Thomas Murray, the specialist custody rating, risk management and research firm upgrades to the Public Depository Rating for The Misr Company for Central Clearing, Depository & Registry (MCDR) of Egypt. MCDR has been awarded a Public CSD rating of ‘A+’, up from ‘A’, being a low overall risk rating made up of the following components:
The overall rating upgrade stems from improved ratings to the risk components, Liquidity and Asset Servicing Risks which also improved from ‘A’ to ‘A+’.
The Misr Company for Central Clearing, Depository & Registry is the major depository for equities and fixed income securities in Egypt. MCDR has a sound ownership structure with ownership dispersed among market participants such as banks, brokers and the Egyptian Stock Exchange. MCDR has established settlement links with Clearstream Banking and Euroclear and has co-operative relationships with other regional depositories in Abu Dhabi, Kuwait and Lebanon. MCDR is regulated by the Egyptian Financial Supervisory Authority (EFSA). Internally MCDR has a centralised decision making structure with a nine person board and there are Audit, Risk Management and Members Consultative Committees in operation that report to the Board.
MCDR’s rating of ‘A+’ relates to a low risk management profile and a ‘Stable’ outlook has been assigned by Thomas Murray. The outlook indicates that the rating of ‘A+’ is unlikely to change in the near future. However, MCDR has a number of projects in progress that will help to mitigate risk and help to improve the rating in the future. One such project is the development of SWIFT 15022 messaging.
In general, MCDR has good clearing and settlement processes and has achieved a near 100% on-exchange settlement rate by adopting pro-active fails management practices. The design of the settlement system is primarily focused on minimising Counterparty risk exposure. MCDR, as central registrar, plays a key role in Asset Servicing in the market, especially in assisting the issuers in setting up their corporate events.
However MCDR does not act as the principal information source for corporate events and the official source is still one newspaper. MCDR takes no liability over the quality of event notifications, but assumes liability for incorrect or the non-execution of corporate actions. Its dividend distribution service is extremely flexible and client-friendly, with the ability to pay directly into bank accounts domestically and overseas. MCDR is a not-for-profit utility, owned by its participants, and provides a number of free services (especially for its large retail client base). However, it has always been operationally profitable, and is well capitalised, especially as an emerging market depository and this helps to minimise Financial Risk. MCDR has immobilised over 98% of eligible equities and 100% of eligible corporate debt but is still maintaining physical certificates in its vaults. Although MCDR has developed its own systems in-house which are effective, there is still potential for further automation, particularly in its interfaces with issuers and custodians.
MCDR has extensive operating documentation and strict internal control mechanisms to manage operational risk exposures. Over the past few years it has intensified its efforts in internal audit and all activities have now been reviewed. Disaster Recovery plans are also in place and back-up servers and communication lines at the ‘hot’ site are able to resume operations within 30mins of a major disaster. The DRP arrangements were successfully demonstrated when a real-life switchover to back-up operations was undertaken in September 2009.
The Central Securities Depository rating assesses the performance of the CSD to mitigate risk in its activities of safekeeping and the clearing and settlement of securities, where applicable. It assesses six key risks. The methodology considers the capabilities of the depository and the quality and effectiveness of its operational infrastructure. It also assesses the depository’s willingness and ability to protect its participants or clients from losses. As part of the rating, the scope and quality of the depository’s services are assessed. The ratings are on a consistent global scale, using the familiar AAA to C ratings scale. Once the rating is assigned there is an ongoing surveillance process to monitor the depository.
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