Capital Level Sustainability Benchmarking of CSDs RISK & RECOVERY MANAGEMENT TASKFORCE (RRM) 18 th ACG Annual General Meeting 2014 Xi’an, China

Contents Introduction3 Cross - Training in Iran Activities4 Financial Ratios 6 Conclusion13 Feedback14 2

Introduction of the RRM Taskforce The idea of formation of a new taskforce was initiated by CDCPL, Risk & Recovery Management, was approved in the 17th ACG General Meeting held at Dhaka in November The Risk & Recovery Management Task Force is set up to facilitate ACG Members to share experiences, information and processes involved in potential risks, to analyze them and precautionary steps to curb the risk and its effective recovery methodology. 3

RRM Activity - Cross - Training Seminar RRM Task Force invited Members of TF to present the “Structure of Risk Management” at the 16 th Cross - Training Seminar held in Tehran, Iran. Following Members participated to provide brief overview & adopted practices: CDCPL – Pakistan NSDL – India CDSL – India MSCH&CD – Mongolia CSDI – Iran Main objective of RRM TF Activity was to discuss Risk Management procedures and practices followed by their organization. It was also stressed that CSDs needs to strengthen Risk Management in order to minimize the operational threats and strengthen their business processes. 4

Capital Level Sustainability Benchmarking The prime objectives of this exercise is as follows: To provide insight about the best practices. To help understand the Capital Adequacy of different CSDs. To help to quantify the Capital Sustainability Level benchmarking as per criteria. 5

Calculating Financial Ratios 6 This ratios are calculated by RRM Taskforce for financial analysis. All figures converted to USD before calculating the ratios. Data obtained from CSDs for the year end like for Dec 31, 2013 or June 30, 2014

Operational Revenue / Paid up Capital This ratio tells us how much revenue is earned by a CSD with respect to its paid up capital. Operational revenue is the income derived from sources related to a CSD’s day to day business operations. Paid up Capital is the amount of a company's issued share capital that has been funded by shareholders. Analysis: The ratio for 8 CSDs portrays that:  4 CSDs ratio is below 1;  2 CSDs are standing between 1 - 4;  2 CSDs are showing the ratio above 6. 7

Insurance Cover / Reserves This ratio tells us how much insurance cover is available as compared to the reserves. Insurance Cover is the amount of risk or liability covered for a CSD by way of insurance services. Insurance cover is issued by an insurer in the event of an unforeseen or unwanted occurrences. Reserve is any part of shareholder’s equity except for the basic share capital. These include: Retained Earnings Investments in Shares Investments in Quoted Debentures etc. Analysis: The ratio for 4 CSDs portrays that:  3 CSDs stand below 0.5; and  1 CSD is standing above

Financial Resources / Asset Under Custody The ratio shows the ratio of the financial resources compared to the assets under custody. This gives an idea of the resources of the CSDs that could be used to cover potential losses in comparison to the size of the market. Financial Resource is the money available to a CSD for spending in the form of cash, liquid securities and credit lines. Every CSD needs to secure sufficient financial resources in order to operate efficiently. Assets Under Custody is the value of clients assets held by a CSD at a particular date. Analysis: The ratio for 8 CSDs portrays that:  6 CSDs are standing below 0.1  1 CSD is standing between  1 CSD is showing the ratio above

Asset Under Custody / Reserves The ratio tells us the amount of assets held by the CSD as compared to its reserves. Assets Under Custody is the value of clients assets held by a CSD at a particular date. Reserve is any part of shareholder’s equity except for the basic share capital. These include: Retained Earnings Investments in Shares Investments in Quoted Debentures etc. Analysis: The ratio for 8 CSDs portrays that:  2 CSDs are standing below 10  3 CSDs are standing between 1,000 to 10,000  3 CSDs are standing above 10,

Operational Revenue / Operational Expenses This ratio shows how much revenue is generated in comparison to what costs are borne by a CSD. It is a measure of efficiency. Operational revenue is the income derived from sources related to an organization’s day to day business operations. Operational expense is any expense incurred in carrying out day-to-day activities, which are not directly associated with day to day operations. This includes accounting expenses, license fees, maintenance and repairs, etc. Analysis: The ratio for 8 CSDs portrays that:  4 CSDs are standing below 2  3 CSDs are standing between 2 – 5  1 CSD gives a high figure that is above 5 11

Current Ratio Current ratio compares the current assets over current liabilities. This ratio shows the ability of a company to pay its short term debts with its short term assets Currents assets represent the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business.. Current liabilities represent company's debts or obligations those are due within one year. Current liabilities include short term debt, accounts payable, accrued liabilities and other debts. Analysis: The ratio for 8 CSDs portrays that:  3 CSDs are standing below 3  1 CSD is standing between  2 CSDs are standing between  2 CSDs give a high figure that is above 10 indicating that their assets are less liquid. 12

Conclusion After calculating the above ratios and keeping the external factors in mind, RRM has reached to a conclusion that it cannot assess the threshold or benchmark on Capital Adequacy and Sustainability of CSDs. Exposure of risk varies across the areas where judgment needs to be given. Also, there is no worldwide benchmarking for the CSDs, hence comparison of the data could not be determined. RRM Taskforce is of the view that it is the need of the day that certain Capital Level Benchmarking requirements & risk assessment criteria needs to be established. 13

Feedback Your comments / feedback will be an essence in our collective efforts formulating the said task force as a significant part of the ACG on the following address: 14