10.3.2017   

EN

Official Journal of the European Union

L 65/1

(1)

The provisions of this Regulation are closely linked since they deal with the elements required for the implementation of the measures laid down in Regulation (EU) No 909/2014. To ensure coherence between those measures and to facilitate a comprehensive view and easy access by persons that are subject to these provisions, it is desirable to include all these elements concerning measures under Regulation (EU) No 909/2014 in a single Regulation.

(2)

Regulation (EU) No 909/2014 requires that central securities depositories (CSDs) impose cash penalties on participants to their securities settlement systems that cause settlement fails (failing participants).

(3)

To ensure that cash penalties imposed on failing participants act as an effective deterrent, the parameters for the calculation of the level of cash penalties should be closely related to the value of financial instruments that fail to be delivered, and to which appropriate penalty rates should be applied. The value of the financial instruments underlying the transaction should also be the basis for the calculation of the level of cash penalty where the settlement fail is due to a lack of cash. The level of cash penalties should provide incentives to failing participants to promptly settle transactions that failed to be settled. In order to ensure the effective achievement of the objectives pursued by the imposition of cash penalties, the adequacy of the parameters for their calculation should be monitored on an ongoing basis and adjusted, as necessary, on the basis of the impact of those penalties on the market.

(4)

In view of the considerable price differences of financial instruments in the multiple underlying transactions and in order to facilitate the calculation of cash penalties, the value of financial instruments should be based on a single reference price. The same reference price should be used by CSDs on a given day for calculating cash penalties for settlement fails concerning identical financial instruments. Cash penalties should be therefore the result of multiplying the number of financial instruments underlying the transaction that failed to settle by the relevant reference price. The establishment of reference prices should be based on objective and reliable data and methodologies.

(5)

Taking into account that the automation of calculations of cash penalties should ensure their effective application by CSDs, appropriate penalty rates should be based on a single table of values that should be easy to automate and apply. Penalty rates for different types of financial instruments should be set at levels that would result in cash penalties that fulfil the conditions of Regulation (EU) No 909/2014.

(6)

Settlement of transactions in shares is usually highly standardised. Where shares have a liquid market and could therefore be bought easily, settlement fails should be subject to the highest penalty rate in order to provide incentives to failing participants to settle failed transactions in a timely manner. Shares that do not have a liquid market should be subject to a lower penalty rate given that a lower penalty rate should still have a deterrent effect without affecting the smooth and orderly functioning of the markets concerned.

(7)

The level of cash penalties for settlement fails of transactions in debt instruments issued by sovereign issuers should take into account the typically large size of these transactions and their importance for the smooth and orderly functioning of the financial markets. Settlement fails should therefore be subject to the lowest penalty rate. Such a penalty rate should nevertheless have a deterrent effect and provide an incentive for timely settlement.

(8)

Debt instruments that are not issued by sovereign issuers have less liquid markets and the size of transactions in such instruments is smaller. Such debt instruments also affect the smooth and orderly functioning of the financial markets less than debt instruments issued by sovereign issuers. The penalty rate for settlement fails should therefore be higher than for debt instruments issued by sovereign issuers.

(9)

Settlement fails of transactions in debt instruments should be subject to lower penalty rates than settlement fails of transactions in other financial instruments in view of their overall larger size, non-standardised settlement, greater cross-border dimension and importance for the smooth and orderly functioning of the financial markets. Such lower penalty rate should nevertheless have a deterrent effect and provide an incentive for timely settlement.

(10)

Financial instruments other than shares and debt instruments that fall within the scope of Regulation (EU) No 909/2014, such as depository receipts, emission allowances and exchange-traded funds, do not usually have a highly standardised settlement and liquid markets. They are also often traded over-the-counter (OTC). In view of the limited volume and size of transactions and in order to reflect their non-standardised trading and settlement, settlement fails should be subject to a similar penalty rate to the one for shares that do not have a liquid market.

(11)

The parameters for calculating cash penalties should be adapted to the specificities of certain trading venues, such as SME growth markets as defined in Directive 2014/65/EU of the European Parliament and of the Council (2). Cash penalties for settlement fails should not hinder access by small and medium enterprises (SMEs) to capital markets as an alternative to bank lending. In addition, Regulation (EU) No 909/2014 allows SME growth markets the flexibility not to apply the buy-in process to settlement fails until up to 15 days after the intended settlement date. Consequently, cash penalties for settlement fails in financial instruments traded on SME growth markets may apply during a longer period of time than for other financial instruments. Given the length of application of cash penalties, lower liquidity and specificities of SME growth markets, the penalty rate for settlement fails of transactions in financial instruments traded on such trading venues should be set at a specific rate that should provide incentives for timely settlement but should not affect their smooth and orderly functioning. It is also appropriate to ensure that settlement fails of transactions in certain financial instruments, such as debt instruments traded on such venues, are subject to a lower penalty rate than similar debt instruments traded on other markets.

(12)

Settlement fails due to a lack of cash should be subject to a single penalty rate for all transactions given that such a situation is independent from the asset type and liquidity of the financial instrument concerned or the type of transaction. In order to ensure a deterrent effect and incentivise timely settlement by failing participants through cash borrowing, it is appropriate to use the costs of borrowing cash as a basis for the penalty rate. The most appropriate penalty rate should be the official interest rate of the central bank issuing the settlement currency that should evidence the borrowing costs for that currency.

(13)

Regulation (EU) No 909/2014 allows CSDs to provide their services in the Union under the supervision of competent authorities of their home Member States. To ensure an appropriate level of safety in the provision of services by CSDs in host Member States, Regulation (EU) No 909/2014 requires the competent and relevant authorities of home Member States and host Member States to establish cooperation arrangements for the supervision of the activities of CSDs in the host Member State when their operations become of a substantial importance for the functioning of the securities markets and the protection of investors in the host Member States concerned.

(14)

To comprehensively establish whether the operations of CSDs have become of substantial importance for the functioning of the securities markets and the protection of investors in host Member States, it is appropriate to ensure that assessment criteria consider the core services provided by CSDs in host Member States as specified in Section A of the Annex to Regulation (EU) No 909/2014 given that such core services are provided by CSDs in their capacity as financial market infrastructures.

(15)

For the purposes of assessing the importance of the operations of CSDs in host Member States, the assessment criteria should consider the size of the core services provided by CSDs to users from host Member States, including to issuers, participants in securities settlement systems or other holders of securities accounts maintained by CSDs. Where the size of core services provided by CSDs to users from host Member States is sufficiently large, the operations of CSDs in such host Member States should be deemed to be of substantial importance for the functioning of the securities markets and the protection of investors given that any failures or deficiencies in the operations of such CSDs may affect the smooth functioning of securities markets and the protection of investors in the host Member States concerned. In order to ensure a comprehensive assessment, it is appropriate to apply assessment criteria which consider independently the size of each core service provided by CSDs to users from host Member States.

(16)

Where CSDs issue or centrally maintain large parts of securities for issuers established in host Member States or where they centrally maintain large parts of securities accounts for participants of their securities settlement systems or other account holders established in host Member States, their operations should be deemed to be of substantial importance for the functioning of the securities markets and the protection of investors in the host Member States concerned.

(17)

Where CSDs settle large values of transactions in securities issued by issuers established in host Member States or where they settle large values of settlement instructions from participants and other holders of securities accounts established in host Member States, their operations should be deemed to be of substantial importance for the functioning of the securities markets and the protection of investors in the host Member States concerned.

(18)

Directive 98/26/EC of the European Parliament and of the Council (3) allows Member States to designate securities settlement systems governed by their laws for the purposes of application of that Directive when Member States consider that such designation is warranted on grounds of systemic risk. When CSDs operate securities settlement systems designated by host Member States in accordance with Directive 98/26/EC, their operations should therefore be deemed to be of substantial importance for the functioning of the securities markets and the protection of investors in those host Member States.

(19)

Assessments of operations of CSDs should be conducted with sufficient frequency in order to allow the authorities concerned to establish without undue delay cooperation arrangements from the moment when the operations of relevant CSDs become of substantial importance for the functioning of the securities markets and the protection of investors in host Member States.

(20)

When the operations of CSDs become of substantial importance for the functioning of the securities markets and the protection of investors in a host Member State, they should be deemed to be of substantial importance for a sufficiently long period of time to allow the authorities concerned to establish effective and efficient cooperation arrangements in accordance with Regulation (EU) No 909/2014.

(21)

Calculations related to assessments under this Regulation should be based on objective and reliable data and methodologies. Given that certain calculations required under this Regulation are based on the rules laid down in Regulation (EU) No 600/2014 of the European Parliament and of the Council (4), such calculations should only be undertaken when Regulation (EU) No 600/2014 is applicable.

(22)

Given that the measures to address settlement fails related to the calculation of cash penalties and certain measures for the establishing of substantial importance may require significant information technology system changes, market testing and adjustments to legal arrangements between the parties concerned, including CSDs and other market participants, sufficient time should be allowed for the application of the relevant measures to ensure that the CSDs and other parties concerned meet the necessary requirements,

(a)

the aggregated market value of financial instruments issued by issuers from the host Member State that are initially recorded or centrally maintained in securities accounts by the CSD represents at least 15 % of the total value of financial instruments issued by all issuers from the host Member State that are initially recorded or centrally maintained in securities accounts by all CSDs established in the Union;

(b)

the aggregated market value of financial instruments centrally maintained in securities accounts by the CSD for participants and other holders of securities accounts from the host Member State represents at least 15 % of the total value of financial instruments centrally maintained in securities accounts by all CSDs established in the Union for all participants and other holders of securities accounts from the host Member State.

(a)

the annual value of settlement instructions related to transactions in financial instruments issued by issuers from the host Member State and settled by the CSD represents at least 15 % of the total annual value of all settlement instructions related to transactions in financial instruments issued by issuers from the host Member State and settled by all CSDs established in the Union;

(b)

the annual value of settlement instructions settled by the CSD for participants and other holders of securities accounts from the host Member State represents at least 15 % of the total annual value of the settlement instructions settled by all CSDs established in the Union, for participants and other holders of securities accounts from the host Member State;

(c)

the CSD operates a securities settlement system governed by the law of the host Member State and has been notified to the European Securities and Markets Authority (ESMA).

(a)

for a settlement instruction against payment, the value of the corresponding transaction in financial instruments as entered into the securities settlement system;

(b)

for free-of-payment (FOP) settlement instructions, the aggregated market value of the relevant financial instruments as determined in accordance with Article 7.

(a)

for financial instruments referred to in Article 3(1) of Regulation (EU) No 600/2014 admitted to trading on a trading venue within the Union, the market value of the relevant financial instrument shall be the closing price of the most relevant market in terms of liquidity referred to in Article 4(1)(a) of Regulation (EU) No 600/2014;

(b)

for financial instruments admitted to trading on a trading venue within the Union other than those referred to in point (a), the market value shall be the closing price derived from the trading venue within the Union with the highest turnover;

(c)

for financial instruments other than those referred to in points (a) and (b), the market value shall be determined on the basis of a predetermined methodology approved by the competent authority of the relevant CSD that refers to criteria related to reliable market data, such as market prices available across trading venues or investment firms.

(a)

by way of derogation from Article 5(2), the market value of financial instruments shall be the nominal value of those instruments;

(b)

by way of derogation from Article 6(2)(b), the market values of the relevant financial instruments shall be the nominal value of those financial instruments.

(a)

Articles 2 and 3 shall apply from the date of entry into force of the delegated act adopted by the Commission pursuant to Article 7(15) of Regulation (EU) No 909/2014.

(b)

Article 7 shall apply from the date referred to in the second paragraph of Article 55 of Regulation (EU) No 600/2014;

(c)

Article 8 shall apply from the date of entry into force of this Regulation.

10.3.2017   

EN

Official Journal of the European Union

L 65/9

(1)

Regulation (EU) No 909/2014 establishes prudential requirements for central securities depositories (CSDs) to ensure that they are safe and sound and comply at all times with capital requirements. Such capital requirements ensure that a CSD is at all times adequately capitalised against the risks to which it is exposed and that it is able to conduct an orderly winding-down or restructuring of its activities if necessary.

(2)

Given that the provisions of Regulation (EU) No 909/2014 concerning credit and liquidity risks relating to CSDs and designated credit institutions explicitly require that their internal rules and procedures allow them to monitor, measure and manage exposures and liquidity needs not only with respect to the individual participants but also with respect to participants that belong to the same group and who are counterparties of the CSD, such provisions should apply to groups of undertakings consisting of a parent undertaking and its subsidiaries.

(3)

For the purposes of this Regulation, the relevant recommendations of the Principles for Financial Market Infrastructures issued by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (‘CPSS-IOSCO Principles’) (2) have been taken into account. The treatment of capital of credit institutions under Regulation (EU) No 575/2013 of the European Parliament and of the Council (3) has also been taken into account given that CSDs are to a certain extent exposed to risks that are similar to the risks incurred by credit institutions.

(4)

It is appropriate for the definition of capital in this Regulation to mirror the definition of capital laid down in Regulation (EU) No 648/2012 of the European Parliament and of the Council (4) (EMIR). Such a definition is the most suitable in relation to the regulatory requirements given that the definition of capital in Regulation (EU) No 648/2012 was specifically designed for market infrastructures. CSDs authorised to provide banking-type ancillary services under Regulation (EU) No 909/2014 are required to meet capital requirements under this Regulation and own funds requirements under Regulation (EU) No 575/2013 simultaneously. They are required to meet the own funds requirements laid down in Regulation (EU) No 575/2013 with instruments that meet the conditions of that Regulation. In order to avoid conflicting or duplicative requirements and considering that the methodologies used for the calculation of the additional capital surcharge for CSDs under Regulation (EU) No 909/2014 are closely related to the ones provided in Regulation (EU) No 575/2013, CSDs offering banking-type ancillary services should be allowed to meet the additional capital requirements of this Regulation with the same instruments meeting the requirements laid down in either Regulation (EU) No 575/2013 or Regulation (EU) No 909/2014.

(5)

In order to ensure that, if required, a CSD would be able to organise the restructuring of its activities or an orderly winding-down, a CSD should hold capital together with retained earnings and reserves that are sufficient, at all times, to withstand operational expenses over a period of time during which the CSD is able to reorganise its critical operations, including by recapitalising, replacing management, revising its business strategies, revising cost or fee structures and restructuring the services that it provides. Given that during the winding-down or restructuring of its activities, a CSD still needs to continue its usual operations and even though the actual expenses during a wind-down or restructuring of the operations of a CSD may be significantly higher than the gross annual operational expenses because of the restructuring or wind-down costs, the use of gross annual operational expenses as a benchmark for calculating the capital required should be an appropriate approximation of the actual expenses during the winding-down or restructuring of the operations of a CSD.

(6)

Similarly to point (a) of Article 36(1) of Regulation (EU) No 575/2013, which requires institutions to deduct losses for the current financial year from the Common Equity Tier 1 capital, the role of net income in covering or absorbing the risks arising from adverse changes in the business conditions should also be recognised in this Regulation. Therefore, only in cases where the net income is insufficient to cover losses arising from the crystallisation of business risk, those losses have to be covered by own funds. Expected figures for the current year to take into account new circumstances should also be considered where data from the previous year are not available, such as in the case of newly established CSDs. In line with similar provisions in Commission Delegated Regulation (EU) No 152/2013 (5), CSDs should be required to hold a minimum prudential amount of capital against business risk in order to guarantee a minimum prudential treatment.

(7)

In accordance with the CPSS-IOSCO Principles, tangible and intangible assets' amortisation and depreciation costs can be deducted from gross operational expenses for the calculation of the capital requirements. Since those costs do not generate actual cash flows that need to be backed by capital, such deductions should be applicable to the capital requirements for business risk and to those covering winding-down or restructuring.

(8)

Since the time necessary for an orderly winding-down or restructuring strictly depends on the services provided by any individual CSD and on the market environment in which it operates, in particular on the possibility that another CSD can take on part or all of its services, the number of months required for restructuring of its activities or winding-down should be based on the CSD's own estimate. However, this period of time should not be less than the minimum number of months required for restructuring or winding-down provided for in Article 47 of Regulation (EU) No 909/2014 in order to ensure a prudent level of capital requirements.

(9)

A CSD should design scenarios for restructuring of its activities or winding-down that are adapted to its business model. However, in order to obtain a harmonised application of the requirements on restructuring or winding-down in the Union and to ensure that prudentially sound requirements are satisfied, the discretion on the design of such scenarios should be limited by well-defined criteria.

(10)

Regulation (EU) No 575/2013 is the relevant benchmark for the purpose of establishing the capital requirements for CSDs. In order to ensure consistency with that Regulation, the methodologies for the calculation of operational risk laid down in this Regulation should also be understood as covering legal risk for the purposes of this Regulation.

(11)

Where there is a failure in the safekeeping of securities on behalf of a participant, such a failure would materialise as either a cost to the participant or as a cost for the CSD that would face legal claims. Therefore, rules for the calculation of the regulatory capital for operational risk already take into account the custody risk. For the same reasons, custody risk for securities held through a link with another CSD should not be subject to any additional regulatory capital charge but should be considered as part of the regulatory capital for operational risk. Similarly, custody risk faced by a CSD on own assets held by a custodian bank or other CSDs should not be double-counted and no additional regulatory capital should be required.

(12)

A CSD may also face investment risks with regard to the assets that it owns or with regard to the investments that it makes using collateral, participants' deposits, loans to the participants or any other exposure under the allowed banking-type ancillary services. Investment risk is the risk of loss faced by a CSD when it invests its own or its participants' resources, such as collateral. Provisions set out in Directive 2013/36/EU of the European Parliament and of the Council (6), Regulation (EU) No 575/2013 and Delegated Regulation (EU) No 152/2013 are the appropriate benchmark for the purpose of establishing capital requirements to cover credit risk, counterparty credit risk and market risks that may arise from the investments of a CSD.

(13)

Given the nature of the activities of CSDs, a CSD assumes business risk due to potential changes in general business conditions that are likely to impair its financial position following a decline in its revenues or an increase in its expenses and that result in a loss that should be charged against its capital. Given that the level of business risk is highly dependent on the individual situation of each CSD and it can be caused by various factors, the capital requirements of this Regulation should be based on a CSD's own estimate and the methodology used by a CSD for such an estimate should be proportional to the scale and complexity of the CSD's activities. A CSD should develop its own estimate of the capital required against business risk under a set of stress scenarios in order to cover the risks that are not already captured by the methodology used for operational risk. In order to ensure a prudent level of the capital requirements for business risk when making a calculation based on self-designed scenarios, a minimum level of capital, should be introduced in the form of a prudential floor. The minimum level of required capital for business risk should be aligned to similar requirements for other market infrastructures in related Union Acts such as Commission Delegated Regulation on capital requirements for central counterparties (‘CCPs’).

(14)

The additional capital surcharge for risks related to banking-type ancillary services should cover all the risks related to the provision of intraday credit to participants or other CSD users. Where overnight or longer credit exposures result from the provision of intraday credit, the corresponding risks should be measured and addressed by using the methodologies already laid down in Part Three, Title II, Chapter 2, for the Standardised Approach, and Chapter 3, for the Internal Ratings Based Approach (IRB Approach), of Regulation (EU) No 575/2013, given that that Regulation provides prudential rules for measurement of credit risk resulting from overnight or longer credit exposures. Intraday credit risks, however, require special treatment since the methodology for their measurement is not explicitly provided for in Regulation (EU) No 575/2013 or other applicable Union legislation. As a result, the methodology that specifically addresses intraday credit risk should be sufficiently risk-sensitive to take into account the quality of the collateral, the credit quality assessment of the participants and the actual observed intraday exposures. At the same time, the methodology should provide proper incentives to the providers of banking-type ancillary services, including the incentive to collect the highest quality of collateral and select creditworthy counterparties. Although providers of banking-type ancillary services have the obligation to properly assess and test the level and value of collateral and haircuts, the methodology used to determine the additional capital surcharge for intraday credit risk should nevertheless cater to and provide enough capital for the case where a sudden decrease in the value of the collateral exceeds estimates and results in partially uncollateralised residual credit exposures.

(15)

The calculation of the capital surcharge for risks arising from providing banking-type ancillary services requires taking into account past information on intraday credit exposures. As a result, in order to be able to calculate that capital surcharge, entities that provide banking-type ancillary services to users of CSD services in accordance with Article 54(2) of Regulation (EU) No 909/2014 (‘CSD-banking service providers’) should record at least one year of data concerning their intraday credit exposures. Otherwise they are not able to identify the relevant exposures based on which the calculation is done. Consequently, CSD-banking service providers should not be required to meet the own funds requirement corresponding to the capital surcharge until after they are able to collect all the information necessary to perform the calculation of the surcharge.

(16)

Article 54(8) of Regulation (EU) No 909/2014 requires the development of rules to determine the additional capital surcharge referred to in point (d) of Article 54(3) and point (e) of Article 54(4) of that Regulation. Further, Article 54 of that Regulation requires that additional surcharge reflects the intra-day credit risk resulting from the activities under Section C of the Annex to Regulation (EU) No 909/2014, and in particular the provisions of intraday credit to participants in a securities settlement system or other users of CSD services. Therefore, intraday credit risk exposure should also include the loss that a CSD-banking service provider would face if a borrowing participant were to default.

(17)

Point (d) of Article 59(3) of Regulation (EU) No 909/2014 relating to the credit risk of a CSD-banking service provider requires the collection of ‘highly liquid collateral with minimal credit and market risk’. Point (d) of Article 59(4) of Regulation (EU) No 909/2014 relating to the liquidity risk of a CSD-banking service provider, requires availability of ‘qualifying liquid resources’. One such qualifying liquid resource is ‘highly liquid collateral’. While it is understandable that the terminology used in each of the two cases is different, given the different nature of the risks involved and the correspondence to different concepts in the regulation of credit and liquidity risk, they both relate to a similarly high quality of providers or assets. Therefore, it would be appropriate to require that the same conditions are met before a collateral or a liquidity resource in the form of collateral can qualify as pertaining to either the ‘highly liquid collateral with minimal credit and market risk' category’, or to the ‘qualifying liquid resources’ category, respectively.

(18)

Point (d) of Article 59(3) of Regulation (EU) No 909/2014 requires that a CSD-banking service provider accepts highly liquid collateral with minimal credit and market risk to manage its corresponding credit risk. The same allows for other types of collateral than highly liquid collateral with minimal credit and market risk to be used in specific situations, with the application of an appropriate haircut. To facilitate this, a clear hierarchy of the collateral quality should be set in order to distinguish which collateral should be acceptable to fully cover credit risk exposures, which collateral is acceptable as liquidity resource and which collateral, although remaining acceptable for mitigating credit risk, requires qualifying liquidity sources. Collateral providers should not be impeded from freely substituting collateral depending on their availability of resources or their asset-liability management strategies. Thus, common collateral practices, such as the reliance on participants' pledge accounts, where the collateral is deposited by the participant in its pledged accounts in order to fully cover any credit exposure should be allowed to be used for substituting collateral as long as the quality and liquidity of the collateral is monitored and complies with the requirements of this Regulation. Under such pledge account arrangements, the collateral is deposited by the participant in his pledged accounts in order to fully cover any credit exposure. In addition, a CSD-banking service provider should accept collateral taking into account the hierarchy specified, but may perform the liquidation of the accepted collateral, where necessary, in the most efficient way following a participant's default. However, from a prudential viewpoint, a CSD-banking service provider should be able to monitor the availability of collateral, its quality and its liquidity on an ongoing basis to fully cover credit exposures. It should also have arrangements in place with the borrowing participants to ensure that all the collateral requirements of this Regulation are met at all times.

(19)

For the purposes of measuring intraday credit risk, CSD-banking service providers should be in a position to anticipate peak exposures for the day. This should not require a forecast of the exact number but should identify trends in those intraday exposures. This is further supported by the reference to ‘anticipate peak exposures’ also in Basel Committee on Banking Supervision standards (7).

(20)

Title II of Part Three of Regulation (EU) No 575/2013 establishes the risk weights to be applied to credit exposures to the European Central Bank and other exempted entities. When measuring credit risk for regulatory purposes, such risk weights are widely understood as the best available reference. Therefore, the same methodology may be applied to intraday credit exposures. However, in order to guarantee the conceptual soundness of that approach, some correction is needed, in particular, when carrying out the computations using the credit risk framework of Part Three, Title II, Chapter 2 for the Standardised Approach, and Chapter 3 for the IRB Approach, of Regulation (EU) No 575/2013, the intraday exposures should be considered as end-of-day exposures as this is the assumption of that Regulation.

(21)

In accordance with Article 59(5) of Regulation (EU) No 909/2014, which includes an explicit reference to Article 46(3) of Regulation (EU) No 648/2012, bank guarantees or letters of credit, where appropriate, should be aligned to the CPSS-IOSCO Principles and meet similar requirements as those laid down in Regulation (EU) No 648/2012. These include the requirement that bank guarantees and letters of credit are fully collateralised by the guarantors. In order to preserve the efficiency of security settlement within the Union, however, when bank guarantees or letters of credit are used in relation to credit exposures that may arise from interoperable CSD links, appropriate alternative risk mitigants should be allowed to be considered as long as they provide an equal or higher level of protection than the provisions laid out in Regulation (EU) No 648/2012. This special treatment should only apply to bank guarantees or letters of credit protecting an interoperable CSD link and should cover exclusively the credit exposure between the two linked CSDs. Since the bank guarantee or the letter of credit protects the non-defaulting CSDs against credit losses, the liquidity needs of the non-defaulting CSDs should also be addressed by either a timely settlement of the guarantors' obligations, or alternatively, by holding qualifying liquidity resources.

(22)

Point (d) of Article 59(4) of Regulation (EU) No 909/2014 requires that CSD-banking service providers mitigate liquidity risks with qualifying liquid resources in each currency. As a result, non-qualifying liquid resources cannot be used to meet the requirements set out in that Article. Nevertheless, nothing precludes non-qualifying liquid resources, such as currency swaps, from being used in the daily liquidity management in addition to the qualifying liquid resources. This is also consistent with international standards reflected in CPSS-IOSCO Principles. Non-qualifying liquid resources should therefore be measured and monitored for that purpose.

(23)

Liquidity risk can potentially arise from any of the banking-type ancillary services performed by the CSD. The management framework for liquidity risks should identify the risks arising from the different banking-type ancillary services, including securities lending and distinguish their management as appropriate.

(24)

In order to cover all of the liquidity needs, including the intraday liquidity needs of a CSD-banking service provider, CSD's liquidity risk management framework should ensure that the payment and settlement obligations are effected as they fall due, including intraday obligations, in all settlement currencies of the securities settlement system operated by a CSD.

(25)

Given that all liquidity risks, except intraday, are already covered by Directive 2013/36/EU and Regulation (EU) No 575/2013, this Regulation should focus on intraday risks.

(26)

Given that CSD-banking service providers are systemically-important market infrastructures, it is essential to ensure that a CSD-banking service provider manages its credit and liquidity risks in a conservative manner. As a result, a CSD-banking service provider should be permitted to grant only uncommitted credit lines to borrowing participants in the course of the provision of banking-type ancillary services as referred to in Regulation (EU) No 909/2014.

(27)

In order to ensure that the risk management procedures of a CSD-banking service provider are sufficiently sound even in adverse conditions, the stress testing of the CSD-banking service provider's liquid financial resources should be rigorous and forward looking. For the same reason, tests should consider a range of extreme but plausible scenarios and be conducted for each relevant currency offered by the CSD-banking service provider taking into account the possible failure of one of the prearranged funding arrangements. Scenarios should include but not be limited to the default of two of the CSD-banking service provider's largest participants in that currency. This is necessary in order to establish a rule that is on the one hand prudent, as it takes into account the fact that other participants are also capable of generating liquidity risk, besides the largest one; and, on the other hand, a rule that is also proportionate to the objective, as it does not take into account those other participants that present a lesser potential for generating liquidity risk.

(28)

Point (c) of Article 59(4) of Regulation (EU) No 909/2014 requires CSD-banking service providers to ensure sufficient liquid resources in all relevant currencies under a wide range of potential stress scenarios. Therefore, rules specifying the frameworks and tools for the managing of liquidity risk in stress scenarios, should prescribe a methodology for the identification of currencies that are relevant for the management of liquidity risk. The identification of relevant currencies should be based on materiality considerations, rely on the net cumulative liquidity exposure identified and based on data collected over an extended and well-defined period of time. In addition, in order to maintain a coherent regulatory framework in the Union, the most relevant Union currencies identified under the Commission Delegated Regulation (EU) 2017/392 (8) under Article 12 of Regulation (EU) No 909/2014 should be included by default as relevant currencies.

(29)

The collection of sufficient data for identifying all other currencies than the most relevant Union currencies requires a minimum time period to elapse from the date of authorisation of the CSD-banking service providers until the end of that time period. Therefore, the use of alternative methods to identify all other currencies than the most relevant Union currencies should be allowed for the first year following the authorisation of CSD-banking service providers under the new regulatory framework established by Regulation (EU) No 909/2014 for those CSD-banking service providers that already provide banking-type ancillary services at the date of entry into force of the technical standards referred to in Article 69 of Regulation (EU) No 909/2014. This transitional arrangement should not affect the requirement for CSD-banking service providers to ensure sufficient liquid resources as such, but only the identification of those currencies that are subject to stress testing for the purpose of liquidity management.

(30)

Point (d) of Article 59(4) of Regulation (EU) No 909/2014 requires the CSD-banking service providers to have prearranged and highly reliable funding arrangements in place to ensure that collateral that is provided by a defaulting client can be converted into cash even in extreme but plausible market conditions. The same Regulation requires the CSD-banking service provider to mitigate intraday risks with highly liquid collateral with minimal credit and market risk. Given that liquidity has to be readily available, a CSD-banking service provider should be able to address any liquidity need on a same day basis. Given that CSD-banking service providers may operate in multiple time-zones, the provision of converting collateral into cash via prearranged funding arrangements on the same-day basis should be applied in consideration of the opening hours of the local payment systems of each individual currency it applies to.

(31)

The provisions in this Regulation are closely linked, since they deal with the prudential requirements for CSDs. To ensure coherence between those provisions, which should enter into force at the same time, and to facilitate a comprehensive view and compact access to them by persons subject to those obligations, it is desirable to include all of the regulatory technical standards required by Regulation (EU) No 909/2014 into a single Regulation.

(32)

This Regulation is based on the draft regulatory technical standards submitted by the European Banking Authority to the Commission.

(33)

The European Banking Authority has worked in close cooperation with the European System of Central Banks (ESCB) and the European Securities and Markets Authority (ESMA) before submitting the draft technical standards on which this Regulation is based. It has also conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the opinion of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and Council (9),

(a)

they are subscribed capital within the meaning of Article 22 of Council Directive 86/635/EEC (10);

(b)

they have been paid up, including the related share premium accounts;

(c)

they fully absorb losses in going concern situations;

(d)

in the event of bankruptcy or liquidation, they rank after all other claims in insolvency actions or under the applicable insolvency law.

(a)

meet the conditions in paragraph 1;

(b)

are ‘own funds instruments’ as defined in point 119 of Article 4(1) of Regulation (EU) No 575/2013;

(c)

are subject to the provisions of Regulation (EU) No 575/2013.

(a)

the CSD's capital requirements for operational, legal and custody risks, referred to in point (a) of Article 47(1) of Regulation (EU) No 909/2014, calculated in accordance with Article 4;

(b)

the CSD's capital requirements for investment risks, referred to in point (a) of Article 47(1) of Regulation (EU) No 909/2014, calculated in accordance with Article 5;

(c)

the CSD's capital requirements for business risks, referred to in point (a) of Article 47(1) of Regulation (EU) No 909/2014, calculated in accordance with Article 6;

(d)

the CSD's capital requirements for winding-down or restructuring its activities, referred to in point (b) of Article 47(1) of Regulation (EU) No 909/2014, calculated in accordance with Article 7.

(a)

A CSD that is not authorised in accordance with Article 54(2) of Regulation (EU) No 909/2014;

(b)

a CSD that is authorised in accordance with point (a) of Article 54(2) of Regulation (EU) No 909/2014 but which does not have permission to use the AMA referred to in Articles 321 to 324 of Regulation (EU) No 575/2013;

(c)

A CSD that is authorised in accordance with point (a) of Article 54(2) of Regulation (EU) No 909/2014 but which does not have permission to use the Standardised approach referred to in Articles 317 to 320 of Regulation (EU) No 575/2013.

(a)

8 % of the CSD's risk-weighted exposure amounts relating to both of the following:

(b)

the CSD's capital requirements for market risk in accordance with paragraphs 4 and 5.

(a)

where the CSD is not authorised in accordance with point (a) of Article 54(2) of Regulation (EU) No 909/2014 to provide banking-type ancillary services, the CSD shall apply the Standardised Approach for credit risk referred to in Articles 107 to 141 of Regulation (EU) No 575/2013 in combination with Article 192 to 241 of that Regulation on credit risk mitigation;

(b)

where a CSD is authorised in accordance with point (a) of Article 54(2) of Regulation (EU) No 909/2014 to provide banking-type ancillary services but does not have permission to use the Internal Ratings Based Approach (IRB Approach) set out in Articles 142 to 191 of Regulation (EU) No 575/2013, the CSD shall apply the Standardised Approach for credit risk set out in Articles 107 to 141 of Regulation (EU) No 575/2013 in combination with the provisions on credit risk mitigation set out in Articles 192 to 241 of Regulation (EU) No 575/2013;

(c)

where a CSD is authorised in accordance with point (a) of Article 54(2) of Regulation (EU) No 909/2014 to provide banking-type ancillary services and has permission to use the IRB Approach, the CSD shall apply the IRB Approach for credit risk provided for in Articles 142 to 191 of Regulation (EU) No 575/2013 in combination with the provisions on credit risk mitigation set out in Articles 192 to 241 of Regulation (EU) No 575/2013.

(a)

one of the methods set out in Articles 271 to 282 of Regulation (EU) No 575/2013;

(b)

the Financial Collateral Comprehensive Method applying the volatility adjustments provided for in Articles 220 to 227 of Regulation (EU) No 575/2013.

(a)

a CSD that is not authorised in accordance with point (a) of Article 54(2) of Regulation (EU) No 909/2014;

(b)

a CSD that is authorised in accordance with point (a) of Article 54(2) of Regulation (EU) No 909/2014 but is not permitted to use internal models to calculate own funds requirements for market risk.

(a)

the estimate resulting from the application of paragraph 2, minus whichever of the following is the lowest:

(b)

25 % of the CSD's annual gross operational expenses referred to in paragraph 3.

(a)

estimate the capital necessary to cover losses resulting from business risk on reasonably foreseeable adverse scenarios relevant to its business model;

(b)

document the assumptions and the methodologies used to estimate the expected losses referred to in point (a);

(c)

review and update the scenarios referred to in point (a) at least annually.

(a)

the CSD's annual gross operational expenses shall consist of at least the following:

(b)

the CSD's annual gross operational expenses shall be determined in accordance with one of the following:

(c)

the CSD may deduct tangible and intangible assets' depreciation and amortisation from annual gross operational expenses;

(d)

the CSD shall use the most recent audited information from their annual financial statement;

(e)

where the CSD has not completed business for one year from the date it starts its operations, it shall apply the gross operational expenses projected in its business plan.

(a)

estimate the time span required for winding-down or restructuring for all of the stress scenarios referred to in the Annex consistently with the plan referred to in Article 47(2) of Regulation (EU) No 909/2014;

(b)

divide the CSD's annual gross operational expenses determined in accordance with Article 6(3) by twelve (‘monthly gross operational expenses’);

(c)

multiply the monthly gross operational expenses referred to in point (b) by the longer of the following points:

(a)

it shall calculate, over the most recent calendar year, the average of the five highest intraday credit exposures (‘peak exposures’) resulting from providing the services set out in Section C of the Annex to Regulation (EU) No 909/2014;

(b)

it shall apply haircuts to all the collateral collected in relation to the peak exposures, and shall assume that, after the application of haircuts in accordance with Articles 222 to 227 of Regulation (EU) No 575/2013, collateral loses 5 % of its market value;

(c)

it shall calculate the average of the own funds requirements with regard to the peak exposures calculated in accordance with paragraph 2 considering those exposures as end-of-the-day exposures (‘capital surcharge’).

(a)

the Standardised Approach for credit risk referred to in Articles 107 to 141 of Regulation (EU) No 575/2013, where they do not have permission to use the IRB Approach;

(b)

the IRB Approach and the requirements of Articles 142 to 191 of Regulation (EU) No 575/2013, where they have permission to use the IRB approach.

(a)

it shall clearly distinguish the collateral from the other securities of the borrowing participant;

(b)

it shall accept collateral that meets the conditions of Article 10, or other types of collateral that meet the requirements of Article 11 in the following hierarchy:

(c)

it shall monitor on at least a daily basis the credit quality, market liquidity and price volatility of each security accepted as collateral and value it in accordance with Article 12;

(d)

it shall specify methodologies related to the haircuts applied to the collateral value in accordance with Article 13;

(e)

it shall ensure that the collateral remains sufficiently diversified to allow its liquidation within the periods referred to in Articles 10 and 11 without a significant market impact, in accordance with Article 14.

(a)

they are issued or explicitly guaranteed by one of the following:

(b)

the CSD can demonstrate that they have low credit and market risk based upon its own internal assessment employing a defined and objective methodology that does not exclusively rely on external opinions and that takes into consideration the country risk of the particular country where the issuer is established;

(c)

they are denominated in a currency the risks of which the CSD-banking service provider is able to manage;

(d)

they are freely transferable without any legal constraint or third party claims that impair their liquidation;

(e)

they fulfil one of the following requirements:

(f)

reliable price data on such debt instruments are published on at least a daily basis;

(g)

they are readily available and convertible into cash on a same-day basis.

(a)

the financial instruments have been issued by an issuer that has low credit risk based on an adequate internal assessment by the CSD-banking service provider, employing a defined and objective methodology that does not exclusively rely on external opinions and that takes into consideration the risk arising from the establishment of the issuer in a particular country;

(b)

the financial instruments have a low market risk based on an adequate internal assessment by the CSD-banking service provider, employing a defined and objective methodology that does not exclusively rely on external opinions;

(c)

they are denominated in a currency the risks of which the CSD-banking service provider is able to manage;

(d)

they are freely transferable and without any legal constraint or third party claims that impair their liquidation;

(e)

they fulfil one of the following requirements:

(f)

they can be liquidated on a same-day basis;

(g)

price data on these instruments are publicly available on a close to real-time basis;

(h)

they are not issued by any of the following:

(i)

they are not otherwise subject to significant wrong-way risk in the meaning of Article 291 of Regulation (EU) No 575/2013.

(a)

they are freely transferable without any legal constraint or third party claims that impair their liquidation;

(b)

they are eligible at a central bank of the Union, where the CSD-banking service provider has access to regular, non-occasional credit (‘routine credit’) at that central bank;

(c)

they are denominated in a currency the risk of which the CSD-banking service provider is able to manage;

(d)

the CSD-banking service provider has a prearranged funding arrangement with the type of creditworthy financial institution referred to in point (e) of Article 59(4) of Regulation (EU) No 909/2014 and specified in Article 38 of this Regulation, which provides for the conversion of these instruments into cash on a same-day basis.

(a)

they are freely transferable without any legal constraint or third party claims that impair their liquidation;

(b)

they are denominated in a currency the risk of which the CSD-banking service provider is able to manage;

(c)

the CSD-banking service provider has both of the following:

(a)

that the financial instruments referred to in Article 10 are valued mark-to- market on at least a daily basis;

(b)

that the financial instruments referred to in Article 11(1) are valued on at least a daily basis, and, where such daily valuation is not possible, that they are valued on a mark-to-model basis;

(c)

that the financial instruments referred to in Article 11(2) are valued on at least a daily basis, and where such daily valuation is not possible, that they are valued on a mark-to-model basis.

(a)

on a regular basis which shall be at least annually;

(b)

where a material change affects the valuation policies and procedures.

(a)

where collateral is eligible at the central bank to which the CSD-banking service provider has access to routine credit, the haircuts applied to that type of collateral by the central bank may be considered as the minimum haircut floor;

(b)

where collateral is not eligible at the central bank to which the CSD-banking service provider has access to routine credit, the haircuts applied by the central bank issuing the currency in which the financial instrument is denominated shall be considered as the minimum haircut floor.

(a)

the type of asset;

(b)

the level of credit risk associated with the financial instrument;

(c)

the country of issuance of the asset;

(d)

the maturity of the asset;

(e)

the historical and hypothetical future price volatility of the asset in stressed market conditions;

(f)

the liquidity of the underlying market, including bid-ask spreads;

(g)

the foreign exchange risk, where applicable;

(h)

the wrong-way risk in the meaning of Article 291 of Regulation (EU) No 575/2013, where applicable.

(a)

policies and procedures to be followed where any breach of the concentration limits occurs;

(b)

the risk mitigation measures to be applied where the concentration limits defined in the policies are exceeded;

(c)

the timing of the expected implementation of measures under point (b).

(a)

individual issuers considering their group structure;

(b)

country of the issuer;

(c)

type of issuer;

(d)

type of asset;

(e)

settlement currency;

(f)

collateral with credit, liquidity and market risk above minimum levels;

(g)

the eligibility of the collateral for the CSD-banking service provider to have access to routine credit at the central bank of issue;

(h)

each borrowing participant;

(i)

all borrowing participants;

(j)

financial instruments issued by issuers of the same type in terms of economic sector, activity, geographic region;

(k)

the level of credit risk of the financial instrument or of the issuer determined by an internal assessment by the CSD-banking service provider, based on a defined and objective methodology that does not exclusively rely on external opinions and that takes into consideration the risk arising from the establishment of the issuer in a particular country;

(l)

the liquidity and the price volatility of the financial instruments.

(a)

a single credit institution;

(b)

a third country financial institution that is subject to and complies with prudential rules that are at least as stringent as those provided in Directive 2013/36/EU and Regulation (EU) No 575/2013, in accordance with Article 114(7) of that Regulation;

(c)

a commercial entity that is part of the same group as the institution referred to in either point (a) or (b).

(a)

they are issued by an issuer that has low credit risk based on an adequate internal assessment by the CSD-banking service provider, employing a defined and objective methodology that does not exclusively rely on external opinions and that takes into consideration the risk arising from the establishment of the issuer in a particular country;

(b)

they are denominated in a currency the risk of which the CSD-banking service provider is able to adequately manage;

(c)

they are irrevocable, unconditional and there is no legal or contractual exemption or option allowing the issuer to oppose the payment of the guarantee;

(d)

they can be honoured, on demand, within one business day, during the period of liquidation of the portfolio of the defaulting borrowing participant free of any regulatory, legal or operational constraint;

(e)

they are not issued by an entity that is part of the same group as the borrowing participant covered by the guarantee, or by an entity whose business involves providing services critical to the functioning of the CSD-banking service provider, unless that entity is an European Economic Area central bank or a central bank issuing a currency in which the CSD-banking service provider has exposures;

(f)

they are not subject to significant wrong-way risk within the meaning of Article 291 of Regulation (EU) No 575/2013;

(g)

they are fully guaranteed by collateral that meets the following conditions:

(a)

they are issued by a Union central bank or a central bank issuing a currency in which the CSD-banking service provider has exposures;

(b)

they are denominated in a currency the risk of which the CSD-banking service provider is able to adequately manage;

(c)

they are irrevocable, unconditional and the issuing central bank cannot rely on any legal or contractual exemption or option allowing the issuer to oppose the payment of the guarantee;

(d)

they are honoured within one business day.

(a)

they cover only the credit exposures between the two linked CSDs;

(b)

they have been issued by a consortium of creditworthy financial institutions that fulfil the requirements set out in Article 38(1), in which each of those financial institutions is obliged to pay the part of the total amount that has been contractually agreed upon;

(c)

they are denominated in a currency the risk of which the CSD-banking service provider is able to adequately manage;

(d)

they are irrevocable, unconditional and the issuing institutions cannot rely on any legal or contractual exemption or option allowing the issuer to oppose the payment of the letter of credit;

(e)

they can be honoured, on demand, free of any regulatory, legal or operational constraint;

(f)

they are not issued by:

(g)

they are not subject to significant wrong-way risk within the meaning of Article 291 of Regulation (EU) No 575/2013;

(h)

the CSD-banking service provider monitors the creditworthiness of the issuing financial institutions on an regular basis by independently assessing the creditworthiness of those institutions and by assigning and regularly reviewing internal credit ratings for each financial institution;

(i)

they can be honoured during the period of liquidation within three business days from the moment when the defaulting CSD-banking service provider fails to meet its payment obligations when they are due;

(j)

qualifying liquid resources referred to in Article 34 are available to a sufficient amount that covers the time gap until the time at which the bank guarantee and letters of credit has to be honoured in case of default of one of the linked CSDs;

(k)

the risk of not having the full amount of the bank guarantee and letters of credit being paid by the consortium is mitigated by:

(l)

the arrangements are periodically tested and reviewed pursuant to Article 41(3) of Regulation (EU) No 909/2014.

(a)

intraday credit risk and overnight credit risk;

(b)

relevant collateral and other equivalent financial resources used in relation to the risks referred to in point (a);

(c)

potential residual credit exposures;

(d)

reimbursement procedures and sanctioning rates.

(a)

the requirements of Section 2 for the monitoring, measuring, management, reporting and public disclosure of liquidity risks;

(b)

the requirements of Regulation (EU) No 575/2013 on monitoring, measuring, management, reporting and public disclosure of other liquidity risks than those covered by point (a).

(a)

measure intraday and overnight credit risk in accordance with Sub-section 1;

(b)

monitor intraday and overnight credit risk in accordance with Sub-section 2;

(c)

manage intraday and overnight credit risk in accordance with Sub-section 3;

(d)

measure, monitor and manage the collateral and other equivalent financial resources, as referred to in points (c) and (d) of Article 59(3) of Regulation (EU) No 909/2014, in accordance with Chapter I of this Regulation;

(e)

analyses and plans how to address any potential residual credit exposures, in accordance with Sub-section 4;

(f)

manage its reimbursement procedures and sanctioning rates, in accordance with Sub-section 5;

(g)

report its credit risks in accordance with Sub-section 6;

(h)

publicly disclose its credit risks in accordance with Sub-section 7.

(a)

the policies and procedures are subject to a material change;

(b)

where the CSD-banking service provider voluntarily carries out a change following the assessment referred to in Article 19.

(a)

the metrics referred to in Article 19;

(b)

haircuts applied in accordance with Article 13, reported per type of collateral;

(c)

changes to the policies or procedures referred to in paragraph 3.

(a)

peak and average intraday credit exposures for banking-type ancillary services set out in Section C of the Annex to Regulation (EU) No 909/2014;

(b)

peak and average intraday credit exposures per borrowing participant, and further breakdown of collateral covering these credit exposures;

(c)

peak and average intraday credit exposures to other counterparties and, if it is secured by collateral, further breakdown of collateral covering these intraday credit exposures;

(d)

total value of intraday credit lines extended to participants;

(e)

further breakdown of credit exposures referred to in points (b) and (c) shall cover the following:

(a)

monitor on an ongoing basis, through an automatic reporting system, the intraday credit exposures arising from the banking-type ancillary services referred to in Section C of the Annex to Regulation (EU) No 909/2014;

(b)

maintain, for a period of at least 10 years, a record of the daily intraday peak and average intraday credit exposures arising from banking-type ancillary services referred to in Section C of the Annex to Regulation (EU) No 909/2014;

(c)

record the intraday credit exposures stemming from each entity on which intraday credit exposures are incurred, including the following:

(d)

fully describe how the credit risk management framework takes into account the interdependencies and the multiple relationships that a CSD-banking service provider may have with each of the entities referred to in point (c);

(e)

specify, for each counterparty, how the CSD-banking service provider monitors the concentration of its intraday credit exposures, including its exposures to the entities of the groups comprising the entities listed in point (c);

(f)

specify how the CSD-banking service provider assesses the adequacy of the haircuts applied to the collateral collected;

(g)

specify how the CSD-banking service provider monitors the collateral coverage of the credit exposures and the coverage of credit exposures with other equivalent financial resources.

(a)

maintain a record of the sum of the actual end of day credit exposures, for a period of at least 10 years;

(b)

record the information referred to in point (a) on a daily basis.

(a)

specify how it assesses the design and operation of its credit risk management framework relating to all the activities listed in Section C of the Annex to Regulation (EU) No 909/2014;

(b)

only grant credit lines that are unconditionally cancellable at any time by the CSD-banking service provider and without prior notice to the borrowing participants of the securities settlement system operated by the CSD;

(c)

where a bank guarantee referred to in Article 16 is used in interoperable links, a CSD-banking service provider shall assess and analyse the interconnectedness that may arise from having the same participants providing that bank guarantee.

(a)

exposures to the members of the European System of Central Banks and other Member States' bodies performing similar functions and other Union public bodies charged with or intervening in the management of the public debt;

(b)

exposures to one of the multilateral development banks listed in Article 117(2) of Regulation (EU) No 575/2013;

(c)

exposures to one of the international organisations listed in Article 118 of Regulation (EU) No 575/2013;

(d)

exposures to public sector entities within the meaning of Article 4(8) of Regulation (EU) No 575/2013 where they are owned by central governments and have explicit arrangements provided by central governments guaranteeing their credit exposures;

(e)

exposures to third country central banks that are denominated in the domestic currency of that central bank provided that the Commision has adopted an implementing act in accordance with Article 114(7) of Regulation (EU) No 575/2013 confirming that this third country is considered as applying supervisory and regulatory arrangements at least equivalent to those applied in the Union.

(a)

assess the creditworthiness of the borrowing participant based on a methodology that does not exclusively rely on external opinions;

(b)

verify the compliance of collateral and other equivalent financial resources provided by a participant to cover intraday credit exposures, with the requirements set out in Articles 9 and 15, respectively;

(c)

set the credit limits to a borrowing participant based on the multiple relationships that the CSD-banking service provider has with the borrowing participant, including where the CSD-banking service provider provides more than one banking-type ancillary service among those referred to in Section C of the Annex to Regulation (EU) No 909/2014 to the same participant;

(d)

take into account the level of qualifying liquid resources in accordance with Article 34;

(e)

review the credit limits to a borrowing participant with the view to ensuring both of the following:

(f)

review the credit lines granted to borrowing participants at least annually based on their actual usage of credit;

(g)

ensure that the amount of overnight credit exposures is integrated in the usage of the credit limit granted to the participant;

(h)

ensure that the amount of overnight credit not yet reimbursed is included in the intraday exposures of the next day and is capped by the credit limit.

(a)

specify how potentially uncovered credit losses are allocated, including repayment of any funds that a CSD-banking service provider may borrow from liquidity providers to cover liquidity gaps related to such losses;

(b)

include an ongoing assessment of evolving market conditions related to the post-liquidation value of the collateral or of other equivalent financial resources that may develop into a potential residual credit exposure;

(c)

specify that the assessment referred to in point (b) shall be accompanied by a procedure setting out:

(a)

they are higher than the interbank money-market overnight collateralised market rate and the marginal lending rate of a central bank of issue of the currency of the credit exposure;

(b)

they take into consideration the funding costs of the currency of the credit exposure and the creditworthiness of the participant that has an overnight credit exposure.

(a)

it shall submit a qualitative statement that specifies the actions taken regarding how credit risks, including intraday credit risks are measured, monitored and managed, with at least an annual frequency;

(b)

it shall notify any material changes to the actions taken in accordance with point (a), immediately after such material changes take place;

(c)

it shall submit the metrics referred to in Article 19 on a monthly basis.

(a)

measure intraday and overnight liquidity risk, in accordance with Sub-section 1;

(b)

monitor intraday and overnight liquidity risk, in accordance with Sub-section 2;

(c)

manage liquidity risk, in accordance with Sub-section 3;

(d)

report intraday and overnight liquidity risk, in accordance with Sub-section 4;

(e)

disclose the framework and tools for the monitoring, measuring, management, and the reporting on liquidity risk, in accordance with Sub-section 5.

(a)

maximum intraday liquidity usage, calculated using the largest positive net cumulative position and the largest negative net cumulative position;

(b)

total available intraday liquid resources at the start of the business day, broken down into all of the following:

(c)

total value of all of the following:

(a)

the metrics referred to in Article 30(1);

(b)

the risk appetite of the CSD-banking service provider;

(c)

a contingency funding plan describing the remedies to be applied where the risk appetite is breached.

(a)

maintain, for a period of at least 10 years, a record of the daily largest positive net cumulative intraday position and the largest negative net cumulative intraday position for each settlement currency of the securities settlement system for which it acts as settlement agent;

(b)

monitor its intraday liquidity exposures on an ongoing basis against the maximum intraday liquidity exposure that has been historically recorded.

(a)

maintain, for a period of at least 10 years, a record of the liquidity risks created by the use of overnight credit for each currency of the securities settlement system for which it acts as settlement agent;

(b)

monitor the liquidity risk created by the overnight credit extended against the maximum liquidity exposure created by the overnight credit extended, historically recorded.

(a)

cash deposited at a central bank of issue;

(b)

available cash deposited at one of the creditworthy financial institutions identified in Article 38(1);

(c)

committed lines of credit or similar agreements;

(d)

assets that fulfil the requirements of Article 10 and Article 11(1) of this Regulation applicable to collateral, or financial instruments compliant with the Delegated Regulation (EU) 2017/392, that are readily available and convertible into cash with prearranged and highly reliable funding arrangements in accordance with Article 38 of this Regulation;

(e)

the collateral referred to in Article 10 and Article 11(1).

(a)

estimate the intraday liquidity inflows and outflows for all the banking-type ancillary services provided;

(b)

anticipate the intraday timing of those flows;

(c)

forecast the intraday liquidity needs that may arise at different periods during the day.

(a)

arrange to acquire sufficient intraday funding to meet its intraday objectives as they result from the analysis referred to in paragraph 1;

(b)

manage and be ready to convert into cash the collateral necessary to obtain intraday funds in stress situations, taking into account haircuts in accordance with Article 13 and concentration limits in accordance with Article 14;

(c)

manage the timing of its liquidity outflows in line with its intraday objectives;

(d)

have arrangements in place to deal with unexpected disruptions to its intraday liquidity flows.

(a)

a range of historical scenarios, including periods of extreme market movements observed over the past 30 years, or as long as reliable data have been available, that would have exposed the CSD-banking service provider to the greatest financial risk, unless the CSD-banking service provider proves that recurrence of a historical instance of large price movements is not plausible;

(b)

a range of potential future scenarios that fulfil the following conditions:

(a)

the design and operations of the CSD-banking service provider, including in relation to the entities referred to in Article 30(2) and linked financial markets infrastructures or other entities that may pose material liquidity risk to the CSD-banking service provider, and, where applicable, cover a multiday period;

(b)

any strong relationships or similar exposures between the participants of the CSD-banking service provider, including between the participants and their parent undertaking and subsidiaries;

(c)

an assessment of the probability of multiple defaults of participants and the effects among the participants that such defaults may cause;

(d)

the impact of multiple defaults referred to in point (c) on the CSD-banking service provider's cash-flows and on its counterbalancing capacity and survival horizon;

(e)

whether the modelling reflects the different impacts that an economic stress may have both on the CSD-banking service provider's assets and its liquidity inflows and outflows.

(a)

the timely monitoring of liquid assets, including the quality of the assets, their concentration and their immediate availability;

(b)

appropriate policy on monitoring market conditions that can affect the liquidity of the intraday qualifying liquid resources;

(c)

the value of the intraday qualifying liquid resources, valued and calibrated under stressed market conditions, including the scenarios referred to in Article 36(7).

(a)

placement of its liquid assets in a separate account under the direct management of the liquidity management function, which may only be used as a source of contingent funds during stress periods;

(b)

establishment of internal systems and controls to give the liquidity management function effective operational control to carry out both of the following:

(c)

a combination of the requirements set out in points (a) and (b), where such a combination ensures a comparable result.

(a)

it is conducted on the basis of the factors referred to in paragraphs 4 and 5, as well as the specific scenarios referred to in paragraph 6;

(b)

it includes regular testing of the CSD-banking service provider's procedures for accessing its qualifying liquid resources from a liquidity provider using intraday scenarios;

(c)

it complies with the requirements of paragraphs 2 to 6.

(a)

report to both its own risk committee and, where relevant, to the risk committee of the CSD the results of the stress tests;

(b)

review and adjust its contingency plan referred to in point (c) of Article 32(1) where breaches cannot be restored by the end of the day;

(c)

have rules and procedures to evaluate and adjust the adequacy of its liquidity risk management framework and liquidity providers in accordance with the results and analysis of its stress tests.

(a)

the missed receipt of payments from participants on a timely basis;

(b)

the temporary failure or inability of one of the CSD-banking service provider's liquidity providers to provide liquidity, including those referred to in point (e) of Article 59(4) of Regulation (EU) No 909/2014, custodian banks, nostro agents, or any related infrastructure, including interoperable CSDs;

(c)

simultaneous pressures in funding and asset markets, including a decrease in the value of the qualifying liquid resources;

(d)

stress in foreign exchange convertibility and access to foreign exchange markets;

(e)

adverse changes in the reputation of a CSD-banking services provider that casue certain liquidity providers to withdraw liquidity;

(f)

relevant peak historic price volatilities of collateral or assets as recurrent events;

(g)

changes in the credit availability in the market.

(a)

rank the currencies from highest to lowest based on the average of the three largest daily negative net cumulative positions, converted into euro, within a period of 12 months;

(b)

consider as relevant:

(a)

an ongoing analysis of evolving liquidity needs to allow the identification of events that may develop into unforeseen and potentially uncovered liquidity shortfalls, including a plan for the renewal of funding arrangements in advance of their expiry;

(b)

a regular practical testing of the rules and procedures themselves.

(a)

how a CSD-banking service provider shall access cash deposits or overnight investments of cash deposits;

(b)

how a CSD-banking service provider shall execute same-day market transactions;

(c)

how a CSD-banking service provider shall draw on prearranged liquidity lines.

(a)

the risk committee of the CSD-banking service provider and, where relevant, to the risk committee of the CSD;

(b)

the relevant competent authority referred to in Article 60(1) of Regulation (EU) No 909/2014, in the manner set out in Article 39 of this Regulation.

(a)

a credit institution authorised in accordance with Article 8 of Directive 2013/36/EU that the CSD-banking service provider can demonstrate to have low credit risk based on an internal assessment, employing a defined and objective methodology that does not exclusively rely on external opinions;

(b)

a third country financial institution that meets all of the following requirements:

(a)

subjecting those institutions to regular and independent assessments of their creditworthiness;

(b)

assigning and regularly reviewing internal credit ratings for each financial institution with which the CSD has established a prearranged and highly reliable funding arrangement.

(a)

that the concentration limits are established by currency;

(b)

that at least two arrangements for each major currency are put in place;

(c)

that the CSD-banking service provider is not overly reliant on any individual financial institution, when all currencies are taken into account.

(a)

any significant changes to the policies and procedures concerning concentration limits towards its liquidity providers determined in accordance with this Article;

(b)

cases where it exceeds a concentration limit towards its liquidity providers set out in its policies and procedures, as referred to in paragraph 5.

(a)

it has real-time visibility of the assets identified as collateral;

(b)

the collateral is segregated from the other securities of the borrowing participant;

(c)

the arrangements with that third party entity prevent any losses of assets to the CSD-banking service provider.

(a)

it shall submit a qualitative statement that specifies all actions taken regarding how liquidity risks, including intraday are measured, monitored and managed, with at least an annual frequency;

(b)

it shall notify any material changes to the actions taken, referred to in point (a), immediately after such material changes take place;

(c)

it shall submit the metrics referred to in Article 30(1) on a monthly basis.

(a)

a sufficiently large relative share of each currency in the total value of settlement by a CSD of settlement instructions, against payment calculated over a period of one year;

(b)

the impact of the non-availability of each currency on the smooth functioning of the operations of CSD-banking service providers under a wide range of potential stress scenarios referred to in Article 36.

10.3.2017   

EN

Official Journal of the European Union

L 65/44

(1)

The European Securities and Markets Authority (ESMA) has considered the ‘Report on the outcome of the Committee of European Banking Supervisors call for evidence on custodian banks' internalisation of settlement and Central Counterparties-like activities’ of 17 April 2009, which showcases considerable differences regarding the rules and monitoring procedures at the level of settlement internalisers across Member States, as well as regarding the understanding of the concept of internalised settlement.

(2)

In accordance with Regulation (EU) No 909/2014, settlement internalisers are to report on settlements that they internalise. In order to provide a good overview of the scope and of the extent of internalised settlements it is necessary to specify further the content of such reporting. The reports on internalised settlement should provide detailed information on the aggregated volume and value of settlement instructions settled by settlement internalisers outside securities settlement systems specifying asset class, type of securities transactions, type of clients, and issuer central securities depository (CSD).

A settlement internaliser should only report internalised settlements where it has executed a settlement instruction by a client of the settlement internaliser in its own books. A settlement internaliser should not report subsequent alignments of book-entry positions to reflect the settlement of instructions by other entities in the holding chain of securities, as these do not qualify as internalised settlement. Similarly, a settlement internaliser should not report transactions executed on a trading venue and transferred by the trading venue to a central counterparty (CCP) for clearing or to a CSD for settlement.

(3)

In order to facilitate data comparability across settlement internalisers, calculations related to the value of internalised settlement instructions under this Regulation should be based on objective and reliable data and methodologies.

(4)

The reporting requirements set out in this Regulation may require significant IT system changes, market testing and adjustments to legal arrangements of the institutions concerned. It is therefore necessary to give those institutions sufficient time to prepare for the application of those requirements.

(5)

This Regulation is based on the draft regulatory technical standards submitted by ESMA to the Commission.

(6)

ESMA has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the opinion of the Securities and Markets Stakeholder Group established in accordance with Article 10 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council (2).

(7)

In accordance with Article 9(2) of Regulation (EU) No 909/2014, in developing the draft regulatory technical standards on which this Regulation is based, ESMA has worked in close cooperation with the members of the European System of Central Banks,

(1)

‘Internalised settlement instruction’ means an instruction by a client of the settlement internaliser to place at the disposal of the recipient an amount of money or to transfer the title to, or interest in, a security or securities by means of a book entry on a register, or otherwise, which is settled by the settlement internaliser in its own books and not through a securities settlement system.

(2)

‘Failed internalised settlement instruction’ means non-occurrence of settlement, or partial settlement, of a securities transaction at the date agreed by the parties concerned due to a lack of securities or cash, regardless of the underlying cause.

(a)

country code of the place of establishment of the settlement internaliser;

(b)

reporting timestamp;

(c)

period covered by the report;

(d)

identifier of the settlement internaliser;

(e)

contact details of the settlement internaliser;

(f)

the aggregated volume and value, expressed in euros, of internalised settlement instructions settled by the settlement internaliser during the period covered by the report;

(g)

the aggregated volume and value, expressed in euros, of internalised settlement instructions settled by the settlement internaliser during the period covered by the report, for each of the following types of financial instruments:

(h)

the aggregated volume and value, expressed in euros, of all internalised settlement instructions, for each of the following types of securities transactions settled by the settlement internaliser during the period covered by the report:

(i)

the aggregated volume and value, expressed in euros, of all internalised settlement instructions, settled by the settlement internaliser during the period covered by the report, covering the following types of clients:

(j)

the aggregated volume and value, expressed in euros, of all internalised settlement instructions referring to cash transfers settled by the settlement internaliser during the period covered by the report;

(k)

the aggregated volume and value, expressed in euros, of all internalised settlement instructions settled by the settlement internaliser during the period covered by the report, per each CSD that provides the core service referred to in point 1 or 2 of Section A of the Annex to Regulation (EU) No 909/2014 in relation to the underlying securities;

(l)

the aggregated volume and value, expressed in euros, of all internalised settlement instructions referred to in points (g) to (j), per each CSD that provides the core service referred to in point 1 or 2 of Section A of the Annex to Regulation (EU) No 909/2014 in relation to the underlying securities;

(m)

the aggregated volume and value, expressed in euros, of failed internalised settlement instructions referred to in points (f) to (l) that fail to be settled as during the period covered by the report;

(n)

the rates of internalised settlement instructions referred to in points (f) to (l) that fail to be settled as compared to the following:

(a)

in the case of internalised settlement instructions against payment, the settlement amount of the cash leg;

(b)

in the case of internalised settlement instructions free of payment, the market value of the securities or, if not available, the nominal value of the securities.

(a)

for financial instruments referred to in Article 3(1) of Regulation (EU) No 600/2014 of the European Parliament and of the Council (4) admitted to trading on a trading venue within the Union, the value determined on the basis of the closing price of the most relevant market in terms of liquidity referred to in Article 4(6)(b) of that Regulation;

(b)

for financial instruments admitted to trading on a trading venue within the Union other than those referred to in point (a), the value determined on the basis of the closing price of the trading venue within the Union with the highest turnover;

(c)

for financial instruments other than those referred to in points (a) and (b) the value determined on the basis of a price calculated using a pre-determined methodology, approved by the competent authority, that refers to criteria related to market data, such as market prices available across trading venues or investment firms.

10.3.2017   

EN

Official Journal of the European Union

L 65/48

(1)

The provisions in this Regulation are closely linked, since they all deal with the supervisory requirements applicable to central securities depositories (CSDs). To ensure coherence between these provisions, which should enter into force at the same time, and to facilitate a comprehensive view and easy access by persons that are subject to these provisions, it is desirable to include all the regulatory technical standards concerning the supervisory requirements under Regulation (EU) No 909/2014 in a single Regulation.

(2)

In view of the global nature of financial markets and given the commitments undertaken by the Union in this field, due regard should be had to the Principles for Financial Market Infrastructures issued by the Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions (CPSS-IOSCO Principles) in April 2012.

(3)

In order to ensure consistent application of rules concerning improving securities settlement in the Union, certain technical terms should be clearly defined.

(4)

It is important to ensure appropriate authorisation and supervision of a CSD. As such, a list of the relevant authorities issuing the most relevant Union currencies in which settlement takes place to be involved in the process of authorisation and supervision of a CSD should be defined. This should be based on the share of the currencies that those authorities issue in the total value of settlement instructions against payment settled annually by a CSD and on the share of settlement instructions against payment settled by a CSD in a Union currency compared to the total value of settlement instructions against payment settled in that currency across all CSDs in the Union.

(5)

In order to allow competent authorities to perform a thorough assessment, a CSD applying for authorisation should provide information on the structure of its internal controls and the independence of its governing bodies to enable the competent authority to assess whether the corporate governance structure ensures the independence of the CSD and whether that structure and its reporting lines, as well as the mechanisms adopted for managing possible conflicts of interest are adequate.

(6)

To enable the competent authority to assess the good reputation and the experience and skills of the CSD's senior management and members of the management body, an applicant CSD should provide all relevant information to perform that assessment.

(7)

Information on a CSD's branches and subsidiaries is necessary to enable the competent authority to clearly understand the CSD's organisational structure and evaluate any potential risk to the CSD due to the activity of those branches and subsidiaries.

(8)

A CSD applying for authorisation should provide the competent authority with the relevant information to demonstrate that it has the necessary financial resources at its disposal and adequate business continuity arrangements for the performance of its functions on an ongoing basis.

(9)

In addition to receiving information on the core activities, it is important for the competent authority to receive information on the ancillary services that the CSD applying for authorisation intends to offer to enable the competent authority to have a complete overview of the applicant CSD's services.

(10)

In order for the competent authority to assess the continuity and orderly functioning of technological systems of an applicant CSD, that CSD should provide the competent authority with descriptions of the relevant technological systems and how they are managed, including if they are outsourced.

(11)

Information concerning the fees associated with the core services provided by CSDs is important and should form part of the application for authorisation of a CSD in order to enable the competent authorities to verify whether those fees are proportionate, non-discriminatory and not bundled with the costs of other services.

(12)

In order to ensure that the investors' rights are protected, and that conflict of laws issues are adequately managed, when assessing the measures that a CSD intends to take to allow its users to comply with the national laws referred to in Article 49(1) of Regulation (EU) No 909/2014, the CSD should take into account both issuers and participants, as appropriate, in accordance with the respective national laws.

(13)

In order to secure fair and non-discriminatory access to the notary, central maintenance and securities settlement services within the financial market, issuers, other CSDs and other market infrastructures have been granted access to a CSD in accordance with Regulation (EU) No 909/2014. An applicant CSD should, therefore, provide the competent authority with information about its access policies and procedures.

(14)

In order to carry out its authorisation duties effectively, the competent authority should receive all information from CSDs applying for authorisation and related third parties, including third parties to whom applicant CSDs have outsourced operational functions and activities.

(15)

To ensure general transparency of governance rules of a CSD applying for authorisation, the competent authority should be provided with documents confirming that the applicant CSD has adopted the necessary arrangements for a non-discriminatory establishment of an independent user committee for each securities settlement system that it operates.

(16)

To secure the orderly functioning of core infrastructure services within the financial market, a CSD applying for authorisation should provide the competent authority with all necessary information to demonstrate that it has adequate policies and procedures for ensuring reliable record-keeping systems as well as effective mechanisms for CSD services, including in particular the measures for preventing and addressing settlements fails, and the rules concerning the integrity of the issue, the protection of securities of participants and those of their clients, settlement finality, participant default and transfer of participants and clients' assets in case of a withdrawal of authorisation.

(17)

The risk-management models associated with the services provided by an applicant CSD are a necessary item in its application for authorisation so as to enable the competent authority to evaluate the reliability and integrity of the adopted procedures and help market participants make an informed choice.

(18)

In order to verify the safety of the link arrangements of the CSD applying for authorisation, to assess the rules applied in the linked systems and evaluate the risks stemming from those links, the competent authority should receive from an applicant CSD any relevant information for the analysis, together with the CSD assessment of the link arrangements.

(19)

When granting the approval of a CSD's participation in the capital of another entity, the competent authority of the CSD should take into consideration the criteria that ensure that the participation does not increase significantly the CSD's risk profile. In order to ensure its safety and continuity of its services, a CSD should not assume unlimited financial liabilities as a result of its participation in the capital of legal persons other than those providing the services set out in Regulation (EU) No 909/2014. A CSD should fully capitalise the risks resulting from any participation in the capital of another entity.

(20)

In order for a CSD not to be dependent on other shareholders of the entities in which it holds a participation, including with regard to the risk-management policies, it should have full control of those entities. This requirement should also facilitate the exercise of supervisory and oversight functions by competent authorities and relevant authorities by allowing easy access to relevant information.

(21)

A CSD should have a clear strategic rationale for the participation beyond mere profit making, taking into account the interests of the issuers of securities issued with the CSD; its participants and its clients.

(22)

In order to properly quantify and outline the risks stemming from its participation in the capital of another legal person, a CSD should provide independent risk analyses, approved by an internal or external auditor, for the financial risks and liabilities of the CSD resulting from that participation.

(23)

Following the experience of the financial crisis, authorities should focus on ongoing rather than ex post supervision. It is, therefore, necessary to ensure that for each review and evaluation under Regulation (EU) No 909/2014, the competent authority has sufficient access to information on a continuous basis. In order to determine the scope of information to be delivered for each review and evaluation, the provisions of this Regulation should follow the requirements for authorisation with which a CSD has to comply under Regulation (EU) No 909/2014. This includes substantive changes to elements already submitted during the process of authorisation, information relating to periodic events and statistical data.

(24)

To promote an effective bilateral and multilateral exchange of information between competent authorities, the results of the review and evaluation by one authority of the activities of a CSD should be shared with other competent authorities where this information is likely to facilitate their tasks, without prejudice to confidentiality and data protection requirements and in addition to any cooperation arrangements provided in Regulation (EU) No 909/2014. An additional exchange of information among competent authorities and relevant authorities or authorities in charge of markets in financial instruments should be organised allowing for a sharing of the findings of the competent authority in the course of the process of review and evaluation.

(25)

Taking into account the possible burden of gathering and processing a vast amount of information related to the operation of a CSD, and in order to avoid duplications, only relevant modified documents should be provided in the context of the review and evaluation. Those documents should be delivered in a manner that enables the competent authority to identify all the relevant changes made to the arrangements, strategies, processes and mechanisms implemented by the CSD since authorisation or since the completion of the last review and evaluation.

(26)

Another category of information that is useful for the competent authority to have in order to be able to perform the review and evaluation refers to events that by nature occur on a periodic basis and which are related to the operation of the CSD and the provision of its services.

(27)

To carry out a comprehensive risk evaluation of a CSD, the competent authority will need to request statistical data on the scope of the CSD's business activities in order to evaluate the risks related to CSDs operation and to the smooth operation of securities markets. In addition, statistical data enable the competent authority to monitor the size and importance of securities transactions and settlements within the financial markets as well as to assess the ongoing and potential impact of a given CSD on the securities market as a whole.

(28)

For the competent authority to monitor and evaluate the risks to which the CSD is or may be exposed to and which may arise for the smooth functioning of securities markets, it should be able to request additional information on the risks and activities of a CSD. The competent authority should therefore be able to define and request on its own initiative, or following a request submitted to it by another authority, any additional information which it considers necessary for each review and evaluation of the activities of a CSD.

(29)

It is important to ensure that third-country CSDs that intend to provide the services pursuant to Regulation (EU) No 909/2014 do not disrupt the orderly functioning of Union markets.

(30)

The ongoing assessment of the full compliance of a third-country CSD with the prudential requirements of a third country is the duty of the third country competent authority. The information to be provided to the European Securities and Markets Authority (ESMA) by an applicant CSD should not have the objective of replicating the assessment of the third country competent authority, but ensuring that the applicant is subject to effective supervision and enforcement in that third country, thus guaranteeing a high degree of investor protection.

(31)

To allow ESMA to perform a complete assessment of the application for recognition, the information provided by the applicant should be complemented by the necessary information to assess the effectiveness of the ongoing supervision, enforcement powers and actions taken by the third country competent authority. That information should be provided under a cooperation arrangement established in accordance with Regulation (EU) No 909/2014. The cooperation arrangement should ensure that ESMA is informed in a timely manner of any supervisory or enforcement action against the third-country CSD applying for recognition and any change of the conditions under which authorisation was granted to the relevant CSD and on any relevant update of the information originally provided by the CSD under the recognition process.

(32)

In order to ensure that investors' rights are protected, and that conflict of laws issues are adequately managed, when assessing the measures that a third-country CSD intends to take to allow its users to comply with the national laws referred to in Article 49(1) of Regulation (EU) No 909/2014, that third-country CSD should take into account both issuers and participants, as appropriate, in accordance with the respective national laws referred to in Article 49(1) of that Regulation.

(33)

To establish a sound risk-management framework, a CSD should take an integrated and comprehensive view of all relevant risks. This should include the risks that the CSD bears from any other entities and the risks that it poses to third parties, including its users and to the extent practicable their clients, as well as linked CSDs, central counterparties, trading venues, payment systems, settlement banks, liquidity providers and investors.

(34)

To ensure that CSDs operate with the necessary level of human resources to meet all of their obligations and to ensure that competent authorities have the relevant contact points within the CSDs that they supervise, CSDs should have key dedicated staff that should be accountable for the CSD and their own individual performance, particularly at the level of senior management and management body.

(35)

To ensure an adequate control of the activities performed by CSDs, independent audits covering the operations of the CSD, risk-management processes, compliance and internal control mechanisms should be put in place and performed regularly. The independence of audits should not necessarily require the involvement of an external auditor, provided that the CSD demonstrates to the competent authority that the independence of its internal auditor is properly ensured. In order to ensure the independence of its internal audit function, the CSD should also establish an audit committee.

(36)

A CSD should set up a risk committee in order to ensure that the management body of the CSD is advised at the highest technical level on its overall current and future risk tolerance and strategy. To ensure its independence from the CSD's executive management and a high degree of competence, the risk committee should be composed of a majority of non-executive members and it should be chaired by a person with an appropriate experience on risk management.

(37)

When assessing potential conflicts of interest, a CSD should not only examine the members of the management body, senior management or staff of the CSD but also any person directly or indirectly linked to those individuals or to the CSD, whether it is a natural or legal person.

(38)

A CSD should have a chief risk officer, a chief compliance officer, a chief technology officer, as well as a risk-management function, a technology function, a compliance and internal control function, and internal audit function. A CSD should in any case be able to organise the internal structure of those functions according to its needs. Different persons should fulfil the roles of chief risk officer, chief compliance officer and chief technology officer given that those functions are usually fulfilled by persons with different academic and professional profiles. In this respect, the provisions set out in this Regulation closely follow the system established by Regulation (EU) No 648/2012 of the European Parliament and the Council (2) for other market infrastructures.

(39)

Records kept by a CSD should be structured and allow for easy access to the data stored by the competent authorities involved in the supervision of CSDs. A CSD should ensure that the data records it keeps, including the complete accounting of the securities it maintains, are accurate and up-to-date in order to serve as a reliable data source for supervision purposes.

(40)

To facilitate the reporting and recording of a consistent set of information under different requirements, records kept by CSDs should cover each individual service provided by the CSD in accordance with Regulation (EU) No 909/2014, and should include at least all the details to be reported under the rules on settlement discipline provided in that Regulation.

(41)

The preservation of the rights of issuers and investors is essential for the orderly functioning of a securities market. A CSD should therefore employ appropriate rules, procedures and controls to prevent the unauthorised creation or deletion of securities. It should also conduct at least daily reconciliation of the securities accounts that it maintains.

(42)

A CSD should maintain robust accounting practices and perform audits to verify that its records of securities are accurate and that its measures ensuring the integrity of securities issues are adequate.

(43)

In order to effectively ensure the integrity of the issue, the reconciliation measures provided in Regulation (EU) No 909/2014 should apply to all CSDs regardless of whether or not they provide the notary service or central maintenance service referred to in that Regulation in relation to a securities issue.

(44)

With regard to other entities involved in the reconciliation process, several scenarios should be distinguished depending on the role of those entities. The reconciliation measures should reflect the specific roles of those entities. According to the registrar model, the registrar maintains records of securities which are also recorded in a CSD. According to the transfer agent model, the fund manager or transfer agent is responsible for an account that maintains a part of a securities issue recorded in a CSD. According to the common depository model, the common depository is used by CSDs that establish an interoperable link and the common depository should be responsible for the overall integrity of the securities issues initially recorded or centrally maintained by the CSDs that have established an interoperable link.

(45)

In order to mitigate operational risks, which comprise the risks caused by deficiencies in information systems, internal processes, and personnel performance or disruptions caused by external events which result in the reduction, deterioration or breakdown of services provided by a CSD, CSDs should identify all risks and monitor their evolution, irrespective of their origin that may include, for instance, their users, providers of services to CSDs and other market infrastructures, including other CSDs. Operational risks should be managed in accordance to a well-documented and robust framework with clearly assigned roles and responsibilities. That framework should include operational targets, tracing features, assessment mechanisms and it should be integrated in the risk-management system of the CSD. In this context, a CSD chief risk officer should be responsible for the operational risk-management framework. CSDs should manage their risk internally. Where internal controls are insufficient or where eliminating certain risks is not a reasonably feasible option, a CSD should be able to take a financial coverage of those risks through insurance.

(46)

CSDs should not enter into investments that may affect their risk profile. CSDs should only enter into derivatives contracts if they are required to hedge a risk that they cannot reduce otherwise. The hedging should be subject to certain strict conditions that ensure that the derivatives are not used for purposes other than for covering risks and are not used for a realisation of profits.

(47)

The assets of CSDs should be held safely, be easily accessible and able to be liquidated promptly. A CSD should therefore ensure that its policies and procedures concerning prompt access to its own assets are based at least on the nature, size, quality, maturity and location of the assets. A CSD should also ensure that prompt access to its assets is not negatively affected by the outsourcing of custody or investment functions to a third party entity.

(48)

To manage its liquidity needs, a CSD should be able to access its cash assets immediately and also be able to access any securities that it holds under its own name on the same business day when a decision to liquidate the assets is taken.

(49)

To ensure a greater degree of protection of the assets of a CSD from the default of the intermediary, a CSD that accesses another CSD through a CSD link should maintain those assets in a segregated account at the linked CSD. This level of segregation should ensure that the assets of a CSD are segregated from those of other entities and protected appropriately. It is however necessary to allow the establishment of links with third-country CSDs even where individually segregated accounts are not available at the third-country CSD provided that assets of the requesting CSD are in any case adequately protected and competent authorities are informed of the risks resulting from the unavailability of individually segregated accounts and the adequate mitigation of such risks.

(50)

In order to ensure that a CSD invests its financial resources in highly liquid instruments with minimal market and credit risks and for these investments to be liquidated rapidly with minimal price effect, it should diversify its portfolio and establish appropriate concentration limits with respect to the issuers of the instruments in which it invests its resources.

(51)

In order to ensure the safety and efficiency of the link arrangement of a CSD with another CSD, a CSD should identify, monitor, and manage all potential sources of risk arising from the link arrangement. A CSD link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the CSDs involved in the link. Linked CSDs should measure, monitor, and manage the credit and liquidity risks arising from each other.

(52)

A requesting CSD that uses an indirect CSD link or an intermediary to operate a CSD link with a receiving CSD should measure, monitor, and manage the additional risks, including custody, credit, legal, and operational risks, arising from the use of the intermediary in order to ensure the safety and the efficiency of the link arrangement.

(53)

In order to ensure the integrity of the issue, where securities are maintained in several CSDs through CSD links, CSDs should apply specific reconciliation measures and coordinate their actions.

(54)

CSDs should provide fair and open access to their services with due regard to the risks to financial stability and the orderliness of the market. They should control the risks arising from their participants and other users by setting risk-related criteria for the provision of their services. CSDs should ensure that their users, such as participants, any other CSDs, central counterparties (CCPs), trading venues or issuers that are granted access to their services meet the criteria and have the required operational capacity, financial resources, legal powers, and risk-management expertise in order to prevent the occurrence of risks for CSDs and other users.

(55)

In order to ensure the safety and efficiency of its securities settlement system, a CSD should monitor compliance with its access requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a requesting party that breaches, or no longer meets, the access requirements.

(56)

For the purpose of the authorisation to provide banking-type ancillary services, a CSD should submit an application to the competent authority including all necessary elements to ensure that the provision of the banking-type ancillary services do not affect the smooth provision of core services of a CSD. Entities already authorised as CSDs should not be required to submit again any elements that were already submitted in the course of the process of application for being authorised as a CSD under Regulation (EU) No 909/2014.

(57)

With a view to ensuring legal certainty and a consistent application of the law, certain requirements provided for in this Regulation concerning settlement discipline measures should start to apply from the date of entry into force of those measures.

(58)

This Regulation is based on the draft regulatory technical standards submitted by ESMA to the Commission.

(59)

In drawing up the technical standards contained in this Regulation, ESMA has worked in close cooperation with the members of the European System of Central Banks and the European Banking Authority.

(60)

ESMA has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the opinion of the Securities and Markets Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council (3),

(a)

‘review period’ means the period under review beginning on the day following the end of the previous review and evaluation period;

(b)

‘settlement instruction’ means a transfer order as defined in point (i) of Article 2 of Directive 98/26/EC of the European Parliament and of the Council (4);

(c)

‘settlement restriction’ means the blocking, reservation or earmarking of securities that make them unavailable for settlement, or the blocking or reservation of cash that make it unavailable for settlement;

(d)

‘exchange-traded fund’ (ETF) means a fund as defined in point (46) of Article 4(1) of Directive 2014/65/EU of the European Parliament and of the Council (5);

(e)

‘issuer CSD’ means a CSD which provides the core service referred to in point 1 or 2 of Section A of the Annex to Regulation (EU) No 909/2014 in relation to a securities issue;

(f)

‘investor CSD’ means a CSD that either is a participant in the securities settlement system operated by another CSD or that uses a third party or an intermediary that is a participant in the securities settlement system operated by another CSD in relation to a securities issue;

(g)

‘durable medium’ means any instrument which enables the storage of information in a way that is accessible for future reference for a period of time adequate for the purposes of the information, and allows the unchanged reproduction of the information stored.

(a)

the relative share of each Union currency in the total value of the settlement by a CSD of settlement instructions against payment, calculated over a period of one year, provided that each individual share exceeds 1 %;

(b)

the relative share of settlement instructions against payment settled by a CSD in a Union currency compared to the total value of settlement instructions against payment settled in that currency across all CSDs in the Union, calculated over a period of one year, provided that each individual share exceeds 10 %.

(a)

contact details of the person responsible for the application;

(b)

contact details of the person or persons in charge of the applicant CSD's compliance and internal control function;

(c)

the corporate name of the applicant CSD, its Legal Entity Identifier (LEI) and registered address in the Union;

(d)

the memorandum and articles of association or other constitutional and statutory documentation of the applicant CSD;

(e)

an excerpt from the relevant commercial or court register, or other forms of certified evidence of the registered address and business activity of the applicant CSD that is valid at the date of the application;

(f)

the identification of the securities settlement systems that the applicant CSD operates or intends to operate;

(g)

a copy of the decision of the management body regarding the application and the minutes of the meeting in which the management body approved the application file and its submission;

(h)

a chart showing the ownership links between the parent undertaking, subsidiaries and any other associated entities or branches, wherein the entities shown in the chart are identified by their full corporate name, legal status, registered address, and tax numbers or company registration numbers;

(i)

a description of the business activities of the applicant CSD's subsidiaries and other legal persons in which the applicant CSD holds a participation, including information on the level of participation;

(j)

a list including:

(k)

a list including:

(l)

a list of core services listed in Section A of the Annex to Regulation (EU) No 909/2014 that the applicant CSD is providing or intends to provide;

(m)

a list of ancillary services explicitly specified in Section B of the Annex to Regulation (EU) No 909/2014 that the applicant CSD is providing or intends to provide;

(n)

a list of any other ancillary services permitted under, but not explicitly specified under Section B of the Annex to Regulation (EU) No 909/2014 that the applicant CSD is providing or intends to provide;

(o)

a list of the investment services subject to Directive 2014/65/EU referred to in point (n);

(p)

a list of services and activities that the applicant CSD outsources or intends to outsource to a third party in accordance with Article 30 of Regulation (EU) No 909/2014;

(q)

the currency or currencies that the applicant CSD processes, or intends to process in connection with services that the applicant CSD provides, irrespective of whether cash is settled on a central bank account, a CSD account, or an account at a designated credit institution;

(r)

information on any pending and final judicial, administrative, arbitration or any other legal proceedings to which the applicant CSD is a party and which may cause it financial or other costs.

(a)

the Member State or Member States in which the applicant CSD intends to operate;

(b)

a programme of operations stating in particular the services which the applicant CSD provides or intends to provide in the host Member State;

(c)

the currency or currencies that the applicant CSD processes or intends to process in the host Member State;

(d)

where the services are provided or intended to be provided through a branch, the organisational structure of the branch and the names of the persons responsible for its management;

(e)

where relevant, an assessment of the measures that the applicant CSD intends to take to allow its users to comply with the national laws referred to in Article 49(1) of Regulation (EU) No 909/2014.

(a)

the job titles of the persons responsible for the approval and implementation of the policies and procedures;

(b)

a description of the measures implementing and monitoring the compliance with the policies and procedures.

(a)

a detailed description of the services referred to in points (l) to (p) of Article 4(2);

(b)

the procedures to be applied in the provision of the services referred to in point (a).

(a)

the policies and procedures referred to in Article 26(7) of Regulation (EU) No 909/2014;

(b)

information on the composition of the senior management, the management body, and the shareholders structure of the parent undertaking and of the other undertakings in the group;

(c)

the services and key individuals other than senior management that the applicant CSD shares with other undertakings in the group.

(a)

the registered address of the parent undertaking of the applicant CSD;

(b)

where the parent undertaking is an entity authorised or registered and subject to supervision under Union or third country legislation, any relevant authorisation or registration number and the name of the authority or authorities competent for the supervision of the parent undertaking.

(a)

financial reports including a complete set of financial statements for the preceding three years, and the statutory audit report on the annual and consolidated financial statements within the meaning of Directive 2006/43/EC of the European Parliament and of the Council (6), for the preceding three years;

(b)

where the applicant CSD is audited by an external auditor, the name and the national registration number of the external auditor;

(c)

a business plan, including a financial plan and an estimated budget that foresees various business scenarios for the services provided by the applicant CSD, over a reference period of at least three years;

(d)

any plan for the establishment of subsidiaries and branches and their location;

(e)

a description of the business activities that the applicant CSD plans to carry out, including the business activities of any subsidiaries or branches of the applicant CSD.

(a)

evidence that demonstrates sufficient financial resources during six months after the granting of an authorisation;

(b)

an interim financial report;

(c)

statements concerning the financial situation of the applicant CSD, including a balance sheet, income statement, changes in equity and in cash flows and a summary of accounting policies and other relevant explanatory notes;

(d)

audited annual financial statements of any parent undertaking for the three financial years preceding the date of the application.

(a)

a summary that provides an overview of the plan and its implementation;

(b)

the identification of the critical operations of the applicant CSD, stress scenarios and events triggering recovery, and a description of recovery tools to be used by the applicant CSD;

(c)

an assessment of any impact of the recovery plan on stakeholders that are likely to be affected by its implementation;

(d)

an assessment of the legal enforceability of the recovery plan that takes account of any legal constraints imposed by Union, national or third country legislation.

(a)

the identity and tasks of the persons responsible for the following positions:

(b)

the number of staff members in each division and operational unit.

(a)

a description of the remuneration policy including information about the fixed and variable elements of the remuneration of the senior management, the members of the management body and the staff employed in the risk-management, compliance and internal control, internal audit and technology functions of the applicant CSD;

(b)

the measures put in place by the applicant CSD to mitigate the risk of over-reliance on the responsibilities entrusted to any individual person.

(a)

a description of the governance arrangements of the applicant CSD established in accordance with paragraph 2 of Article 47;

(b)

the policies, procedures and systems established in accordance with paragraph 1 of Article 47;

(c)

a description of the composition, role and responsibilities of the members of the management body and senior management and the committees established in accordance with Article 48.

(a)

a description of the monitoring and evaluation tools for the adequacy and effectiveness of the applicant CSD's internal audit systems;

(b)

a description of the control and safeguard tools for the applicant CSD's information processing systems;

(c)

a description of the development and application of the applicant CSD's internal audit methodology;

(d)

a work plan of the internal audit function for three years following the date of application;

(e)

a description of the roles and qualifications of each individual who is responsible for internal audit referred to in Article 47(3)(d) under the oversight of the audit committee referred to in Article 48(1)(b).

(a)

a description of the roles and qualifications of individuals who are responsible for the compliance and internal control function and of any other staff involved in the assessments of compliance, including a description of the means to ensure the independence of the compliance and internal control function from the rest of the business units;

(b)

the policies and procedures of the compliance and internal control function, including a description of the compliance role of the management body and senior management;

(c)

where available, the most recent internal report prepared by the persons responsible for the compliance and internal control function or by any other staff involved in the assessments of compliance within the applicant CSD.

(a)

a copy of a curriculum vitae which sets out the experience and knowledge of each member;

(b)

details regarding any criminal and administrative sanctions imposed on a member in connection with the provision of financial or data services or in relation to acts of fraud or misappropriation of funds, in the form of an appropriate official certificate where available in the relevant Member State;

(c)

a self-declaration of good repute in relation to the provision of financial or data services, where all members of the senior management and management body shall state whether they have been subject to any of the following:

(a)

evidence of compliance with Article 27(2) of Regulation (EU) No 909/2014;

(b)

a description of the roles and responsibilities of the members of the management body;

(c)

the target for the representation of the underrepresented gender in the management body, the relevant policy on how to meet that target and the method used by the applicant CSD to make public the target, policy and its implementation.

(a)

a description of the ownership structure of the applicant CSD referred to in point (i) of Article 4(2), including a description of the identity and size of interests of any entity in a position to exercise control over the operation of the applicant CSD;

(b)

a list of the shareholders and persons who are in a position to exercise, directly or indirectly, control over the management of the applicant CSD.

(a)

a description of the policies and procedures concerning the identification, management and disclosure to the competent authority of potential conflicts of interest and of the process used to ensure that the staff of the applicant CSD is informed of those policies and procedures;

(b)

a description of the controls and measures put in place to ensure that the requirements referred to in point (a) on the management of conflicts of interest are met;

(c)

a description of the following elements:

(a)

information relating to participants, clients, issuers or other users of the applicant CSD services;

(b)

other information held by the applicant CSD as a result of its business activity not permitted to be used for commercial purposes.

(a)

the internal procedures concerning permissions of access to information that ensure secured access to data;

(b)

a description of any restrictions on the use of data for reasons of confidentiality.

(a)

the mandate of the user committee;

(b)

the governance arrangements of the user committee;

(c)

the operating procedures of the user committee;

(d)

the admission criteria and the election mechanism for the members of the user committee;

(e)

a list of the proposed members of the user committee and the indication of interests that they represent.

(a)

an analysis of the extent to which the applicant CSD's existing record-keeping systems, policies and procedures are compliant with the requirements under Article 54;

(b)

an implementation plan detailing how the applicant CSD will comply with the requirements referred to in Article 54 by the date on which it becomes applicable.

(a)

the criteria for participation that allow fair and open access for all legal persons that intend to become participants in the securities settlement systems operated by the applicant CSD;

(b)

the procedures for the application of disciplinary measures against existing participants that do not comply with the criteria for participation.

(a)

the procedures and measures to prevent settlement fails in accordance with Article 6 of Regulation (EU) No 909/2014;

(b)

the measures to address settlement fails in accordance with Articles 7 of Regulation (EU) No 909/2014.

(a)

the rules and procedures to reduce and manage the risks associated with the safekeeping of securities;

(b)

a detailed description of the different levels of segregation offered by the applicant CSD, a description of the costs associated with each level, the commercial terms on which they are offered, their main legal implications and the applicable insolvency law;

(c)

the rules and procedures for obtaining the consents referred to in Article 38(7) of Regulation (EU) No 909/2014.

(a)

a copy of the outsourcing agreements;

(b)

the methods used to monitor the service level of the outsourced services and activities.

(a)

the applicant CSD holds its financial assets in accordance with Article 46(1), (2) and (5) of Regulation (EU) No 909/2014 and Chapter XI of this Regulation.

(b)

the investments of the applicant CSD are compliant with Article 46(3) of Regulation (EU) No 909/2014 and Chapter XI of this Regulation.

(a)

information demonstrating that the capital of the applicant CSD, including retained earnings and reserves of the applicant CSD, meets the requirements of Article 47 of Regulation (EU) No 909/2014;

(b)

the plan referred to in Article 47(2) of Regulation (EU) No 909/2014 and any updates to that plan, and evidence of its approval by the management body or an appropriate committee of the management body of the applicant CSD.

(a)

a description of the CSD links accompanied by assessments of potential sources of risks arising from those link arrangements by the applicant CSD;

(b)

the expected or actual settlement volumes and values of the settlement performed within the CSD links;

(c)

the procedures concerning the identification, assessment, monitoring and management of all potential sources of risk for the applicant CSD and for its participants arising from the link arrangement and the appropriate measures put in place to mitigate them;

(d)

an assessment of the applicability of insolvency laws applicable to the operation of a CSD link and their implications for the applicant CSD;

(e)

other relevant information requested by the competent authority for assessing the compliance of CSD links with the requirements provided in Article 48 of Regulation (EU) No 909/2014 and Chapter XII of this Regulation.

(a)

from legal persons intending to become participants in accordance with Article 33 of Regulation (EU) No 909/2014 and Chapter XIII of this Regulation;

(b)

from issuers in accordance with Article 49 of Regulation (EU) No 909/2014 and Chapter XIII of this Regulation;

(c)

from other CSDs in accordance with Article 52 of Regulation (EU) No 909/2014 and Chapter XIII of this Regulation;

(d)

from other market infrastructures in accordance with Article 53 of Regulation (EU) No 909/2014 and Chapter XIII of this Regulation.

(a)

the extent of the financial liabilities assumed by the CSD as a result of that participation;

(b)

whether the CSD holds sufficient financial resources that fulfil the criteria referred to in Article 46 of Regulation (EU) No 909/2014 to cover the risks resulting from the following:

(c)

whether the legal person in which the CSD holds a participation provides services that are complementary to the core services offered by the CSD, as referred to in Article 18(4) of Regulation (EU) No 909/2014, such as: