Thomas Murray, the specialist custody rating, risk management and research firm, recently announced the issue of an AA Public Depository Rating to CDS Clearing and Depository Services Inc. (CDS), which places CDS among the top-rated organizations in the world currently assessed by the firm.

The AA rating recognizes the very strong procedures and controls applied within CDS to minimize risk for market participants. The outlook for this rating has been assigned as stable, which suggests that there are no imminent developments that may change the rating at this stage.

Simon Thomas, CEO and chief ratings officer of Thomas Murray said when announcing the rating of CDS, “CDS, in operating a complex and sophisticated risk model, has put in place very strong controls and procedures in order to minimize risk. The rating reflects the work done over the years to maintain a sound and efficient infrastructure that meets international standards and places CDS among the top tier depositories currently assessed.”

Allan Cooper, president and CEO of CDS, said, “CDS is pleased to have worked with Thomas Murray in order to obtain an independent view of our existing capabilities and processes. The rating process involved a thorough review of CDS’s clearing and settlement process and the AA rating demonstrates that CDS is in an excellent position, domestically and internationally, to support Canada’s capital markets.”

Thomas Murray’s report highlighted a number of strengths at CDS including:

  • a well-operated computer system;
  • effective monitoring and management of operational risk with regular reviews;
  • comprehensive, annual, external audits of operational controls;
  • separation of commercial activities from core businesses;
  • credit arrangements backed by the Bank of Canada;
  • extensive disaster recovery plans with real-time back up of key data;
  • highly developed business continuity arrangements.

Some areas of asset servicing were identified by Thomas Murray as under performing – particularly in regards to corporate action information collection, where “a significant degree of manual interaction” still exists. However, Thomas Murray also recognized that current market arrangements imposed restrictions on CDS’s ability to provide more efficient services in many of these areas. CDS views these limitations as opportunities to improve its services and will be working with regulators and stakeholders to address them.

The central securities depository (CSD) rating assesses the risk exposures for investors associated with the processes CDS has in place to facilitate the safekeeping and the clearing and settlement of securities, where applicable. It assesses six key risks: asset commitment risk, liquidity risk, counterparty risk, asset servicing risk, financial risk, and operational risk. 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 is 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.