-out completed in 2006) will be pursued in 2007. In systems, CBSS has significantly developed the functionality of the Custodian Bank’s web platform (CustNet) in 2006, and will continue to migrate information delivery onto CustNet for all clients in 2007, while further developing the functionality to enable performance analytics to be delivered.

OUTLOOK

Custodian Bank as a global custodian is entering an interesting phase in its development. The strategy of Custodian Bank is to continue to develop its Investor Services business in Asia and Australia.

The business is involved in “bottom slicing“ its clients which is not being well received in the market. Significant work is needed in North America is to integrate and build out the Global custody business.

Slight concerns exist about senior management and the lack of information concerning North American and Australian business development initiatives

GLOBAL CUSTODY RATING

Quarter 3, 2007

Produced: 2nd October, 2007Custodian: Custodian Bank

(Appointed: 1 March 2001)

Cust o d ian Mo n it o r ing


Public Domestic Custody Ratings Report August 2007

Danske Bank, Denmark, Norway, Sweden

Corporate Actions

Danske Bank provides corporate actions based on clients’ settled as opposed to traded positions for Denmark, Norway and Sweden. The Bank will pursue market claims on behalf of the client. However, as with claims relating to income events, the process of identifying instances where claims are required in relation to corporate actions is manual in nature. Staff check trade activity reports manually, with paper records maintained of any claims made and in line with income claims the Bank will originate a counterparty claim within 1-2 days. Following the introduction of the trade date as a settlement matching criteria in 2008 it will allow the Bank to identify claims more easily and therefore it should improve and shorten the claims process. Corporate actions announcements in the Nordic markets are often announced in Danish, Norwegian, Swedish and English. When announcements are only in the local languages Danske Bank will supply clients with an English translation of the key details relating to the event normally within 24 hours from receipt by SWIFT MT564 automatically in real-time. In the event that additional data is necessary the MT568 is also used. Domestic clients will receive a formal advice by letter and the Bank’s system will produce the advice in the appropriate language as required. For mandatory corporate action events Danske Bank will send an unconfirmed pre-advice by SWIFT between 3-5 business days prior to the event date and then follow this up with an official notification.Danske Bank requires client instructions regarding corporate action events 24 hours prior to the market deadline, although these deadlines are under review. The Bank will accept standing instructions for corporate actions but these are recorded manually. The Bank has implemented the SWIFT MT565 instruction message capability and will confirm the receipt of instruction and their status for all instructions received by MT567 on the business day following receipt of instruction. Non-SWIFT clients are able to view all corporate action events relating to their portfolio via Danske Bank’s web-based reporting tool, Markets Online. Markets Online allows clients to identify non-instructed balances and view corporate action details. The Bank provides a monthly consolidated report of all corporate action events which is sent by email.

Corporate Governance

The market position in Denmark regarding proxy voting is that the chairman of a board accepts a power of attorney to vote on behalf of shareholders although with some issuers if voting is against the resolution the chairman will not accept the vote and will require representation by an alternate. Danske Bank has enhanced its proxy voting services over the past 3 years. The Bank will vote on a clients behalf if requested and is able to accept voting instructions for all companies listed on the Copenhagen Stock Exchange and report on the outcome of votes. As securities must be in the beneficial owners name prior to the meeting being call Danske Bank will facilitate segregated accounts in the beneficial owners name or on request reregister the securities into the owners name at the VP in the month prior to the historic date of the AGM to ensure the client has the opportunity to vote. Clients are usually informed of forthcoming AGMs/EGMs 2 - 3 weeks prior to the meeting. Danske Bank requires voting instructions 24 hours prior to the company deadline. The Bank is pro-active and reminds clients in the event of non-receipt of voting instructions.

For voting on securities in Sweden, Danske Bank covers all listed securities traded in the Swedish market. On identification of a meeting Danske Bank will notify the client by mail or fax. Clients who wish to participate and vote at a meeting in Sweden must ensure that the Bank is advised of the intention at least 5 days prior to the meeting. Danske Bank will register the shares in the share register at VPC 5 days prior to the meeting. A shareholder’s power of attorney must be deposited with Danske Bank in order that clients may vote. Danske Bank will arrange for the Proxy (including the voting instructions) signed by Danske Bank to be submitted together with the client’s Power of Attorney to the authorised representative attending the general meeting. The Bank will represent shares at the meeting in person if requested. DanskeBank will notify the custodian client of the outcome of the voting by e-mail. As with Denmark, the Bank requires client’s voting instructions 24 hours prior to the company deadline. In Norway, the Bank will facilitate clients wanting to vote by arranging that any shares are registered in the beneficial owners name in a segregated account between 1-5 days before the meeting and reregister them the day after the meeting. The Bank will vote at meetings if requested and a power of attorney is provided and instructions are normally required 24 hours before the date of the meeting. Results will be advised by email.

Cash/FX Management

Danske Bank does not use dedicated cash accounts for custody activity unless requested by a client. Normally, cash accounts are shared with the payments area, which takes responsibility for them. Staff in the Bank’s cash and custody areas are experienced enough to handle

Sweden: RATING: A+Norway: RATING:Denmark: RATING: AA

CORPORATE GOVERNANCE

Sweden: RATING: AA-Norway: RATING:Denmark: RATING: AA-

CASH/FX MANAGEMENT


CORPORATE ACTIONS




Core ServicesSummarySettlement, Safekeeping, Corporate Actions, Cash Management and Income Collection services are very strong. Corporate Governance services and Taxation services are strong. Securities Lending services are available but currently remain unrated.

Settlements

The Bank can provide both actual and contractual settlement options for the Danish, Norwegian and Swedish markets with the latter option being provided to the domestic Nordic institutional investors. The Bank is able to settle all instruments traded in the Danish, Norwegian and Swedish markets and Danske Bank has a good settlement performance with an average fail rate of 2.75% for the three markets. The Bank has matching procedures in place, and will add additional matching criteria in 2008 which will assist the monitoring process. The Bank’s system is exception based and they will contact the client via SWIFT, immediately any potential failed trades are identified. The Bank pro-actively manages clients trades that do fail. Clients are updated at each status change of the trade automatically by SWIFT message. Danske Bank will seek approval from the client to cancel transactions failing for more than one month. The Bank is able to provide clients with comprehensive reporting on failed trades, detailing fail reason codes. In addition, the Bank can provide a good range of settlement reporting to clients via SWIFT at a frequency that can be determined by the client. The custody system currently in place and due to be implemented for Norway in Q4 will allow for full end to end straight through processing but clients can elect the level of STP they wish the Bank to apply to their transaction instructions. For domestic institutional clients the Bank provides a trade input functionality and trade status reporting via its web-based application, Markets Online. Danske Bank’s average STP rate for all markets is approximately 92% for their Nordic clients and 98% for their international clients. The deadline for the receipt of transaction settlement instructions by Danske Bank’s is 3.00pm on SD-1, 8.00am on SD for Sweden and 4.00pm on SD-1 for Norway, which are competitive.

Safekeeping

Equities and bonds are held in either segregated or omnibus accounts as a client wishes. However, to facilitate representation of shares at company meeting the shares must be registered in the name of the beneficial owner and the Bank will assist clients to achieve this process by using segregated accounts as required. Registration of shares is automatic on settlement and the, registration details are transmitted electronically to the CSD who informs the registrar or issuer. For both Denmark and Sweden, SWIFT holdings statements are sent to clients, per account at a frequency of their choice either daily, weekly or monthly. Similarly, for Norwegian securities the Bank will also offer security statements at a frequency of their choice either daily, weekly or monthly. Upon request, Danske Bank will monitor clients’ investments against local shareholder disclosure levels and assist clients with the disclosure process. The Bank’s holdings are reconciled on a daily basis to the Danish and Swedish CSDs which is through an automated process for Danish and Swedish securities and manually for the Norwegian securities on a twice monthly basis at the present time. Danske Bank plans to implement an automated reconciliation with the Norwegian CSD (VPS) by December 2007. Physical securities held by the bank are reconciled in full on an annual basis and this is supported by random checks throughout the year.

Income Collection

Danske Bank offers clients actual rather than contractual income for the Danish, Norwegian and Swedish markets. Income payments are based on the settled as opposed to traded positions on record date. The Bank will pursue market claims on behalf of the client. However, the process of identifying instances where claims are required is manual in nature in Denmark, Norway and Sweden and staff in Copenhagen monitor the transaction settlement reports manually identifying the claims to be made on counterparties, which are raised within 48 hours with paper records maintained of any claims made. Claims made are generally settled quickly but the Bank will follow up on a weekly basis any claims outstanding. Danske Bank in Denmark and Fokus Bank in Norway acts as paying agent for some companies, and are therefore able to receive information directly and then feeding this into the custody system. Danske Bank uses the stock exchange bulletins as the official sources of information which is compared to a direct electronic feed received from Telekurs which creates an event file on the custody system. An initial unconfirmed SWIFT MT564 advice is issued real-time automatically on receipt of the information for all 3 Nordic markets. Once the data has been validated and authorised which is a manual process the advices are automatically sent out by the system using SWIFT MT564 messages sent overnight and hardcopy advices for domestic non-SWIFT clients. All dividend announcements are advised to clients within 24 hours of the receipt of the market announcement. For Denmark, final payment advices are sent after close of business on record date by MT566. Swedish and Norwegian final payment advices are sent overnight 2 days prior to the value date, also by MT566.Dankse Bank is able to accept standing instructions for the disposal of income.

Sweden: RATING: AA-Norway: RATING:Denmark: RATING: AA

SETTLEMENT


SAFEKEEPING


INCOME COLLECTION




Barclays Bank, Profile

Company Structure and Ownership

Danske Bank is a diversified financial services group and is the second largest bank in the Nordic region in terms of market capitalisation and the largest in terms of total assets. The Bank is listed on the Copenhagen Stock Exchange, with its share capital consisting of approximately698 million shares, all of which carry the same voting rights. The As at the 31st December 2007, the Bank had almost 300k shareholders and only two shareholders are reported holding of at least 5 per cent of the Bank’s share capital, although none has a significant influ ence over the Group’s strategic direction. A.P. Møller and Chastine Mc-Kinney Møller Foundation and companies of the A.P. Møller – Maersk Group, Copenhagen, have a reported holding of more than 22.27% of the Bank's share capital. Fonden Realdania, Copenhagen, has a reported holding of more than 11.88% of the Bank's share capital. The Danske Bank Group itself holds 2.1% of the share capital.

Group Strategy

The Bank’s key strategic objective is to become a major Northern European financial institution developing its various businesses and existing market share in its domestic market and the other Nordic countries while continuing to focus on profitable growth. The Bank’s acquisition of Sampo Bank in Finland in 2007, makes Danske Bank the largest bank in the region and is a clear signal of the Bank’s long term regional intentions. The Bank's management is cautious in its approach and appears determined to maintain control of the group, and there are no known plans for mergers with organisations of a similar size. To date the Bank has been successful in achieving these objectives and it continues to maintain its strategy of divesting non-core and/or unprofitable activities.

In its domestic market, Danske Bank’s core strategic business focus is to continue to develop its brand on a nationwide basis concentrating on expanding its market share in its core commercial banking activities and on diversifying its operations in the personal finance sector, particularly life insurance and pensions, fund management, and private banking. Internationally, the Bank has been successful in leveraging of its systems and has recognised the value of centralising its business operations into a single processing centre in order to realise the common synergies across the Group to increase efficiency reducing the number of systems utilised and thereby realising economies of scale. All operations in Denmark, Sweden, Norway, Germany, UK, Luxembourg, Poland are on the same platform, and during Easter 2008 SampoBank will be migrated to the common platform. The Group has also recognised the value of the brands that it has within the organisation andhas made a strategic decision to maintain the brands in the local market where it is strong. In the Danish market, the BG Bank and DanskeBank brands have become almost synonymous and have been amalgamated during 2007, and will stand alongside Realkredit Danmark as the group’s strong domestic identities. In Norway, the corporate identity of Fokus Bank name is strong and well known and has been retained as has the Sampo Bank brand in Finland which was acquired by the group in the 2006, and several local brands are also used in Sweden.The Bank has also decided to continue to maintain the existing brands for its Irish operations of Northern Bank and National Irish Bank.

Custody Strategy

Danske Bank has two major priorities which are to maintain its dominance in its home domestic market and second to complete the implementation of its regional custody capability and to grow its regional market share. The Bank has an existing Nordic regional custody capability but currently faces some capacity issue in the Norwegian (which should be rectified in November 2007) and Finland. Danske Bank has had direct links to the Nordic CSDs for many years, these have now been upgraded to enable Danske Bank to offer custody services in each country. Danske Bank has centralised the custody processing in its shared Services Centre in Denmark, which is supported by staff in each country to elicit local information and provide specialist knowledge and expertise. Client interaction is managed by client service managers in each country who are able to fully support domestic and international clients investing in the Nordic markets. The Bank’s securities lending business has become the largest in the Danish market but remains smaller than other groups operating from Sweden. The lending team which is part of the Danske Markets business has been increased in size and is covering all the Nordic markets. Danske Bank is confident that its auto-borrowing/lending solution and the opportunistic lending will grow significantly and the Bank has set about actively marketing the product to institutional investors in Denmark. The existing internally developed system is shortly to be enhanced to improve the levels of automation and capacity. The business has commenced to generate increasing revenues for the Bank and it expects that its business volumes are likely to increase significantly as the service further develops over the next twelve months. To support its drive as a regional custody service provider the Bank reorganised its Sales and Client Relationship activities consolidating them into a single team during the early part of 2007. Centrally located in Copenhagen within the custody area, and supported in each country by dedicated local specialists it should provide the Bank with a more coordinated approach and ability to track and manage business opportunities and client relations for international and Nordic investors alike.




Overall SummaryDanske Bank A/S (Danske Bank/”The Bank”) is the parent company of the Danske Bank Group. It is a public company, listed on the Copenhagen Stock Exchange. As a universal bank providing a wide range of products and services to both retail and corporate clients. Danske Bank is sound and has a strong brand identity in Denmark and Sweden and through Fokus Bank in Norway and the recent acquisition of Sampo Bank in Finland can only strengthen the Bank’s position as a strategic regional player in financial services. In terms of custody services the Bank has offered Danish domestic custody since 1985, Swedish domestic custody since 2003 and in Norway through Fokus Bank since 1999.

The Bank is well regarded in its home market as the major domestic custody provider where it has a solid client base. The Bank’s senior management team has been established for several years and states it has the commitment from the management board to build on the existing business drive forward a competitive Nordic custody solution. However, it continues to faces challenges associated with a rapidly evolving regional landscape and increased competition from other regional custody providers. If client buying behaviour changes in the Nordics, the Bank’s existing domestic franchise may be affected. Danske Bank’s response to this has been to develop a regional strategy offering, establishing direct links to all Nordic markets from its operations centre in Copenhagen supported in each local market by resident client facing personnel. Its main processing centre is in Copenhagen and the Bank’s clients are predominantly Danish, for domestic and global custody and European and US banks and brokers for domestic custody. Danske Bank offers a single point of entry via Copenhagen into the Danish, Norwegian and Swedish markets through its Nordic Custody system. Danske Bank demonstrates a very strong core custody offering for the Danish and Swedish markets and strong in Norway but by the end of 2007 the Norwegian custody services should be at the same level as the other 2 markets. In terms of the Bank’s total assets under custody, the assets increasedfrom DKK 2,252.7 billion (USD 384.1 billion) as at June 30, 2006 to DKK 2,504 billion (USD 459.7 billion) as at July 2007. Danske Bank has the largest market share of custody in the Danish securities market. Danske Bank has DKK 626 billion (USD 114.9 billion) under custody on behalf of international clients. For Sweden, Danske Bank has DKK 108.4 billion (USD18.5 billion) under custody for all client types and in Norway, Fokus Bank has around DKK 77 billion (USD 14 billion) in custody for all clients.

Financial risk exposure is low. Danske Bank is the largest banking group in Denmark and remains one of the largest banking groups in the Nordic region, with net assets of DKK 97.4 billion (USD 17.7 billion) as at June 30, 2007. Tier 1 regulatory capital stood at 6.7%, and total regulatory capital at 9.7% as at 30 June 2007. Danske Bank has had strong and improving long-term credit ratings for the last five years. The long term credit ratings are currently AA-from S&P, AA- from Fitch, and Aa1 from Moody’s. Operational risk exposures are low. The Bank’s contingency plans have been independently reviewed by specialist organisations and have been confirmed as being among the most comprehensive. Different aspects of the Bank’s business continuity and disaster recovery plans are tested throughout the year. Asset safety risk is low. Client assets are segregated from the Bank’s own assets and the Bank will take full responsibility for losses with respect to breakdowns in its internal controls and procedures for loss of cash and securities it holds on behalf of clients. Asset servicing risk exposure is low for Denmark and Sweden. Danske Bank provides a good level of asset servicing support for Danish Norwegian and Swedish securities. The Bank accepts responsibility for providing clients with accurate, timely and complete income and corporate action information.The level of client interest and success of Danske Bank’s regional custody solution will only become clearer over time.

OutlookThomas Murray considers the outlook for Danske Bank as stable. The stable outlook is based upon the Bank’s continued commitment to the long term provision of custody services across the Nordic region despite being late in delivering its regional custody solution. It has made substantial investments into the business and is now close to having all the necessary elements in place to successfully compete as a true regional provider. With the integration of the Norwegian leg in November 2007 and the Finish element in March 2008 the Bank will be able to provide a competitive service offering a genuine single point of entry and end to end STP in transaction settlement. The Bank could realise a Positive rating action if it were seen to be recapturing major custody business opportunities previously lost to its regional competitors or that it announced the capture of a major broker dealer or tier one global custodian client to provide custody in multiple Nordic markets which would be seen as a vindication of its regional strategy.

AA-AA-N/AA+AA-A+AA-AA-AA-AAA+A+Sweden:

Norway:

CORE SERVICES

AA-AA-N/AAAA-AA-AA-AA-AAAAAAAA-Denmark:

Risks

Internal Operations

Securities Lending

Taxation

Cash/FX M

anagement


Corporate Actions

Income

Collection

Safekeeping

Settlements

Credentials

Overall Rating

Public DomesticCustody Rating:

DANSKE BANK

OUTLOOK:DOMESTIC CUSTODY RATING:



StableAA-

SWEDEN

StableA+

NORWAY

StableAA-

DENMARK

PROPRIETARY & CONFIDENTIAL Copyright © Thomas Murray Ltd 2002

4.3.15 Will all corporate governance information be supplied to clients in English?2.5.13 What is your cut-off time prior to the meeting by which the client must instruct?

VOTING INSTRUCTION REQUIRED WITHIN 1DAY OF MARKET DEADLINE

MEETING/VOTINGINFORMATION NOT

SUPPLIED INENGLISH

VOTING INSTRUCTION REQUIRED WITHIN7 DAYS OF MARKET DEADLINE

ALL MEETING/VOTINGINFORMATIONSUPPLIED INENGLISH

Representations 4.3 Core Services

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COMMENTSVertical

Horizontal

Bank of TokyoMitsubishi

Fuji Bank Ltd

HSBC

Standard Chartered

Bank

Sumitomo MitsuiBanking Corporation

The bank can provide all information in English except Notices of Agendadue to the time restraints. DD

The bank’s standard deadline to receive voting instructions from the clientis 4 business days prior to the meeting date.

Yes, the bank will supply information in English. DD

The bank’s cut-off time varies between 0-72 hours depending on requestsignificance first, followed by processing time and volume..

The bank's standard reporting items in English on Corporate Governance are:Meeting date/place, meeting type, available holdings, agenda items and instructiondeadline. As the bank has previously mentioned that Corporate Governanceservices are classed as a value added service at additional cost, it is unclear ifthese items are included in the standard custody fee. DDThe bank’s cut-off time is 9:00 (JST).

Yes, the bank will supply information in English within 24 hours from itsreceipt of the information. DD

The bank expects voting instructions to be provided 3 business days priorto the meeting, 5 business days in the case of partial votes.

Yes, the bank will supply information in English. DD

The bank’s cut-off time is 8:00 3 business days prior to the meeting.

BTM

FB

HSBC SCBSMBC

No, the bank states that English is mandatory only for those stocks listedon the Nikkei 225, all other corporate governance instructions would bedistributed in Japanese. DD

The client must instruct the bank 1 week before the actual meeting. DD

Citibank

CITI


OPERATIONAL BENCHMARKING Piccadilly Pension Fund

June 2007 Custodian A


Trade Instructions - Aged Profile from ‘T’

Trade Instruction Ageing Analysis

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STP Rates

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What the chart shows

This chart shows the numbers and percentage volume of trades instructed by number of days after the trade date.

The percentage of trades instructed on trade date should be in line with, or ideally be above the TM Universe.

It would be of concern if a large proportion of trades were instructed later than T+1. In particular, reasons for trades being instructed on T+3 or later should be requested from the custodian.

Chart Description

The green bars show the volume of client trades instructed on trade date (T). The yellow bar shows the volume of client trades instructed on T+1, the grey shows those instructed on T+2 and so on. The red and blue lines shows the percentage of trades instructed on ‘T’ for the client and the TM Universe.


This chart shows the percentage of trades that are received electronically by the custodian and sent to the sub-custodian without any manual intervention.

It should be expected that the majority of trades are received STP, therefore the STP rate should be in line with or ideally be above the TM Universe.

If there is a significant decline in STP levels, the custodian should be requested to provide reasons for the deterioration in performance. Non STP trades may result in an additional charge to the client, and significant increased operational risk. It is important to ensure that STP levels are monitored and that the custodian and investment manager are continuously working towards improving STP levels.

Chart Description

The green bars show the percentage of client trades that achieved STP. The blue line shows the STP rates for the TM Universe. (STP is defined as the bank receiving trade instructions electronically and forwarding, with no manual intervention, to sub custodian/depository.)


Fee Analysis

Custody Fee Review – Cash Payments

Cash Movement Charges

Piccadilly Pension Fund makes approximately 3,400 cash payments per annum. These are charged at $16 resulting in cash fees of approximately $54,000 per annum.

There is room for improvement in the cash movement charges and this would suggest Piccadilly Pension Fund could reasonably expect toachieve savings of around $20,000 per annum.

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Piccadilly PensionFund

Bank A Bank B Bank C Bank D Bank F Bank G


OPERATIONAL BENCHMARKING Piccadilly Pension Fund

June 2007 Custodian A


$85 millionQuarterly Value of Trades Instructed

323Quarterly Volume of Trades Instructed

$2.0 billionClient Assets Under Custody with the

Custodian

USDBase Currency of Client

Custodian ACustodian

Client Details

Trade Instructions


This chart shows the timeliness of trade instructions from the client/investment manager to the custodian.

It would be expected that the percentage of trades instructed on trade date would be at similar levels to the number of trades instructed overall.

If trades instructed on trade date are significantly below the number of trades instructed, the custodian should be requested to provide detailed reasons for the delays, highlighting if applicable the investment managers responsible.

Possible reasons for not instructing trades on trade date could be due to trading activity in exotic markets, or due to time zone differences between the client/investment manager, or manual processes in place at the client/investment manager.

Chart DescriptionThe green bars show the volume of client trades instructed. The blue bar shows the number of trades that were instructed on trade date (T). The red line shows the value of trades instructed

Trade Volume & Value

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Cust o d ian Mo n it o r ing




Corporate Actions

Danske Bank provides corporate actions based on clients’ settled as opposed to traded positions for Denmark, Norway and Sweden. The Bank will pursue market claims on behalf of the client. However, as with claims relating to income events, the process of identifying instances where claims are required in relation to corporate actions is manual in nature. Staff check trade activity reports manually, with paper records maintained of any claims made and in line with income claims the Bank will originate a counterparty claim within 1-2 days. Following the introduction of the trade date as a settlement matching criteria in 2008 it will allow the Bank to identify claims more easily and therefore it should improve and shorten the claims process. Corporate actions announcements in the Nordic markets are often announced in Danish, Norwegian, Swedish and English. When announcements are only in the local languages Danske Bank will supply clients with an English translation of the key details relating to the event normally within 24 hours from receipt by SWIFT MT564 automatically in real-time. In the event that additional data is necessary the MT568 is also used. Domestic clients will receive a formal advice by letter and the Bank’s system will produce the advice in the appropriate language as required. For mandatory corporate action events Danske Bank will send an unconfirmed pre-advice by SWIFT between 3-5 business days prior to the event date and then follow this up with an official notification.Danske Bank requires client instructions regarding corporate action events 24 hours prior to the market deadline, although these deadlines are under review. The Bank will accept standing instructions for corporate actions but these are recorded manually. The Bank has implemented the SWIFT MT565 instruction message capability and will confirm the receipt of instruction and their status for all instructions received by MT567 on the business day following receipt of instruction. Non-SWIFT clients are able to view all corporate action events relating to their portfolio via Danske Bank’s web-based reporting tool, Markets Online. Markets Online allows clients to identify non-instructed balances and view corporate action details. The Bank provides a monthly consolidated report of all corporate action events which is sent by email.


The market position in Denmark regarding proxy voting is that the chairman of a board accepts a power of attorney to vote on behalf of shareholders although with some issuers if voting is against the resolution the chairman will not accept the vote and will require representation by an alternate. Danske Bank has enhanced its proxy voting services over the past 3 years. The Bank will vote on a clients behalf if requested and is able to accept voting instructions for all companies listed on the Copenhagen Stock Exchange and report on the outcome of votes. As securities must be in the beneficial owners name prior to the meeting being call Danske Bank will facilitate segregated accounts in the beneficial owners name or on request reregister the securities into the owners name at the VP in the month prior to the historic date of the AGM to ensure the client has the opportunity to vote. Clients are usually informed of forthcoming AGMs/EGMs 2 - 3 weeks prior to the meeting. Danske Bank requires voting instructions 24 hours prior to the company deadline. The Bank is pro-active and reminds clients in the event of non-receipt of voting instructions.

For voting on securities in Sweden, Danske Bank covers all listed securities traded in the Swedish market. On identification of a meeting Danske Bank will notify the client by mail or fax. Clients who wish to participate and vote at a meeting in Sweden must ensure that the Bank is advised of the intention at least 5 days prior to the meeting. Danske Bank will register the shares in the share register at VPC 5 days prior to the meeting. A shareholder’s power of attorney must be deposited with Danske Bank in order that clients may vote. Danske Bank will arrange for the Proxy (including the voting instructions) signed by Danske Bank to be submitted together with the client’s Power of Attorney to the authorised representative attending the general meeting. The Bank will represent shares at the meeting in person if requested. DanskeBank will notify the custodian client of the outcome of the voting by e-mail. As with Denmark, the Bank requires client’s voting instructions 24 hours prior to the company deadline. In Norway, the Bank will facilitate clients wanting to vote by arranging that any shares are registered in the beneficial owners name in a segregated account between 1-5 days before the meeting and reregister them the day after the meeting. The Bank will vote at meetings if requested and a power of attorney is provided and instructions are normally required 24 hours before the date of the meeting. Results will be advised by email.

Cash/FX Management

Danske Bank does not use dedicated cash accounts for custody activity unless requested by a client. Normally, cash accounts are shared with the payments area, which takes responsibility for them. Staff in the Bank’s cash and custody areas are experienced enough to handle

Sweden: RATING: A+Norway: RATING:Denmark: RATING: AA

CORPORATE GOVERNANCE


CASH/FX MANAGEMENT


CORPORATE ACTIONS




Core ServicesSummarySettlement, Safekeeping, Corporate Actions, Cash Management and Income Collection services are very strong. Corporate Governance services and Taxation services are strong. Securities Lending services are available but currently remain unrated.

Settlements

The Bank can provide both actual and contractual settlement options for the Danish, Norwegian and Swedish markets with the latter option being provided to the domestic Nordic institutional investors. The Bank is able to settle all instruments traded in the Danish, Norwegian and Swedish markets and Danske Bank has a good settlement performance with an average fail rate of 2.75% for the three markets. The Bank has matching procedures in place, and will add additional matching criteria in 2008 which will assist the monitoring process. The Bank’s system is exception based and they will contact the client via SWIFT, immediately any potential failed trades are identified. The Bank pro-actively manages clients trades that do fail. Clients are updated at each status change of the trade automatically by SWIFT message. Danske Bank will seek approval from the client to cancel transactions failing for more than one month. The Bank is able to provide clients with comprehensive reporting on failed trades, detailing fail reason codes. In addition, the Bank can provide a good range of settlement reporting to clients via SWIFT at a frequency that can be determined by the client. The custody system currently in place and due to be implemented for Norway in Q4 will allow for full end to end straight through processing but clients can elect the level of STP they wish the Bank to apply to their transaction instructions. For domestic institutional clients the Bank provides a trade input functionality and trade status reporting via its web-based application, Markets Online. Danske Bank’s average STP rate for all markets is approximately 92% for their Nordic clients and 98% for their international clients. The deadline for the receipt of transaction settlement instructions by Danske Bank’s is 3.00pm on SD-1, 8.00am on SD for Sweden and 4.00pm on SD-1 for Norway, which are competitive.

Safekeeping

Equities and bonds are held in either segregated or omnibus accounts as a client wishes. However, to facilitate representation of shares at company meeting the shares must be registered in the name of the beneficial owner and the Bank will assist clients to achieve this process by using segregated accounts as required. Registration of shares is automatic on settlement and the, registration details are transmitted electronically to the CSD who informs the registrar or issuer. For both Denmark and Sweden, SWIFT holdings statements are sent to clients, per account at a frequency of their choice either daily, weekly or monthly. Similarly, for Norwegian securities the Bank will also offer security statements at a frequency of their choice either daily, weekly or monthly. Upon request, Danske Bank will monitor clients’ investments against local shareholder disclosure levels and assist clients with the disclosure process. The Bank’s holdings are reconciled on a daily basis to the Danish and Swedish CSDs which is through an automated process for Danish and Swedish securities and manually for the Norwegian securities on a twice monthly basis at the present time. Danske Bank plans to implement an automated reconciliation with the Norwegian CSD (VPS) by December 2007. Physical securities held by the bank are reconciled in full on an annual basis and this is supported by random checks throughout the year.

Income Collection

Danske Bank offers clients actual rather than contractual income for the Danish, Norwegian and Swedish markets. Income payments are based on the settled as opposed to traded positions on record date. The Bank will pursue market claims on behalf of the client. However, the process of identifying instances where claims are required is manual in nature in Denmark, Norway and Sweden and staff in Copenhagen monitor the transaction settlement reports manually identifying the claims to be made on counterparties, which are raised within 48 hours with paper records maintained of any claims made. Claims made are generally settled quickly but the Bank will follow up on a weekly basis any claims outstanding. Danske Bank in Denmark and Fokus Bank in Norway acts as paying agent for some companies, and are therefore able to receive information directly and then feeding this into the custody system. Danske Bank uses the stock exchange bulletins as the official sources of information which is compared to a direct electronic feed received from Telekurs which creates an event file on the custody system. An initial unconfirmed SWIFT MT564 advice is issued real-time automatically on receipt of the information for all 3 Nordic markets. Once the data has been validated and authorised which is a manual process the advices are automatically sent out by the system using SWIFT MT564 messages sent overnight and hardcopy advices for domestic non-SWIFT clients. All dividend announcements are advised to clients within 24 hours of the receipt of the market announcement. For Denmark, final payment advices are sent after close of business on record date by MT566. Swedish and Norwegian final payment advices are sent overnight 2 days prior to the value date, also by MT566.Dankse Bank is able to accept standing instructions for the disposal of income.


SETTLEMENT


SAFEKEEPING


INCOME COLLECTION




Barclays Bank, Profile

Company Structure and Ownership

Danske Bank is a diversified financial services group and is the second largest bank in the Nordic region in terms of market capitalisation and the largest in terms of total assets. The Bank is listed on the Copenhagen Stock Exchange, with its share capital consisting of approximately698 million shares, all of which carry the same voting rights. The As at the 31st December 2007, the Bank had almost 300k shareholders and only two shareholders are reported holding of at least 5 per cent of the Bank’s share capital, although none has a significant influ ence over the Group’s strategic direction. A.P. Møller and Chastine Mc-Kinney Møller Foundation and companies of the A.P. Møller – Maersk Group, Copenhagen, have a reported holding of more than 22.27% of the Bank's share capital. Fonden Realdania, Copenhagen, has a reported holding of more than 11.88% of the Bank's share capital. The Danske Bank Group itself holds 2.1% of the share capital.

Group Strategy

The Bank’s key strategic objective is to become a major Northern European financial institution developing its various businesses and existing market share in its domestic market and the other Nordic countries while continuing to focus on profitable growth. The Bank’s acquisition of Sampo Bank in Finland in 2007, makes Danske Bank the largest bank in the region and is a clear signal of the Bank’s long term regional intentions. The Bank's management is cautious in its approach and appears determined to maintain control of the group, and there are no known plans for mergers with organisations of a similar size. To date the Bank has been successful in achieving these objectives and it continues to maintain its strategy of divesting non-core and/or unprofitable activities.

In its domestic market, Danske Bank’s core strategic business focus is to continue to develop its brand on a nationwide basis concentrating on expanding its market share in its core commercial banking activities and on diversifying its operations in the personal finance sector, particularly life insurance and pensions, fund management, and private banking. Internationally, the Bank has been successful in leveraging of its systems and has recognised the value of centralising its business operations into a single processing centre in order to realise the common synergies across the Group to increase efficiency reducing the number of systems utilised and thereby realising economies of scale. All operations in Denmark, Sweden, Norway, Germany, UK, Luxembourg, Poland are on the same platform, and during Easter 2008 SampoBank will be migrated to the common platform. The Group has also recognised the value of the brands that it has within the organisation andhas made a strategic decision to maintain the brands in the local market where it is strong. In the Danish market, the BG Bank and DanskeBank brands have become almost synonymous and have been amalgamated during 2007, and will stand alongside Realkredit Danmark as the group’s strong domestic identities. In Norway, the corporate identity of Fokus Bank name is strong and well known and has been retained as has the Sampo Bank brand in Finland which was acquired by the group in the 2006, and several local brands are also used in Sweden.The Bank has also decided to continue to maintain the existing brands for its Irish operations of Northern Bank and National Irish Bank.

Custody Strategy

Danske Bank has two major priorities which are to maintain its dominance in its home domestic market and second to complete the implementation of its regional custody capability and to grow its regional market share. The Bank has an existing Nordic regional custody capability but currently faces some capacity issue in the Norwegian (which should be rectified in November 2007) and Finland. Danske Bank has had direct links to the Nordic CSDs for many years, these have now been upgraded to enable Danske Bank to offer custody services in each country. Danske Bank has centralised the custody processing in its shared Services Centre in Denmark, which is supported by staff in each country to elicit local information and provide specialist knowledge and expertise. Client interaction is managed by client service managers in each country who are able to fully support domestic and international clients investing in the Nordic markets. The Bank’s securities lending business has become the largest in the Danish market but remains smaller than other groups operating from Sweden. The lending team which is part of the Danske Markets business has been increased in size and is covering all the Nordic markets. Danske Bank is confident that its auto-borrowing/lending solution and the opportunistic lending will grow significantly and the Bank has set about actively marketing the product to institutional investors in Denmark. The existing internally developed system is shortly to be enhanced to improve the levels of automation and capacity. The business has commenced to generate increasing revenues for the Bank and it expects that its business volumes are likely to increase significantly as the service further develops over the next twelve months. To support its drive as a regional custody service provider the Bank reorganised its Sales and Client Relationship activities consolidating them into a single team during the early part of 2007. Centrally located in Copenhagen within the custody area, and supported in each country by dedicated local specialists it should provide the Bank with a more coordinated approach and ability to track and manage business opportunities and client relations for international and Nordic investors alike.




Overall SummaryDanske Bank A/S (Danske Bank/”The Bank”) is the parent company of the Danske Bank Group. It is a public company, listed on the Copenhagen Stock Exchange. As a universal bank providing a wide range of products and services to both retail and corporate clients. Danske Bank is sound and has a strong brand identity in Denmark and Sweden and through Fokus Bank in Norway and the recent acquisition of Sampo Bank in Finland can only strengthen the Bank’s position as a strategic regional player in financial services. In terms of custody services the Bank has offered Danish domestic custody since 1985, Swedish domestic custody since 2003 and in Norway through Fokus Bank since 1999.

The Bank is well regarded in its home market as the major domestic custody provider where it has a solid client base. The Bank’s senior management team has been established for several years and states it has the commitment from the management board to build on the existing business drive forward a competitive Nordic custody solution. However, it continues to faces challenges associated with a rapidly evolving regional landscape and increased competition from other regional custody providers. If client buying behaviour changes in the Nordics, the Bank’s existing domestic franchise may be affected. Danske Bank’s response to this has been to develop a regional strategy offering, establishing direct links to all Nordic markets from its operations centre in Copenhagen supported in each local market by resident client facing personnel. Its main processing centre is in Copenhagen and the Bank’s clients are predominantly Danish, for domestic and global custody and European and US banks and brokers for domestic custody. Danske Bank offers a single point of entry via Copenhagen into the Danish, Norwegian and Swedish markets through its Nordic Custody system. Danske Bank demonstrates a very strong core custody offering for the Danish and Swedish markets and strong in Norway but by the end of 2007 the Norwegian custody services should be at the same level as the other 2 markets. In terms of the Bank’s total assets under custody, the assets increasedfrom DKK 2,252.7 billion (USD 384.1 billion) as at June 30, 2006 to DKK 2,504 billion (USD 459.7 billion) as at July 2007. Danske Bank has the largest market share of custody in the Danish securities market. Danske Bank has DKK 626 billion (USD 114.9 billion) under custody on behalf of international clients. For Sweden, Danske Bank has DKK 108.4 billion (USD18.5 billion) under custody for all client types and in Norway, Fokus Bank has around DKK 77 billion (USD 14 billion) in custody for all clients.

Financial risk exposure is low. Danske Bank is the largest banking group in Denmark and remains one of the largest banking groups in the Nordic region, with net assets of DKK 97.4 billion (USD 17.7 billion) as at June 30, 2007. Tier 1 regulatory capital stood at 6.7%, and total regulatory capital at 9.7% as at 30 June 2007. Danske Bank has had strong and improving long-term credit ratings for the last five years. The long term credit ratings are currently AA-from S&P, AA- from Fitch, and Aa1 from Moody’s. Operational risk exposures are low. The Bank’s contingency plans have been independently reviewed by specialist organisations and have been confirmed as being among the most comprehensive. Different aspects of the Bank’s business continuity and disaster recovery plans are tested throughout the year. Asset safety risk is low. Client assets are segregated from the Bank’s own assets and the Bank will take full responsibility for losses with respect to breakdowns in its internal controls and procedures for loss of cash and securities it holds on behalf of clients. Asset servicing risk exposure is low for Denmark and Sweden. Danske Bank provides a good level of asset servicing support for Danish Norwegian and Swedish securities. The Bank accepts responsibility for providing clients with accurate, timely and complete income and corporate action information.The level of client interest and success of Danske Bank’s regional custody solution will only become clearer over time.

OutlookThomas Murray considers the outlook for Danske Bank as stable. The stable outlook is based upon the Bank’s continued commitment to the long term provision of custody services across the Nordic region despite being late in delivering its regional custody solution. It has made substantial investments into the business and is now close to having all the necessary elements in place to successfully compete as a true regional provider. With the integration of the Norwegian leg in November 2007 and the Finish element in March 2008 the Bank will be able to provide a competitive service offering a genuine single point of entry and end to end STP in transaction settlement. The Bank could realise a Positive rating action if it were seen to be recapturing major custody business opportunities previously lost to its regional competitors or that it announced the capture of a major broker dealer or tier one global custodian client to provide custody in multiple Nordic markets which would be seen as a vindication of its regional strategy.

AA-AA-N/AA+AA-A+AA-AA-AA-AAA+A+Sweden:

Norway:

CORE SERVICES

AA-AA-N/AAAA-AA-AA-AA-AAAAAAAA-Denmark:

Risks

Internal OperationsSecurities Lending

Taxation

Cash/FX Management

Corporate GovernanceCorporate Actions

Income Collection

Safekeeping

Settlements

Credentials

Overall Rating

Public DomesticCustody Rating:

DANSKE BANK




StableAA-

SWEDEN

StableA+

NORWAY

StableAA-

DENMARK

PRIMARY RESEARCH, ANALYSIS AND INFORMATION

Introduction

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Best Market Practice and Standards

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The International Organisation of Securities Commissions (IOSCO) www.iosco.org

BIS/IOSCO "Recommendations for Securities Settlement Systems", Report of the Committee on Payment and Settlement Systems and the Technical Committee of IOSCO November 2001

Some recommendations of particular relevance at this time;

• Recommendation # 1 – Legal Framework Securities settlement systems should have a well founded, clear and transparent legal basis in the relevant jurisdictions.

• Recommendation # 5 – Securities Lending Securities lending and borrowing should be encouraged as a method for expediting the settlement of securities transactions. Barriers that inhibit the practice of lending securities for this purpose should be removed.

• Recommendation # 9 – CSD Risk Controls to Address Participant Default: Deferred net settlement systems should institute risk controls that, at a minimum, ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle. In any system in which a CSD extends credit or arranges securities loans to facilitate settlement, best practice is for the resulting credit exposures to be fully collateralised.

• Recommendation # 13 – Governance: Governance arrangements for CDSs and CCPs should be designed to fulfill public interest requirements and to promote the objectives of owners and users

• Recommendation # 17 – Transparency CSDs and CCPs should provide market participants with sufficient information for them to identify and evaluate accurately the risks and costs associated with use of the CSD or CCP services.

Best Market Practice

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The International Organisation of Securities Commissions (IOSCO) www.iosco.org

BIS/IOSCO "Recommendations for Securities Settlement Systems“.

Other recommendations of particular relevance are;

• Recommendation # 4 – Central Counterparties (CCPs) The benefits and costs of a CCP should be carefully evaluated. Where such a mechanism is introduced, the CCP should rigorously control the risks it assumes.

• Recommendation # 10 – Cash Settlement Assets Assets used to settle the cash leg of securities transactions between CSD members should carry little or no credit or liquidity risk. If central bank money is not used, steps must be taken to protect CSD members from potential losses and liquidity pressures arising from the failure of a settlement bank.

• Recommendation # 11 – Operational Reliability: Sources of operational risk arising in the clearing and settlement process should be identified and minimised through the development of appropriate systems, controls and procedures. Systems should be reliable and secure and have adequate scaleable capacity, Contingency plans and backup facilities should be established to allow for timely recovery of operations and completion of the settlement process.

• Recommendation # 16 – Communications Procedures and Standards Securities settlement systems should use or accommodate the relevant international procedures and standards in order to facilitate efficient settlement of cross border transactions.


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Group of Thirty (G30) www.group30.org

• The report promotes “best practice” for the most developed markets in the world. • There is considerable overlap with the IOSCO recommendations, however the material should certainly

be heeded by any market contemplating infrastructure or process changes.

Association of National Numbering Agencies (ANNA) www.anna-web.com

• International securities identification numbering system (ISIN).• Recognised as the ISO standard for securities numbering ISO 6166.

The Giovannini Group ec.europa.eu/economy_finance/giovannini_en.htm

• The Giovannini Group is a group of financial-market participants, which advises the European Commission on financial market issues.

• In its 2003 report, the Group, as advisor to the European Commission, published a report identifying 15 barriers to efficient EU cross-border clearing and settlement.

FIX Protocol Organisation www.fixprotocol.org

• Their goal is to improve the global trading process by defining, managing, and promoting an open protocol for real-time, electronic communication between industry participants, while complementing industry standards.


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Securities and Exchange Commission (SEC) 17f-7 Rule

• Rule 17f-7 sets forth the circumstances under which U.S. investment companies may hold securities through the facilities of non-U.S. securities depositories.

• A principal requirement of Rule 17f-7 is that an investment company must receive from its Primary Custodian an analysis of the custody risks associated with maintaining assets with each depository it uses.

Association of Global Custodians AGC www.theagc.com

• The AGC is not a standards setting body as such, but its members have the ability to disqualify a CSD as an eligible custody location based upon a failure of the CSD to respond to its questionnaire or a determination that the CSD presents an unacceptable level of risk.

Society for Worldwide Interbank Financial Telecommunication (SWIFT) www.swift.com

• SWIFT acts as the secretariat for ISO for securities messaging.• ISO/SWIFT messaging standards should be referenced prior to the adoption of and messaging

standards for domestic or cross border activity.


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Market Trends

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Market Trends

• Pressure on profitability of exchanges

• Exchanges downstream - vertical silos (e.g Spain, Germany, Norway)

• Horizontal consolidations (e.g OMX Group, Euroclear)

• Historical transition from exchange/broker owned, to market owned to public ownership (e.g. Australia, Hong Kong)

• Transfer from market utility to commercial enterprises

• Involvement of central banks in CSD business (e.g Costa Rica, NZ, T2S)

• Expanding added value services (e.g issuers service, derivatives, funds processing)

• Renewed focus on risk mitigation measures following Financial crisis and Lehman’s Default

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The Evolving Role of CSDs

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Traditional Roles of CSDs

The Provision of domestic custody and support services for equity and debt issues.

Offering settlement services to regulated domestic financial intermediaries.

Processing income distributions in support of issues on deposit .

Role of CSDs

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The Evolving Roles of CSD

Value Added Services

With increasing frequency CSDs are providing Clearing and Trade Matching services to their markets.

CSDs are providing a range of Outsourcing services including back office services, corporate actions processing as well as systems management and operations. Among CSDs providing these services are HEX (Finland), CDS (Canada). TSD (Thailand)

CSDs are providing an expanded range of Information Services including; corporate events, proxy services, reference data and even pricing information, e.g. VP (Denmark), CDS (Canada), DTCC (USA)

Role of CSDs

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A number of CSDs around the world are providing Securities Lending services ranging from lending securities as principle, to matching up borrowers and lenders, to the provision of transaction and loan management services, e.g. KSD (Korea)

A great number of CSDs provide International Links to other markets, providing services that extend from basic custody facilities to DVP settlement services. Increasingly CSDs are moving to provide expanded Corporate Actions Processing for their markets, thus allowing their participants to capitalise on economy of scale opportunities and focus on more commercially oriented activities. (Many CSDs around the world) Responsibility for Securities Numbering has increasingly come under the purview of CSDs. A significant number of the recognised national numbering agencies are now CSDs. Among the CSDs performing this function are DECEVAL (Colombia), CDS (Canada), Indeval (Mexico), NDC (Russia).

CSDs are now providing Mutual Fund Services including account maintenance and transaction processing. VPS (Norway)

With dematerialisation and high rates of immobilisation at CSDs the provision of Registry Services are becoming common place. VPS (Norway), VPC (Sweden), MCDR (Egypt)

Value Added Services

Role of CSDs

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Traditional Services Value Added Services

Bermuda, Bolivia, Costa Rica, Ecuador, El Salvador, Guatemala, Jamaica, Panama, T&T, Uruguay, Venezuela

Chile, Colombia, Peru, Egypt, Russia, China,

Canada, UK, Japan, Singapore, Sweden, Finland, Denmark, Malaysia, South Africa

USA, Norway, Euroclear, Clearstream

France, Germany, Italy, Poland, Hong Kong, Australia, Thailand

Range of services

Role of CSDs

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SettlementSettlementSafekeepingSafekeeping MatchingMatching

Clearing-DVP, netting


SafekeepingSafekeeping MatchingMatching SettlementSettlement RegistrationRegistration InvestorServicesInvestorServices

DerivativesProcessingDerivativesProcessing

FundServices

FundServices

DCV ChileDCV Chile

VPS NorwayVPS Norway



RegistrationRegistration Tax ServicesTax Services InvestorServicesInvestorServices

DerivativesProcessingDerivativesProcessing

Stock Lending

Stock Lending

StockLending

StockLending

IssuerServicesIssuer

Services

Issuer ServicesIssuer

ServicesTax

ServicesTax

Services

DCV RegistrosDCV Registros

ProvidedNot Provided

Traditional Value Added

ICSD Services

ICSD Services

RefinancingRefinancingNOS

ICSD Services

ICSD Services

RefinancingRefinancingFundServices

FundServices

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Role of CSDs

Securities Lending and Borrowing

0

10

20

30

40

50

60

70

80

90

100

Only operates in Market- IRSU( reverse reposonly)

Only operates on CSD None possible or undertaken- A(NDC), GCSD,K(CSD), R(DCC,NDC,VTB), SSD,SCDS

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Utility vs. Commercial Motivations

• Pursuing commercial activities can have the effect of causing staff to think more innovatively about the core business.

• Increasingly CSDs are augmenting their core businesses and revenue sources with new “non-traditional” revenue streams.

• In 2006, CDS in Canada (a not for profit CSD) realised in excess of 35% of its total revenue (in excess of CAD 34 Million) from non-core/non-traditional (clearing, settlement and depository) activities.

Role of CSDs

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Corporate Actions

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• Mandatory Corporate Actions – don’t require an instruction from participant

• Voluntary Corporate Actions – requires participant to provide an instruction for each corporate action

Corporate Actions

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Corporate Actions

Corporate Actions

4

32

101

0

20

40

60

80

100

120

Equities - GCSD Debt - VTB, SSD Equities/Debt -NDC, K (CSD), R (DCC,NDC),SCDS, IRSU

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Asset Servicing Risk

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.

Corporate Actions

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Asset Servicing Risk Criteria

• Receipt of Corporate Action information.– Requires a reliable ‘official’ source– Multiple information sources allow for verification/’data scrubbing’

• Distribution of Corporate Action information– Requires timely, accurate, efficient and comprehensive event notification

• Receipt of Corporate Action Instructions– Requires pro-active client servicing– Multiple and efficient electronic means of receiving information– Straight Through Processing

• Processing of Corporate Action Instructions– Requires timely, accurate and comprehensive event processing

• Proxy Voting

Corporate Actions

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Asset Servicing Risk Criteria

• Clear statement of liability– Investors need to be aware of the liability assumed by CSD and custodian in event of an

error– Manual processing of asset servicing operations more common – Likelihood of error is higher for Asset servicing – Potential losses can be high

• Managing corporate actions effectively is perhaps the biggest potential risk exposure

Corporate Actions

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Rating

AAA

AA+

AA

AA-

A+

A

A-

BBB

BB

B

CCC

CC

C

CSD

AS1

AS2

AS3

AS4

AS3

AS4

AS1

AS2Comparative Chart

Average Americas - TM Proprietary Rating

Average Eastern Europe – TM

Proprietary

Avge West Euro – TM Proprietary

Avge Asia Pac – TM Proprietary

Average Africa – TM Proprietary

Avge Mid East – TM Proprietary

Asset ServiceRatingCSD

Info Collection

Info Dissemination

Receipt of Instructions

Execution of Instructions

Proxy Voting

CriticalImportantLess important

AS5AS5

Asset Service Criteria

Asset Servicing Risk

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Lehman’s Default Response

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Lehman Default

• Initial response – suspension by exchanges and clearing houses– Typically took one to two days for action

• Follow-up Response – settlement of outstanding obligations or default– Action ranged from settlement of transactions to widespread default– Guarantee Funds utilised in many markets– Reporting by markets was inadequate => confusion

• Regulator Concern – action on short selling– Action ranged from identifying short sales (Greece) to banning short selling of all

securities (Australia)– New disclosure requirements introduced

• Issues– Information on situation slow, incomplete and sporadic– Use of Guarantee Fund not always disclosed– Position of unmatched OTC trades not disclosed– Tightening in fails arrangements

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Lehman Default

• Monday 15 September 5.00am GMT– Parent Company of Lehman’s filed for bankruptcy

• Tuesday 16 September, am GMT– Markets started managing situation by suspending membership and ceasing to settle transactions

related to Lehmans– Use of Guarantee Funds was indicated (Japan)– Mainly Asian markets providing advice

• Tuesday 16 September, pm GMT– European markets started taking action

• Wednesday 17 September, am GMT– Markets continue to clarify default arrangements– Trading in Russia (RTS and MICEX) suspended by order of FFMS

• Wednesday 17 September, pm GMT– Some European and Nordic markets releasing information for first time– South Africa and Australia released information on default for first time

Timeline of Actions

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Lehman Default

• Thursday 18 September, am GMT– Italy’s CCP (CC&G) advised of delays in settlement processing of some previous day

transactions– UAE advises of suspension of participation of Lehmans

• Thursday 18 September, pm GMT– France, Germany and the UK advise of suspension of Lehman operations for first time

• Friday 19 September, am GMT– FSA took action to stop short selling in publicly quoted finance company shares– Irish regulator and US SEC also banned short selling in financial company shares– Russia’s FFMS allowed trading to resume on MICEX and RTS– Bank of Spain temporarily suspends Lehman activities in debt market

• Friday 19 September, pm GMT– DTC of USA announces increase in its fails management resources from US$2.5 bn to

US$3.2 bn

Timeline of Actions

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Lehman Default

• Monday 22 September, am GMT– China Securities Regulatory Commission reminds QFIIs of reporting responsibilities – Belgium, France Netherlands ban naked short selling of financial shares for 3 months– Australia bans short selling of all company shares for at least 30 days

• Monday 22 September, pm GMT– Canadian regulator bans short selling for 2 weeks on a few financial shares

• Tuesday 23 September, am GMT– SGX enhances disclosure of naked shorts and increases penalties on buy-ins

• Tuesday 23 September, pm GMT– FFMS in Russia suspends naked short selling– Portugal requires daily disclosure on short selling

• Wednesday 24 September, am GMT– FSS of Korea discovers violations of naked short selling, takes action to increase collateral

requirements for SLB transactions and enhances disclosure requirements, introduces ‘cooling period’ in which short sales not allowed

Timeline of Actions

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Lehman Default

• Wednesday 24 September, pm GMT– Luxembourg regulator bans short selling of shares issued by finance companies

• Thursday 25 September– LCH Clearnet advises that the risk exposure as a result of Lehman’s default had fallen

by over 90% and that the remaining exposure would be covered by use of margins rather than access to the Guarantee Fund.

– Eurex (Germany) advised that exposure of Lehman trades covered by collateral and guarantee fund was not used.

– Issues relating to OTC trades unsettled in Crest have yet to be finalised with the administrators

• Friday 26 September– SGX continues to provide clarity around changes to its penalties for failed trades

Timeline of Actions

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Lehman Default

• Regulator Response– Many markets around the world have made significant changes to rules regarding short

selling in recent weeks. In particular, many regulators have moved to restrict or ban “naked” short selling ( prohibited from outset in some markets ) or to completely

suspend short selling for certain stocks.

• CSD Response– Identify the problem– Deal with issue (Suspend membership, settle matched transactions, close-out defaults)– Recover (Replenish guarantee funds, boost guarantee funds – i.e.DTC, enhance

penalty arrangements for failed trades, examine ability to identify naked short selling)– Provide Market Information (Keep the market and public informed)

Issues

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Lehman Default

• On-exchange trades and trades covered by CCP arrangements have generally been settled adequately

• Off exchange trades have been left to the market to settle – arrangements are more difficult and invariably involve the administrator - PWC

• Questions Remain– Has the infrastructure been effective at managing a major default?– How would the market have managed with a major bank default?– Are the measures to manage a default adequate?– Are the resources available for a default appropriate?– Should more be done to manage the settlement and provide protection for OTC trades?– Are the CSD communication channels appropriate in times of crisis?

Observations

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short sell ing permitted in the market short sell ing not permitted in the market-A(NDC),G(CSD),K(CSD),R(DCC,NDC,VTB),IRSU,SSD,SCDS

Short Selling

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Thomas Murray Capital Markets Infrastructure Ratings

Comparative Chart

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Average East Europe

Avge West Europe

Avge Asia Pacific

Avge Mid East Africa

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Rating

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OverallRating ACR LR CR ASR FR OR

Average Rating - Eastern Europe TM Rating of 7 CSDs in AECSDAverage Rating - Highest Rated Regions

Rating


Average Rating - AECSDGap between top and bottom rated AECSD country

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Average Rating - AECSD Highest Public Rated Depository

Average Rating - Highest Rated Region/s

Rating Gap Analysis - MCDR

MCDR Public Rating


Rating Gap between MCDR and Highest Rated CSD

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Average Rating - AECSD Highest Public Rated Depository

Average Rating - Highest Rated Region/s

Rating Gap Analysis – Best Practice

Highest Rating in AECSD


Rating Gap between Top AECSD Rating and Highest Rated CSD

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Conclusions

• Range of service offerings provided by Eurasian CSDs is more closely represented by the traditional CSDs

• Eurasian CSDs portray wide disparities in their risk ratings generally reflecting their stage in market and infrastructure development

• Greater need for awareness of best practice standards amongst Eurasian CSDs

Page 1 Thomas Murray © 2008 Thomas Murray Ltd. Page 1 International Capital Market Infrastructure Experience and Practices 5 th International Conference.

Documents

days of market deadline

bank states

meeting voting information

information introduction

standards market trends

csd ratings global

banks cutoff time

data services