G-30 Self Assessment CDS “A Case Study” Bruce Butterill Vice-President, Product Management The...

G-30 Self AssessmentG-30 Self Assessment CDS “A Case Study”CDS “A Case Study”

Bruce ButterillBruce ButterillVice-President, Product ManagementVice-President, Product Management

The Canadian Depository for Securities LimitedThe Canadian Depository for Securities LimitedNovember, 2003November, 2003




2November 2003 - p. 2

On The Agenda….On The Agenda….On The Agenda….On The Agenda….

Introduction Why Self-Assess? A Self-Assessment Program Stage 1: Original Content Review Stage 2: Content Organization & Document Map Stage 3: Abridged Content Stage 4: Content Summaries Stage 5: Assessment Metrics Stage 6: Self Assessment Framework Issues


IntroductionIntroductionIntroductionIntroduction

Various organizations are “competing” to set a standard for securities markets to pursue:

Group of Thirty CPSS/IOSCO Recommendations

CPSS/IOSCO Assessment Guide ISSA

We are left with the reality of having to interpret the objectives, rationalize the content, interpret the priorities, assess our status and plan for global harmony


Introduction Introduction (cont’d.)(cont’d.)Introduction Introduction (cont’d.)(cont’d.)

In our opinion, the Group of Thirty Report is not necessarily the authoritative reference source:

Regulators and central banks may find the CPSS/IOSCO report more relevant

There is no clear consensus of support for the G-30 Report in total

But, it cannot be ignored. Instead, we must consider all of the intellectual inputs as we go through a self-assessment process


Why Self-Assess?Why Self-Assess?Why Self-Assess?Why Self-Assess?

We need to be able to respond authoritatively to various stakeholders including media agencies, regulators, industry stakeholders and other interested parties

Acquired knowledge contributes to the body of intellectual property being compiled by other industry organizations

We need a baseline to establish planning priorities


Why Self-Assess?Why Self-Assess?(cont’d.)(cont’d.)

Why Self-Assess?Why Self-Assess?(cont’d.)(cont’d.)

Our stakeholders expect us to pursue global best practices

We must understand the issues and gaps in order to develop the business case for change


A Self-Assessment ProgramA Self-Assessment ProgramA Self-Assessment ProgramA Self-Assessment Program CDS embarked on a self-assessment path early in 2003 In high level terms, here is how we proceeded:

G-30

CPSS/IOSCO ASSESSMENT

CPSS/IOSCO ISSA

STAGE 1: ORIGINAL CONTENT REVIEW

STAGE 2: CONTENT ORGANIZATION

STAGE 3: ABRIDGED CONTENT

STAGE 4: CONTENT SUMMARIES

STAGE 5: ASSESSMENT METRICS

STAGE 6: ASSESSMENT, GAP ANALYSIS, ACTION PLAN

ORIGINAL REPORTS


Stage 1: Original Content Stage 1: Original Content ReviewReview

Stage 1: Original Content Stage 1: Original Content ReviewReview

Comprehensive review of original reports Review all background materials Interviews with key stakeholders


Stage 1: Original Content Stage 1: Original Content IssuesIssues

Stage 1: Original Content Stage 1: Original Content IssuesIssues

G-30 document is lengthy and complex– It tends to “ramble” across issues– Is very prescriptive

CPSS/IOSCO document is well-organized– More practical in nature– Relatively brief– Contains assessment criteria

ISSA report is very brief– Is a sub-set of others

10November 2003 - p. 10

Stage 2: Content OrganizationStage 2: Content OrganizationStage 2: Content OrganizationStage 2: Content Organization The key is to organize the information around key processes and industry infrastructure Key report content can be “mapped” to organized content structure Develop a ‘process chain’ which can be used and recognized as a logical grouping of objectives/recommendations We chose the following process map:

CCP/ Netting

Settlement Securities Lending

Business Recovery

Legal & Regulatory

Governance & Access

Matching

Demat./ Immob.

Asset Servicing

Transparency & Reporting

Corporate Actions

Settlement

Payment

Tax

Foreign Ownership

Map Abridged Content

11November 2003 - p. 11

Stage 2: The Document MapStage 2: The Document MapStage 2: The Document MapStage 2: The Document Map

Topics/headings selected to accommodate global source material categories

Process chain reflects logical data/information/processing flows

ISSA

No material

ISSA

R 1,6

ISSA

R 7,8

ISSA

R 2

ISSA

R 4

ISSA

R 3

ISSA

R 4

ISSA

R 3,5

ISSA

R 8

CPSS/IOSCO

R 16,17

CPSS/IOSCO

R 13,14

CPSS/IOSCO

R 1,18

CPSS/IOSCO

R 9,11

CPSS/IOSCO

R 12

CPSS/IOSCO

R 6,12

CPSS/IOSCO

R 5

CPSS/IOSCO

R 2,3,7,8,10

CPSS/IOSCO

R 4

G-30

No material

G-30

R 10,17,18,19

G-30

R 9,14,15

G-30

R 12,13

G-30

R 8

G-30

R 1,2,3

G-30

R 7

G-30

R 2,3,4,5,11

G-30

R 6,16

CORPORATE ACTIONS, TAX, FOREIGN OWNERSHIP

MATCHING, SETTLEMENT, PAYMENT

SUB-CATEGORIESSUB-CATEGORIES

TRANSPARENCY & REPORTING

GOVERNANCE & ACCESS

LEGAL & REG.

BUSINESS RECOVERY

ASSET SERVICING

DEMAT./ IMMOB.

SECURITIES LENDING

SETT.CCP/NETTING

PROCESS CHAIN DIMENSIONSPROCESS CHAIN DIMENSIONS

12November 2003 - p. 12

Stage 3: Abridged ContentStage 3: Abridged ContentStage 3: Abridged ContentStage 3: Abridged Content

Edit source documents and map to “process chain”

Use original content, but re-organized Filter out “filler” content in original reports Edit source materials and formats for easier

reference and generalized, ongoing use Define the format for status reporting and

action planned reporting Define the basic framework for content

creation which can be used in whatever distribution/communication format desired

13November 2003 - p. 13

Stage 3: Abridged ContentStage 3: Abridged Content(cont’d.)(cont’d.)

Stage 3: Abridged ContentStage 3: Abridged Content(cont’d.)(cont’d.)

Compile all materials into a logical architecture

Define the administrative management for the completion and maintenance of the knowledge base

Recommend content population alternatives and tasks

14November 2003 - p. 14

Abridged ContentAbridged ContentExampleExample

Abridged ContentAbridged ContentExampleExample

SOURCE REFERENCE MATERIAL

GROUP OF THIRTY

G-30 RECOMMENDATION 1

ELIMINATE PAPER AND AUTOMATE COMMUNICATION, DATA CAPTURE, ANDENRICHMENT

Infrastructure providers and relevant public authorities should work with issuersand securities industry participants to eliminate the issuance, use, transfer, andretention of paper securities certificates without delay.

All market participants should seek to automate elements of the process, such asconfirmations and trade allocations, that introduce other forms of paper into thesecurities processing transaction flow as technology safely allows.

All market participants should use electronic communication to transmitinformation for all instruments and transaction types. They should also identifyopportunities to streamline processes by avoiding duplicative recording of data andmanual addition of supplementary information at each stage of the value chain.

Such action should be subject to proper investor protection over assets held inelectronic form. There is no greater assurance of ownership or control frommaintaining paper, and it should be possible to overcome the contrary perceptionsof some retail investors through education and by ensuring a sound legal basis forall paperless securities in each jurisdiction. Dematerialization of securitiescertificates—converting all paper ownership records into electronic format is thepreferred solution. However, in practice immobilization—where ownership isrecorded through electronic book entry and the underlying paper certificate is keptin a central security depository—realizes many of the benefits of dematerialization.

Therefore, if immobilization can be achieved more quickly and efficiently thandematerialization, it is an acceptable step on the way to full dematerialization.

All market participants should seek to automate elements of the process thatintroduce other forms of paper, such as confirmations and trade allocations, intothe securities processing transaction flow as available technology safely allows,from issuance through to asset servicing.

Means of electronic capture, storage, and transmission of documents should be used totheir fullest extent to avoid the need for physical documents to serve as evidence oftransactional activities and asset ownership

PROCESS CATEGORY DEMATERIALIZATION/IMMOBILIZATION

SUB CATEGORY

CDS OWNER

15November 2003 - p. 15

Stage 4: Content SummariesStage 4: Content SummariesStage 4: Content SummariesStage 4: Content Summaries

The organized content is now summarized into 4 categories:– Operational implications– Risk management implications– Legal & regulatory implications– Cross-border implications

The result is an abbreviated set of objectives and direction

16November 2003 - p. 16

Content SummaryContent SummaryExampleExample

Content SummaryContent SummaryExampleExample

SOURCE MATERIAL SUMMARY

PROCESS CATEGORY DEMATERIALIZATION/IMMOBILIZATIONSUB CATEGORYCDS OWNER Bruce Butterill

OPERATIONAL IMPLICATIONS Dematerialization is the elimination of physical paper used for issuance, use, transfer, and

retention of securities certificates. It includes:o Prospectus, selling memoranda, corporate actions documentation, subscription

agreementso Confirmations and contractso Beneficial ownership declarations, tax authority certifications and omnibus

certifications

Standards are required for all of the above.

Additionally, the elimination of paper should include other forms of paper introduced into theprocess chain, such as confirmations, allocations, trading, settlement, transfer, assetservicing (corporate actions, rights and decisions, etc.) related to asset ownership.

Immobilization achieves many of the benefits of dematerialization providing that major tradingparticipants use the book-entry settlement and custody facilities.

Client assets must be segregated to protect against claims of third parties.

Participant reconciliation must be regular and audited regularly.

Solutions must be cost-effective.

Dematerialization/immobilization facilitates securities lending

G-30 regards partial immobilization, where participants can withdraw physical certificates asunsafe and inefficient.

The use of electronic communication, based on standards is a corollary. Standards includeISO 15022 and 15022 (XML) for numbering, counterparty identification and transaction datareferences. ISO 9362 (counterparty identification) is also required.

All messaging must be network agnostic, but conform to standards.

A national authority should be set up to defines and enforce use of standards.

All participants must harmonize internal data standards to global standards.

17November 2003 - p. 17

Stage 5: Assessment Metrics Stage 5: Assessment Metrics Stage 5: Assessment Metrics Stage 5: Assessment Metrics

The starting point is the CPSS/IOSCO Assessment Guide– This must be addressed at a minimum, as

regulators will use this template Additional metrics were drawn from:

– Internal resources– Global surveys (e.g. AGC)– Thomas Murray Review– National stakeholder groups

Metrics were grouped against source material summaries

18November 2003 - p. 18

Assessment MetricsAssessment MetricsExampleExample

Assessment MetricsAssessment MetricsExampleExample

ASSESSMENT CATEGORY: DE-MATERIALIZATION SUB-CATEGORY: N/A

GOAL KEY METRICSComplete de-materialization of allsecurities issues

% of securities dematerialized Describe eligible securities Are securities fungible? Can de-materialized securities be re-

certificated? Is a nominee registration used?

Complete immobilization of all securities % of securities immobilized Describe eligible securities Are securities fungible? Can immobilized securities be re-

certificated? Does the CSD use third party vaulting

facilities? Is a nominee registration used?

19November 2003 - p. 19

Stage 6: Self AssessmentStage 6: Self AssessmentStage 6: Self AssessmentStage 6: Self Assessment

Objective assessment of current status vs. objectives using key metrics

The temptation is to be optimistic:– Desired state vs. actual state– Assumed that planned initiatives are in

place– Tendency to de-emphasize importance of

some issues where non-compliance exists Needs “clinical” evaluation with external input

20November 2003 - p. 20

Stage 6: Self AssessmentStage 6: Self Assessment(cont’d.)(cont’d.)

Stage 6: Self AssessmentStage 6: Self Assessment(cont’d.)(cont’d.)

Engage internal expert resources– Process is instructive

This is not a negative exercise Consistent style is important, as results will

be transparent

21November 2003 - p. 21

Framework Framework Framework Framework

Hyper-linked references from index to:– Edited source material– Status reports– Action planned reports

..\CDS CD 2\_REPORT INDEX\REPORT INDEX.doc

22November 2003 - p. 22

Issues Issues Issues Issues

Resource availability/constraints• Internal & external

Deadlines• Imposed by regulators• Expected by organizations such as G-30,

CPSS/IOSCO Consistency of content

• Multiple authors will require disciplined editing & formatting

23November 2003 - p. 23

Issues Issues (cont’d.)(cont’d.) Issues Issues (cont’d.)(cont’d.)

Change management• Ongoing updates

Administration • Technical requirements & resource

availability

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