Custodian Banks and CSD Interaction Asia Pacific Central Securities Depository Group General Meeting Market Booms and Busts Date: 19-22 October 2013 PUBLIC How are CSDs directly serving the end investor? Listed Company Registrar Lawyer Investors Buy Hold Sell Funds (Fund Manager) International Brokers Banks (Local Custodial) Members Brokers Banks (Global Custody) Depository Banks Local Brokers Sp. Category Insurance Companies Banking Infrastructure 2 PUBLIC Primary responsibility to the investor Instantaneous transfer of securities ownership linked with cash settlement “Speed to market" of corporate action notification and entitlement payment – Golden record Provider of Proxy services "Provide uncompromised safekeeping of assets" Legally ringfenced Operationally robust Financially stable Lien free 3 PUBLIC The sub-custodian bank A Custodian bank, is a specialised financial institution responsible for safeguarding a firm's or individual's financial assets, and providing residual services related to this function Custody services are approved either as part of the banking license, or as an add-on certification to a banking license Core service offerings Value-add service offerings Safekeepingofofassets Safekeeping assetsthrough through thethe depository. depository. Local Local Custodian Bank Custodian Bankmirrors mirrors depository depository holdings holdings in internal in internal books and report books andtoreport clientsto clients Reconciliation ofofCSD Reconciliation CSDand and local local custodian custodian bank bank records records Receipt and Receipt anddelivery deliveryofof securities, securities, after after matching matching client client instructions toto instructions counterparty counterparty allegement allegement and and market settlement market settlement Forex conversion for foreign institutional investors Cash payments and receipts, linking them to securities Transaction/portfolio/cash reporting in specialised SWIFT formats formats SWIFT Corporate action Corporate actionreporting/administration reporting/administration Dividend and Dividend andincome income collection collection Proxy services Proxy services Take-up of Take-up ofrights rightsand andbonus bonus issues issues Regionally consistent interface across markets Extended client services hours Single point of contact Documentation review for account opening Stock transfer processing between Registry and Trading accounts Special daily reports for alleged trades, trade status, settled trades etc High quality market information via Market Guide, Newsflashes, etc Cash Management services MIS reporting, eg settlement and income collection performance, Securities Performance Reports Relationship Profile, Query Tracking reports etc Regulatory reporting (if any) Acts as the “Intermediary” of an investor 4 PUBLIC Relevant regulations – USA Employee Retirement Income Security Act of 1974 The Employee Retirement Income Security Act of 1974 (ERISA) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by: – Requiring the disclosure of financial and other information concerning the plan to beneficiaries – Establishing standards of conduct for plan fiduciaries – Providing for appropriate remedies and access to the federal courts ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself 17F-5/17F-7 Rule 17f-5 was adopted in 1984, and revised in 1997. The 1997 Amendments expanded the types of foreign banks and securities depositories that may serve as custodians of fund assets, and required that the selection of a foreign custodian be based on whether the fund's assets will be subject to reasonable care if maintained with that custodian Rule 17f-7 permits a fund to maintain assets with a foreign securities depository if certain conditions are met. First, the depository must be an "eligible securities depository". Second, the fund's "primary custodian" must provide the fund or its adviser with an analysis of the custodial risks of using the depository, monitor the depository on a continuing basis and notify the fund of any material changes in risks associated with using the depository. The rule defines a primary custodian (often referred to as a "global custodian") as a US bank or qualified foreign bank (as defined by rule 17f-5) that contracts directly with the fund to provide custodial services for foreign assets 5 PUBLIC Risk management Thomas Murray Depository Review and Risk Evaluation – Asset Commitment Risk – Counterparty Risk Risk – Liquidity Liquidity Risk – Asset Safety Risk – Asset Servicing Risk – Financial Risk – Operational Operational Risk Risk – Governance Governance and Risk andTransparency Transparency Risk – CSD on CSD Credit Risk Source: Thomas Murray Data Services Ltd 6 PUBLIC Regional risk ratings AAA Extremely low risk AA+ Very low risk BBB 4% A4% 1 AA AA- 1 AA 7% 2 Very low risk Very low risk A 18% 5 A+ Low risk A Low risk A- Low risk BBB Acceptable risk BB Less than acceptable risk 7 AA26% 11 B Quite high risk CCC High risk A+ 41% Source: Thomas Murray Data Services Ltd 7 PUBLIC Communication Industry groups – Working together Vietnam Korea Ad hoc custodian bank meeting to discuss issues. (foreign banks) Korea Federation of Banks has a new sub-group Association of Local Custodians Thailand Custodian Club – Market Advocacy division interact with Stock Exchange, BOT, and MOF. CSD will invite market participants where they will present proposed changes and enhancements Japan Korea Taiwan India Taiwan Hong Kong India Informal Custodian Bank group – foreign and local banks. NMPG Singapore SMPG – SWIFT related and Ind ustry related issues. CSD reps participate Japan Business operations committee – 10 Sub-committees and SM PG Thailand Vietnam Taiwan Securities Association (broker member level). TDCC host public forums for member to receive input on changes or enhancements Philippines Hong Kong Custodian Bank Working Group (8 banks) Regular Monthly meetings Singapore Philippines Indonesia Indonesia Association of Custodian Banks Indonesia 8 Four foreign custodian banks conduct ad hoc meetings based on industry issue PUBLIC Thank you PUBLIC Disclaimer CERTAIN INFORMATION IN THIS PRESENTATION HAVE BEEN PREPARED AND PRESENTED BY THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED ("THE BANK") BASED ON INFORMATION OBTAINED FROM SOURCES IT BELIEVES TO BE RELIABLE BUT WHICH IT HAS NOT INDEPENDENTLY VERIFIED. WHILST EVERY CARE HAS BEEN TAKEN IN PREPARING SUCH INFORMATION, THE BANK MAKES NO GUARANTEE, REPRESENTATION OR WARRANTY AND ACCEPTS NO RESPONSIBILITY OR LIABILITY AS TO ITS ACCURACY OR COMPLETENESS. EXCEPT AS SPECIFICALLY INDICATED, THE EXPRESSIONS OF OPINION ARE THOSE OF THE BANK ONLY AND ARE SUBJECT TO CHANGE WITHOUT NOTICE © COPYRIGHT. THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED 2013. ALL RIGHTS RESERVED NO PART OF THIS PRESENTATION MAY BE REPRODUCED, STORED IN A RETRIEVAL SYSTEM, OR TRANSMITTED, IN ANY FORM OR BY ANY MEANS, ELECTRONIC, MECHANICAL, PHOTOCOPYING, RECORDING, OR OTHERWISE, WITHOUT THE PRIOR WRITTEN PERMISSION OF THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED 10 PUBLIC