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					Concerning assessment of the risks related to the activities of
    the Central Securities Depository of Lithuania, plc
Thomas Murray (the leading independent management consultancy group dedicated to
the global securities and investment market and publishing Central Securities
Depositories Guide) and Standard & Poor's (Credit Rating Agency) have launched a
global Depository Review and Risk Evaluation Service to the global securities services
and investment industry. According to the risk assessment criteria provided by the
Service, the Central Securities Depository of Lithuania (CSDL) has made a preliminary
assessment of the risks within the Depository.

                  Description of Risk Assessment Criteria
1. Asset Commitment Risk
Asset commitment risk looks at the period of time from which use of securities or
cash is lost (control given up) before irrevocable receipt of countervalue. It focuses on
concerns regarding the asset commitment periods. This is the amount of time
participant assets, either cash or stock, are frozen within the CSD pending settlement
of the underlying transaction(s) and the irrevocable receipt of value. Following initial
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

Asset commitment risk is the period of exposure direct participants and their clients
have to the settlement cycle. Assessing this risk fully requires an examination of local
rule books in order to obtain the definitive definition of “finality”, in each market and
in each circumstance. The Depository Service understands that as “irrevocability” and
“finality” can differ in usual circumstances, the Service will concentrate its
assessment to normal circumstances only.

An illustration of asset commitment risk from both a securities and cash perspective
would be as follows:

1.1. Securities – In one country’s securities clearing infrastructure, trade instructions
for any given settlement date are accepted three to five days before Settlement Date
(SD-5 to SD-3). At 12.00 noon at SD-1, the national securities depository blocks the
securities to be delivered the next day in each participant’s account, effectively
removing the participants’ ability to use the securities for overnight lending,
collateralisation, or any other purpose. The participants see in their communications
with the depository that the securities have changed from their normal
“AVAILABLE” status to a “TO BE TRADED” status, no longer part of the account

Impact on securities asset commitment – In this case, since securities are always
cleared on a gross basis at 12.00 noon on SD, we view the asset commitment period to
last on-day i.e., from 12.00 noon on SD-1 to 12.00 noon on SD. At the end of this
period, the securities are irrevocably credited to the purchasing participant’s account,
with the cash credited also at 12.00 noon to the selling participant’s account with
finality. While the exchange is considered final at this point, the seller has been

exposed during the previous 24-hour period to the effects of whatever system outage
or operational problem might arise while they no longer control over or access to their
securities, but prior to their receipt of the sale’s corresponding cash proceeds.

In the case of CSDL, trade instructions are accepted one to four days before
Settlement Date (SD-4 – SD-1). At 11.00 a.m. SD, the CSDL blocks the securities
and transfers them finally and irrevocably at 3.00 p.m. SD between the general
accounts of the account managers. Thus, the period of exposure to securities
commitment risk arising from the settlement of transactions handled by CSDL lasts
for 4 hours (from 11.00 a.m. till 3.00 p.m.).

1.2. Cash – In another country’s securities infrastructure, trade instructions are
accepted only on SD-3 for all “against payment” settlements. At 9.00 a.m. on SD-1, a
cash amount equal to the gross purchases of each participant is frozen in the
participant’s central bank cash account in anticipation of the debit to be passed the
next day (SD) at 12.00 noon. During the intervening 27 hours, the blocked cash
amounts are not available to either buyer or seller. Overnight cash account statements
show these cash amounts in a special “frozen” status.

Impact on cash asset commitment – In this case, we view the pre-settlement cash
commitment period to last 27 hours, from 9.00 a.m. on SD-1 to 12.00 noon on SD. At
the end of this period, the securities are irrevocably credited to the purchasing
participant’s account, with the cash credited also at noon to the selling participant’s
account with finality. While the exchange is considered final at this point, the buyer
has been exposed during the previous 27-hour period to the effects of whatever
system outage or operational problem might arise while they no longer have control
over or access to their cash, but prior to their receipt of the purchase’s corresponding

In the case of CSDL, cash is to be accumulated in the account managers’ clearing
accounts at 11.00 a.m. SD and finally and irrevocably transferred at 3.00 p.m. SD
by the depository instruction between the relevant clearing accounts opened in the
Settlement Centre of the Bank of Lithuania. Thus, the period of exposure to cash
commitment risk arising from the settlement of transactions handled by CSDL lasts
from 11.00 a.m. till 3.00 p.m.

2. Counterparty risk
Counterparty Risk is the risk that a counterparty (i.e. an entity) will not settle its
obligations for full value at any time. This risk occurs when a participant is unable to
meet its financial liability to the CSD and possibly other creditors. Counterparty risk
depends on who the other participants are and examines the effectiveness of the
monitoring of those participants. Effective counterparty monitoring should cause the
CSD to withdraw services to a participant who fails to meet a financial liability to
another organisation, not directly connected to the CSD. Areas of investigation will
include: participant criteria, participant concentration, financial compliance and trade
surveillance, lien on securities/rights of retention, delivery versus payment, credit
facilities/stock lending, guarantee fund, CSD guarantee and the handling of unwound

       Two-way activity: A sells securities to B with payment taking place later (or
       Assume payments are made 5 days after securities have been delivered.
       During 5 days, A runs counterparty risk on B (as A will not receive money if
B defaults).
                                  Securities (T)

        A                                                                       B
When the counterparty is the CSD or an associated clearing house a default would
require the liquidation of the organisation concerned and the settlement of all
outstanding trades will be called into question. For the purposes of the Depository
service 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 subsequently default.

CSDL never plays the role of the central counterparty in settlements; never does it
lend securities or cash to the settlement participants. Therefore the counterparty
risk occurs only in cases of default by the account managers where they fail to
accumulate either cash or securities in due time. The volume of such cases is
illustrated by due date settlement criteria. According to FIBV and ISSA2000
recommendations, acceptable norms for the suspended and deferred settlements are
        1% of the total value of transactions, and
        2.5% of the total number of transactions.
After CSDL had taken over management of clearing accounts from NSEL (on the
1st of May 2000), these indicators by the end of 2000 accounted for 0.13% and
0.61%, respectively.

3. CSD on CSD Credit Risk
CSD on CSD Credit Risk looks to assess the credit risk that a CSD is taking when
linking to a peer group CSD i.e., the risks a CSD is taking in either providing a
service for another CSD or using another CSD as a local service provider (host CSD).
Today this is a relatively uncommon risk but given market developments, particularly
in the EuroZone, this risk will gain in potential importance. The Depository service
will this year restrict itself to the credit risk associated with these links, as well as the
collection of data surrounding links including the operating rules for the link and a
description of the initial and on-going due diligence in place to support the link. The
effect of the links on the safe and secure operation of each CSD will not be considered
as part of the assessments this year. The only exception to this is where there are
domestic links between two CSDs, within the same country, and who settle the same
underlying securities. Further analysis will be required if the volumes are in any way

To date, CSDL has been carrying out cross-border settlements only with Latvian
Central Depository. Their scope as well as risk is negligible: on the 29 th of
December 2000, CSDL held in custody the holdings of Latvian CSD in the amount
of LTL 4.3 m, i.e. only 0.02% of total capitalisation. At the end of Setember 2001,
total CSDL participants’ holdings on the custody accounts of Latvian CSD and
Clearstream banking made up LTL 67.7 m (USD 17 m).

4. Financial Risk
This risk is concerned with the financial strength of the depository to operate as an
on-going concern. Issues considered include if the capital is sufficient to meet the on-
going operation of the organisation and its revenues, cash flow and ongoing
profitability. It is not looking at when the CSD is a counterparty to a transaction, as
this is covered under Counterparty Risk. Aspects of the Financial Risk assessment
include the capital structure and financial aspects of the CSD, its ownership, and its
dividend and rebate policies, funding aspects including its ability to raise additional
capital. The assessments will consider the diversity of products and examine volumes
of each over a five-year period to determine if there are any concentration issues. The
ownership of a CSD can take many different forms, which may have assessment
implications. This assessment is interested in the financial resources and the
incentives of the owners and participants to support the CSD in times of need.

The largest founder and main shareholder of CSDL is the Bank of Lithuania (owns
60% of share capital), which is a Lithuanian institution possessing independence by
Law and running the largest assets in Lithuania. The CSDL has been operating
profitably since its incorporation (for 7½ years); over 50% of its equity are
comprised of liquid, non-risk bearing assets – investment in Government securities
of the Republic of Lithuania. At the end of the year 2000, the shareholders’ equity
amounted to USD 2.7 m.

You may find a complete Annual Report of the Board of CSDL on the 1999 and
2000 activities and International Auditor’s Report on our web site

5. Liquidity Risk
Liquidity risk is the risk that insufficient securities and/or funds are available to meet
commitments but the obligation will be met sometime 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 have 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.

Aspects of a CSD to be looked at under this risk include the settlement processing
cycle, the availability of credit and stock lending facilities and the registration model,
types of deposited securities and procedures for the deposit and withdrawal of
securities. The assessments will look at the connection between the stock exchange
trades settlement process and the inter-bank transfer process and/or OTC settlement
processes to identify if due securities received from a stock exchange procedure can
or cannot be re-transferred immediately to the account of the final owner. Also
considered are same day turnaround settlement procedures, the objective being to
identify whether the procedure may result in the inability to process a same day

turnaround trade (i.e., back to back) or in the case the sale could be settled while the
receipt is failing may result in “technical” securities lending.

To date, CSDL has been ensuring only direct securities lending between the
account managers, including also in extraordinary cases securities lending during
the settlement cycle.

Securities registration does not pose any additional problems as there are no special
transfer agents or Registrars in Lithuania. Registration, i.e. management of
personal accounts, is carried out by the account managers, who may execute the
trading functions, as well as other functions traditional to financial brokerage

6. Operational Risk
Operational risk is the risk of loss due to clerical errors, organisational deficiencies,
delays, fraud, system failure or non performance b third party service providers.
These are both internal and external factors that effect the safe operation of the
depository. Internal factors to be considered in the assessment include ensuring the
CSD has formalised procedures established for all its 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. Services include: instruction
processing, lending programme (if applicable), cash (if applicable), settlement,
registration, reporting, safekeeping/custody, corporate events, market interfaces,
systems: changes to system software, data security/systems, access controls, data
centre security, contingency planning, third party services, pre-matching, segregation
of assets and training and supervision/established procedures. External operational
risk will exist when the CSD receives local infrastructure services (e.g., the payment
system) or has outsourced certain functions, such as custody of underlying participant
assets to a third party.

The CSDL has put the following formalised procedures in place:
 Approved the regulations of the Depository subdivisions, internal workrules,
    work description of the Administration, and job instructions for senior
  Provided a fairly comprehensive description of the operating procedures for the
     IT and securities accounting employees and a contingency plan to act under
     force majeure circumstances;
 Installed the reserve hardware and software and fitted out additional working
    places for the purpose of dealing with the above-mentioned contingency and
    providing data back-up capabilities in an off- site location.
The internal control of the Depository is run by Internal auditor, the operational
and legal control is in the hands of Lithuanian Securities Commission, whereas the
financial control of the Depository is carried out by International auditor.

The internal security facilities include a reliable system for the placement and
confirmation of instructions; a procedure for the allotment of passwords and the
computer identification and reconciliation of data; as well as participant training
and inspection.


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