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Commission Delegated Regulation (EU) 2017/390 of 11 November 2016 supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to regulatory technical standards on certain prudential requirements for central securities depositories and designated credit institutions offering banking-type ancillary services (Text with EEA relevance. )

Type Delegated Regulation

Publication 2017-03-10

State In force

Department European Commission, FISMA

Source EUR-Lex

articles 42

Where the stress tests result in breaches to the agreed risk appetite referred to in point (b) of Article 32(1), the CSD-banking service provider shall:

(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.

The stress testing scenarios used in the stress testing of liquid financial resources shall be designed taking into account the design and operation of the CSD-banking service provider, and include all entities that may pose material liquidity risk to it.

The stress testing scenarios used in the stress testing of the qualifying liquid financial resources shall be designed taking into account the default, in isolation or combined, of at least two participants of the CSD-banking service provider, including their parent undertaking and subsidiaries, to which the CSD-banking service provider has the largest liquidity exposure.

The scenarios used in the stress testing of liquid financial resources shall be designed taking into account a wide range of relevant extreme but plausible scenarios, covering short-term and prolonged stress, and institution specific and market-wide stress, including:

(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.

The CSD-banking service provider shall determine the relevant currencies referred to in point (c) of Article 59(4) of Regulation (EU) No 909/2014 by applying the following steps in sequence:

(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:
(i) the most relevant Union currencies that meet the conditions specified in the Delegated Regulation (EU) 2017/392;
(ii) all remaining currencies until the corresponding aggregated amount of the average largest net negative cumulative positions measured according to (a) is equal to or exceeds 95 % for all currencies.

The CSD-banking service provider shall identify and update relevant currencies referred to in paragraph 8 regularly but at least on a monthly basis. It shall provide in its rules that, under stress situations, the provisional settlement services in non-relevant currencies could be executed for their equivalent value in a relevant currency.

Article 37

Unforeseen and potentially uncovered liquidity shortfalls

The CSD-banking service provider shall establish rules and procedures to effect intraday and multiday timely settlement of payment obligations following any individual or combined default among its participants. Those rules and procedures shall provide for any unforeseen and potentially uncovered liquidity shortfall resulting from such default with the view to avoiding unwinding, revoking, or delaying the same-day settlement of payment obligations.

The rules and procedures referred to in paragraph 1 shall ensure that the CSD-banking service provider has access to cash deposits or overnight investments of cash deposits, and has a process in place in order to replenish any liquidity resources that it may employ during a stress event, so that it can continue to operate in a safe and sound manner.

The rules and procedures referred to in paragraph 1 shall include requirements for both of the following:

(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.

The rules and procedures referred to in paragraph 1 shall be accompanied by a procedure setting out how the identified potential liquidity shortfalls shall be addressed without undue delay, including, where necessary, by updating the liquidity risk management framework.

The rules and procedures referred to in paragraph 1 shall also detail all of the following:

(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;

The rules and procedures referred to in paragraph 1 shall include a requirement for the CSD-banking service provider to report any liquidity risk that has the potential to cause previously unforeseen and potentially uncovered liquidity shortfalls to:

(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.

Article 38

Arrangements in order to convert collateral or investment into cash using prearranged and highly reliable funding arrangements

For the purposes of point (e) of Article 59(4) of Regulation (EU) No 909/2014 creditworthy financial institutions shall include one of the following:

(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:
(i) it is subject to and complies with prudential rules considered to be at least as stringent as those set out in Directive 2013/36/EU and Regulation (EU) No 575/2013;
(ii) it has robust accounting practices, safekeeping procedures, and internal controls;
(iii) it has low credit risk based on an internal assessment carried out by the CSD-banking service provider, employing a defined and objective methodology that does not exclusively rely on external opinions;
(iv) it takes into consideration the risks arising from the establishment of that third country financial institution in a particular country.

Where a CSD-banking service provider plans to establish a prearranged and highly reliable funding arrangement with a creditworthy financial institution as referred to in paragraph 1, it shall use only those financial institutions that at least have access to credit from the central bank issuing the currency used within the prearranged funding arrangements, either directly or through entities of the same group.

After a prearranged and highly reliable funding arrangement has been established with one of the institutions referred to in paragraph 1, the CSD-banking service provider shall monitor the creditworthiness of these financial institutions on an ongoing basis by applying both of the following:

(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.

The CSD-banking service provider shall closely monitor and control the concentration of its liquidity risk exposure to each financial institution involved in a prearranged and highly reliable funding arrangement, including its parent undertaking and subsidiaries.

The CSD-banking service provider's liquidity risk management framework shall include a requirement to establish concentration limits, providing the following:

(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.

For the purposes of point (b) major currencies shall be considered to be at least the top 50 % of the most relevant currencies as determined in accordance with Article 36(8). Where a currency has been determined as a major currency, it shall continue to be considered as major for a period of three calendar years from the date of its determination as major currency.

A CSD-banking service provider which has access to routine credit at the central bank of issue shall be considered to fulfil the requirements of point (b) in paragraph 5 to the extent it has collateral that is eligible for pledging to the relevant central bank.

The CSD-banking service provider shall continuously monitor and control its concentration limits towards its liquidity providers, with the exception of those referred to in paragraph 6, and it shall implement policies and procedures to ensure its overall risk exposure to any individual financial institution remains within the concentration limits determined in accordance with paragraph 5.

The CSD-banking service provider shall review its policies and procedures concerning applicable concentration limits towards its liquidity providers, with the exception of those referred to in paragraph 6, at least annually and whenever a material change occurs and affects its risk exposure to any individual financial institution.

In the context of its reporting to the relevant competent authority in accordance with Article 39, the CSD-banking service provider shall inform the competent authority of both of the following:

(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.

10.

Where a concentration limit towards its liquidity providers is exceeded, the CSD-banking service provider shall remedy the excess without undue delay following the risk mitigation measures referred to in paragraph 7.

11.

The CSD-banking service provider shall ensure that the collateral agreement allows it to have prompt access to its collateral in the event of the default of a client, taking into account at least the nature, size, quality, maturity, and location of the assets provided by the client as collateral.

12.

Where assets used as collateral by the CSD-banking service provider are in the securities accounts maintained by another third party entity, the CSD-banking service provider shall ensure that all of the following conditions are met:

(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;

13.

The CSD-banking service provider shall take all necessary steps in advance to establish the enforceability of its claim to financial instruments provided as collateral.

14.

The CSD-banking service provider shall be capable of accessing and converting non-cash assets referred to in Article 10 and Article 11(1) into cash on a same-day basis through pre-arranged and highly reliable arrangements established in accordance with point (d) of Article 59(4) of Regulation (EU) No 909/2014.

Sub-Section 4

Reporting of Liquidity Risks

Article 39

Reporting to competent authorities on intraday risk management

A CSD-banking service provider shall report to the relevant competent authority referred to in Article 60(1) of Regulation (EU) No 909/2014.

A CSD-banking service provider shall comply with all of the following reporting requirements:

(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;

Where the CSD-banking service provider is in breach of, or risks breaching the requirements of this Regulation, including during times of stress, it shall immediately notify this to the relevant competent authority and it shall submit without undue delay to that relevant competent authority a detailed plan for the timely return to compliance.

Until compliance with the requirements of this Regulation and Regulation (EU) No 909/2014 is restored, the CSD-banking service provider shall report the items referred to in paragraph 2, as appropriate, at least daily, by the end of each business day unless the relevant competent authority authorise a lower reporting frequency and a longer reporting delay, by taking into account the individual situation of the CSD-banking service provider and the scale and complexity of its activities.

Sub-Section 5

Public disclosure

Article 40

Public Disclosure

A CSD-banking service provider shall publicly disclose a comprehensive qualitative statement that specifies how liquidity risks, including intraday liquidity risks are measured, monitored and managed on an annual basis.

Sub-Section 6

Final provisions

Article 41

Transitional provisions

CSD-banking service providers shall identify the relevant currencies under point (ii) of Article 36(8)(b) 12 months after obtaining the authorisation to provide banking-type ancillary services.

During the transitional period of 12 months referred to in paragraph 1, the CSD-banking service providers referred to in that subparagraph shall identify the relevant currencies under point (ii) of Article 36(8)(b) by taking into account both of the following:

(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.

Article 42

Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

ANNEX

Winding-down or restructuring scenarios

1. A scenario where the CSD is unable to raise new capital to comply with the requirements laid down in Article 47(1) of Regulation (EU) No 909/2014 shall be considered as triggering the restructuring of a CSD (‘restructuring’) where the events described in the scenario would still lead the CSD to continue to operate a securities settlement system as referred to in point (3) of Section A of the Annex to Regulation (EU) No 909/2014 and to provide at least one other core service listed in Section A of the Annex to Regulation (EU) No 909/2014.

1. A scenario where the CSD is unable to raise new capital to comply with requirements laid down in Article 47(1) of Regulation (EU) No 909/2014 shall be considered as triggering the winding-down of its operations (‘winding down’) where the events described in the scenario would render the CSD unable to meet the definition of Article 2(1) of the Regulation (EU) No 909/2014.

1. The scenarios referred to in Article 7(a) shall include the following assessments:
(a) in the case of a restructuring, the CSD shall assess the expected number of months needed for ensuring the orderly restructuring of its operations;
(b) in the case of a winding-down, the expected number of months needed for the winding-down.

1. The scenarios shall be commensurate with the nature of the business of the CSD, its size, its interconnectedness to other institutions and to the financial system, its business and funding model, its activities and structure, and any identified vulnerabilities or weaknesses of the CSD. The scenarios shall be based on events that are exceptional but plausible.

1. When designing the scenarios, a CSD shall meet each of the following requirements:
(a) the events foreseen in the scenario would threaten to cause the restructuring of the CSD operations;
(b) the events foreseen in the scenario would threaten to cause the winding-down of the CSD operations.

1. The plan ensuring an orderly restructuring or winding-down of the CSD's activities referred to in point (b) of Article 47(2) of Regulation (EU) No 909/2014 shall include all the following scenarios (‘idiosyncratic events’):
(a) the failure of significant counterparties;
(b) damage to the institution's or group's reputation;
(c) a severe outflow of liquidity;
(d) adverse movements in the prices of assets to which the institution or group is predominantly exposed;
(e) severe credit losses;
(f) a severe operational risk loss.

1. The plan ensuring an orderly restructuring or winding down of the CSD's activities referred to in point (b) of Article 47(2) of Regulation (EU) No 909/2014 shall include all the following scenarios (‘system-wide events’):
(a) the failure of significant counterparties affecting financial stability;
(b) a decrease in liquidity available in the interbank lending market;
(c) increased country risk and generalised capital outflow from a significant country of operation of the institution or the group;
(d) adverse movements in the price of assets in one or several markets;
(e) a macroeconomic downturn.

[^E0001]: Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (OJ L 372, 31.12.1986, p. 1).

[^E0002]: Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (OJ L 243, 11.9.2002, p. 1).

[^E0003]: Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies (OJ L 222, 14.8.1978, p. 11).

[^E0004]: Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54(3)(g) of the Treaty on consolidated accounts (OJ L 193, 18.7.1983, p. 1).

[^E0005]: Commission Regulation (EC) No 1569/2007 of 21 December 2007 establishing a mechanism for the determination of equivalence of accounting standards applied by third country issuers of securities pursuant to Directives 2003/71/EC and 2004/109/EC of the European Parliament and of the Council (OJ L 340, 22.12.2007, p. 66).

[^E0006]: Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (OJ L 168, 27.6.2002, p. 43).

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