Hannes Van Eeden, Head of Finance and Company SecretaryOctober 9,2007

The two faces of risk…

The culture, processes and structuresThat are directed towards the effective management of potential opportunities and adverse effects

AU/NZS 4360

Enterprise is the undertaking of risk for reward

Corporate governance can, in part, be viewed as a company’s strategic responseto the need to assume prudent risks, appropriately mitigated, in exchange for measurable rewards

King II

Overview

South African market comprises Equities, Bonds and Money Market instruments

Equities and Bonds currently settled through the Depository

Money Market environment still “paper-based” – dematerialised / electronic settlement

model currently under development by Strate

Thomas Murray – ACSDA Data sharing initiative

Capital Market Infrastructure Risk Ratings (CMIRR)

An opinion of the post trade risk exposures to which an asset owner is exposed

when buying or selling securities in local capital markets.

The ratings examine the extent to which each local infrastructure minimises

recognised risks and maximises asset safety for investment.

Evaluation of infrastructure across 7 different facets (SA only 6 as we do not have cross-

border links)

Definitions

Asset commitment

The period of time from when control of securities or cash is given up until receipt of counter value. This risk concerns the time period during which a participant’s assets, either cash or stock, are frozen within the CSD and payment system pending final settlement of the underlying transaction(s). Following settlement, the risk period is extended until the transfer of funds and stock becomes irrevocable. It excludes any periods when assets, cash or stock, are committed to a market participant including brokers, banks and custodians, not caused by CSD processing .

Definitions

Liquidity

The risk that insufficient securities and or funds are available to meet commitments; the obligation will be covered some time later. This is where for certain technical reasons (e.g., stock out on loan, stock in course of registration , turn round of recently deposited stock is not possible) one or both parties to the trade has a shortfall in the amount of funds (credit line) or unencumbered stock available to meet settlement obligations when due. These shortfalls may lead to settlement ‘fails’ but do not normally lead to a default.

Definitions

Counterparty

The risk that a counterparty (i.e., an entity) will not settle its obligations for full value at any time. This is simply the total default of a direct participant of the CSD or market utility including the CSD. This is the event when a participant is unable to meet its financial liability to the CSD and possibly other creditors. When the counterparty is the CSD or an associated clearing house this would require the liquidation of the organisation concerned and the settlement of all outstanding trades will be called into question. This risk only goes as far as direct participants of the CSD and excludes clients of direct participants that default on liabilities to such participants, even if such a default should systemically cause the direct participant to subsequently default.

Definitions

Financial

The ability of the CSD to operate as a financially viable company. This risk concerns the financial strength of the depository and if its capital is sufficient to meet the on-going operation of the organisation. It is not looking at when the CSD is a counterparty to a transaction; see Counterparty Risk (The capital adequacy of the CSD).

Definitions

Operational

The risk that deficiencies in information systems or internal controls, human errors or management failures will result in losses. The risk of loss due to breakdowns or weaknesses in internal controls and procedures. Internal factors to be considered in the assessment include ensuring the CSD has formalised procedures established for its main services. The CSD should have identified control objectives and related key controls to ensure operation and proper control of established procedures. Systems and procedures should be tested periodically. There should be external audit processes in place to provide third-party audit evidence of the adequacy of the controls.

Definitions

Asset Servicing

The risk that a participant may incur a loss arising from missed or inaccurate information provided by the depository, or from incorrectly executed instructions, in respect of corporate actions and proxy voting. This risk arises when a participant places reliance on the information a depository provides or when the participant instructs the depository to carry out an economic transaction on its behalf. If the depository fails either to provide the information or to carry out the instruction correctly then the participant may suffer a loss for which the depository may not accept liability. The depository may provide these services on a commercial basis, without statutory immunity, or it may provide the service as part of its statutory role, possibly with some level of protection from liability. This risk is likely to become much higher when international securities are included in the service.

CC

C B BB

BB

B A-

A A+

AA

-

AA

AA

+

AA

A

Asset Commitment risk

Strengths

Minimal asset commitment exposure

Asset and cash settlement irrevocable

Opportunities

Introduction of an electronic (dematerialised) Money Market securities settlement and custody environment with SFIDvP settlement on a T0 basis

Weaknesses

1st settlement window for equities reflects a standard minimum exposure time of 5 hours

Money Market settlements are not SFIDvP

Liquidity risk

CC

C B BB

BB

B A-

A A+

AA

-

AA

AA

+

AA

AStrengths

Net cash / net securities with intraday settlement windows

Good fails management

Opportunities

Improved liquidity for Money Market instruments as a consequence of improved settlement methodologies

Weaknesses

Exchange Control regulations place certain constraints on the availability of borrowing facilities to non-residents

Gross trade by trade settlement of Money Market transactions without the benefit of SFIDvP

Counterparty risk

CC

C B BB

BB

B A-

A A+

AA

-

AA

AA

+

AA

AStrengths

Effective Fails management

JSE and BESA Guarantee funds

SFIDvP in Central Bank funds

Opportunities

Money Market project

Potential for a CCP across all markets

Weaknesses

No DVP for Money Market instruments (yet)

Lack of a central securities lending pool

No settlement assurance - Off-market transactions

Financial risk

CC

C B BB

BB

B A-

A A+

AA

-

AA

AA

+

AA

AStrengths

Improved profit history of CSD (increases stability of overall infrastructure)

Opportunities

Opportunities for new revenue streams- Issuers- Data mining

Other products – Mortgage Bonds / Unit Trusts

Weaknesses

Reliance on JSE market volumes results in poor diversification of income

Operational risk

CC

C B BB

BB

B A-

A A+

AA

-

AA

AA

+

AA

AStrengths

Continually improving operational procedures / processes across market

Focus on operational excellence (CSD)

Opportunities

Enhanced / proven measures for mitigation of operational risk could encourage other parties to use Strate as “trusted 3rd party”

Opportunities to consolidate / enhance BCP

Weaknesses

New procedures / processes still being bedded down

Instability of staff – small resource pool

Asset servicing risk

CC

C B BB

BB

B A-

A A+

AA

-

AA

AA

+

AA

AStrengths

Effective elimination of claims in the market

Opportunities

Centralisation of services

Further automation of Corporate Actions processing across market

Weaknesses

Manual processes

Multiple layers across market make for inefficient communication and potentially increase the likelihood of miscommunication