Post on 12-Apr-2017
Custody Risk Management:The Role of the JCSD in Retail Repo Reform
Robin Andrew Levy
General Manager
Jamaica Central Securities Depository
A Presentation to the
Global Association of Risk Professionals
11 May 2016
2
The views expressed in the following material are the
author’s and do not necessarily represent the views of
the Global Association of Risk Professionals (GARP),
its Membership or its Management.
3 | © 2014 Global Association of Risk Professionals. All rights reserved.
Jamaica’s Retail Repurchase Market - c. 2012
Distinct from Outright Repos
• Dealer uses Investor funds to buy securities. Sells securities to pay RR Investors out.
• Security Dealer retails ownership and control of both cash and securities.
• Withholding tax implications make transfer of securities to Investors on “Open Leg” difficult.
• Client effectively issued a certificate of participation.
• Dealer retains option to swap out comparable securities, often shorter-term than RR.
• Dealer makes a margin on Interest Rate.
• Many RR Investors treat RR like a savings or call deposit account.
Large and Active Market
• Over J$300 billion in local and global securities.
• Hundreds of transactions of hundreds of millions of J$ daily.
• Dominated by GOJ and BOJ securities.
• Held in custody at BOJ JamClear CSD and with Overseas Custodian Bank.
• Significant line of business for several Security Dealers.
• No losses for decades.
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A3
Old RR Model
INVESTORS
Dealer AFront Office
New Funds/ Requests/
Instructions
Receipt, RR contract, Investment proceeds
A1
A4
Dealer ABack
Office
JamClearCSD
Information
Reconciliation
FSC
A5
Reports
Dealer B
Buy/Sell Securities
A2
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Legal
• Assets remain in name of “Selling” Dealer
• RR Investor has no real proof of ownership
• Imperfect trail to current underlying security
• RR Investor has no better legal claim than any other creditor
Operational
• Possible for a Dealer to “overtrade” a security
• Errors, embezzlement, fraud, act of God all jeopardise RR Investment
Interest Rate
• JDX and NDX highlighted risks to Dealers and by extension to RR clients
Counterparty Default
• Dealer has claim to all entitlements (interest and principal)
Risks Identified
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More Risks
Issuer Default
• GOJ or BOJ may default
Concentration
• Some Dealers have over 50% of their total assets in repo’ed securities
• Most dealers use a single international custodian (Oppenheimer)
Systemic
• Highly inter-connected Money Market.
• Dealers rely on each other to meet downstream obligations, including to Banking
system
The Government of Jamaica agree to reform the RR sector, structural benchmarks
placed under the IMF agreement
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FSC tasked to spearhead the reform under direction of the Executive Director
• Steering Committee and Work Teams formed
• Consultants contracted by IMF to guide and assist
Overarching Objective
• Reduce systemic risk and Improve investor protections
Methodology
• Reduce size and complexity of RR sector
• Addressable risks - legal, operational and default
• Determine models and consult with stakeholders
Model determined
• No exactly comparable international structure
• Tri-partite trust to be established with securities moving to a trustee
• Dealer to provide securities and liquidity on open and close legs respectively
• JCSD/JCSDTS asked to provide custody and trustee services to sector
Legislative amendments to support model
The Reform Process
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Implement minimum RR size
• Phased in over several months
• To J$1m or FX equivalent
Restrict securities that can be FSC approved for RR
• Investment grade corporates, GOJ/BOJ, certain foreign sovereign
• ISINs required
RR contracts not to exceed tenure of underlying securities
Legislative amendments to ring-fence RR securities
• Securities Act, SIPPS, Insolvency Act and other Acts and Regulations examined
• Amendments passed Dec. 2014 (1st benchmark achieved)
First Wave of Reform
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The New Model
INVESTORS
Dealer A
Dealer AOwn A/C
JCSDTS Dealer A Client A/c
Dealer AOwn A/C
JCSDTS Dealer A Client A/C
JCSD/JCSDTS
JamClear-RTGS
JamClear–CSD or
JCSD/Intl. Custodian
Bank
FSC
Batch Settlement File with DvP & FOP
messages for each dealer (securities out)
Dealer A Transaction File
Reconciliation, Notification of
exceptions and failures
DvP & FOP single messages
(securities in)
Notification of failures
New Funds/ Requests/
Instructions
Receipt, Investment proceeds, contract note
A1
A2
A3A4
A5b
A5a
A6
A7
A5a
A5b
Reconciliation, Notification of exceptions and
failures
A8A5b
A5a
Netting Advice
10 | © 2014 Global Association of Risk Professionals. All rights reserved.
The Model Implemented
DESCRIPTION 2:00pm
New Funds
Roll Overs
Encashments
Substitutions
8:30am
Daily Repricing Check
*Assumption is all clients have a JCSD account.
* The Settlement Assurance Fund and process to access it are not yet defined
*Possible scenario is to force retention of funds in SA 36 Act as well as return of funds to clients after 3 days.
*Funds received should be paid into/deposited in the SA 36.
OVERVIEW OF RETAIL REPO TRANSACTION STRUCTURE
After 3 days
End
Advises trustee of
action
Settlement
Instructions
Yes
No
Security available for allocation?
Dealer
DDetermines fix and resubmits (at
Box 17 or 12)
Dealer
End
Reconciliation Process
Refer to Flowchart 3
DReceives funds and
gives receipt
Dealer1 DIdentifies & allocates
security
Dealer
11
DPrepares rollover
details
Dealer
6
Prepares & uploads transaction file to
JCSD
Dealer
12
2
DPrepares payment instructions
Dealer
7
DPerforms netting of securities & cash
per ISIN
Trustee
13
Identifies securities
and accounts affected
Dealer
9
Determines
securities and accounts affected
Dealer
10
D Performs settlement of
securities
Trustee
Settlement
Instructions
18Sends securities and
proof of available cash balance
Dealer
17
DSends notice of failure to dealer by
Trustee24
DPrepares & sends reconciliation
report to dealer & FSC
Trustee22
26
Flag event for settlement assurnace.
or unwind failed transaction. Notify
dealer by email and FSC by exception
report.
Trustee
27
DPrepares & sends netting advice to
dealer
Trustee14
Generates & sends
contract note to RR client
Dealer23DFlag event as one
necessitating a regulatory response
FSC
28
Notify Trustee by email & determine fix
Dealer
16
Retains funds
(SA.36) until security is sourced
Dealer
3
D Returns funds
Dealer
5
Yes
Confirm netting advice?
Dealer
No15
No
Cash obligation balance
remaining?
Dealer
Yes
8
Settlement Failed?
Trustee
Yes
No
20
Yes
Security available for allocation?
Dealer
No
4
2:00pmSettlement Process Refer to Flowchart 2
19
21Has time for fix (3:30pm)
passed?
Trustee
No
Yes
25
Yes
Security available for allocation?
Dealer
No
6b
Prepare payment
instructiions. Payout Client
Dealer
6c
11 | © 2014 Global Association of Risk Professionals. All rights reserved.
Legal
• Dec 2014 legislative amendments to ring-fence RR securities
• Gives RR investors claim on securities held in trust if Dealer defaults
Counterparty Default
• Trustee may intercept entitlements in case of SD default
Operational (2nd benchmark achieved)
• Adequate security in trust for RRs continuously assured
• Dealer/Trustee record redundancies reduce possibility of error
• RR investor and FSC have on-line viewing access
• 3rd party (trustee) validation for approved securities, RR tenure, all transactions
Interest rate and Issuer default unaffected
Systemic
• Reduced risk due to all the above
Concentration, settlement and liquidity risk somewhat increased
How Risks Have Been Mitigated
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Continue to improve the model
• Incremental adjustments – overseas securities movement, FSC report writing, etc.
• More automation, SWIFT messaging?
• More transparent price determination of securities – trading GOJ/BOJ securities on the JSE
Prudential tightening
• To a systemically manageable prudential level
• Reduce RR as a % of Dealer’s balance sheet
• Raise liquidity and capital requirements for Dealers who offer RR
Thank you for your attention
What’s Next?
C r e a t i n g a c u l t u r e o f
r i s k a w a r e n e s s ®
Global Association of
Risk Professionals
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U.K.
+ 44 (0) 20 7397 9630
www.garp.org
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make
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