Capital Adequacy Requirements
The ability to identify and monitor risks on an ongoing basis is crucial for a clearing and settlement organisation. The strategy is to avoid, as much as possible, situations that can create unacceptable levels of risk for the clearing and settlement organisation and its participants. It is in this context that the CDS mandated international consultants to carry out a risk review and make recommendations on the risk management and monitoring policies of the CDS. One of the main recommendations of the consultants was the setting up of capital adequacy requirements for the CDS participants as a first line of defence against risk. The stability and financial health of participants in the clearing and settlement services is an important indication of potential trouble.
Since November 1999, the CDS has implemented a set of rules on conditions for participation called Financial Resource Requirements. These rules require each stock broking company to have sufficient adjusted liquid capital to cover its fixed expenditure base requirements and risk (position, counter party and foreign exchange) requirements. Stock broking companies are required to submit monthly returns to allow CDS to monitor compliance with the Financial Resource Requirements.