## cr1792 ## Source details **Canonical URL:** [cr1792](https://www.imf.org/-/media/files/publications/cr/2017/cr1792.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1792.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1792.pdf.json) --- ### Strengthening of FMI supervision in the Netherlands - Supervision of financial market infrastructures (FMIs) in the Netherlands has been significantly strengthened in recent years. - EMIR introduced legally binding requirements for central counterparties (CCPs) located in the Netherlands. - The Dutch authorities have adopted the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI) in oversight and supervision of central securities depositories (CSDs)/securities settlement systems (SSSs) and systemically important payment systems. - EMIR, combined with the Eurosystem’s Oversight Framework for FMIs, implements regulatory frameworks for CCPs and trade repositories consistent with the PFMI. - The Central Securities Depositories Regulation (CSDR), once in effect, is expected to establish a clear statutory basis and enhance transparency of policies for CSDs/SSSs in the Netherlands. - Systemically important payment systems in the euro area are subject to the Eurosystem’s Regulation on Systemically Important Payment Systems (SIPS Regulation), which implemented the PFMI. ### Gaps and supervisory priorities for Dutch authorities - Ensure Dutch FMIs observe all PFMI requirements, including those not covered by EMIR. - Key supervisory priorities: - DNB and AFM should ensure Dutch CCPs develop comprehensive recovery plans ahead of legally binding EU requirements. - AFM and DNB should ensure ongoing compliance with PFMI disclosure requirements. - AFM and DNB should share their respective annual supervisory plans to enhance coordination (para. 35). ### Domestic and international cooperation; crisis management - Dutch authorities cooperate effectively with each other and relevant foreign authorities in FMI regulation, supervision and oversight. - Most Dutch FMIs are jointly regulated, supervised and overseen by AFM and DNB. - DNB should review allocation of resources across different FMIs to reflect relative risks. - Netherlands does not currently have a resolution regime for FMIs. - EU legislation on CCP recovery and resolution was expected to be proposed in late 2016. - Once a CCP resolution regime is in place, the Dutch authority given CCP resolution responsibility (working assumption: DNB) should establish crisis management groups (CMGs) for Dutch CCPs (para. 37). - If DNB is assigned resolution authority for EuroCCP, it will need further resources to fulfill this role. ### EuroCCP: structure, scale and key statistics - Centrally clears equity transactions traded at 16 different trading venues across 19 different markets. - 47 active clearing participants, with headquarters across 14 jurisdictions in Asia, Europe, and North America. - In 2015 cleared an average of 6.8 million trade sides per day, of which 1.3 million were cleared over a link with one of two other CCPs. - Staff located in Amsterdam, London and Stockholm; operations located across two sites in the Netherlands. - Received regulatory authorization under EMIR in April 2014. - Ownership: equal shares by ABN AMRO Clearing Bank, BATS Chi-X Europe, NASDAQ, and The Depository Trust & Clearing Corporation. - Governance: two-tier board structure (Supervisory Board and Management Board); Risk Committee and stakeholder forums (Advisory Board, Nordic Advisory Council, Platform Advisory Council). ### DNB resourcing and oversight of EuroCCP (Responsibility B) - Finding: Being the NCA primarily responsible for EuroCCP—one of the largest securities CCPs in Europe—"comes with significant reputational risk." EuroCCP clears "19 different equities markets." - Current staffing: "the staff resources devoted to EuroCCP oversight should be further increased from the current two staff members assigned to EuroCCP supervision full time." - Oversight Department context: "In total there are 13 staff in the Oversight Department, but 5 of them work on oversight of retail payments systems, i.e., Equens, CCV and Mastercard Europe." - Recommendation: Broaden management involvement from the FMI Oversight Department in supervisory meetings with EuroCCP, including periodic managerial attendance (e.g., quarterly) in addition to current ad hoc arrangements. - Existing enhancements: thematic reviews across FMIs (e.g., cyber resilience) and "fortnightly coordination meetings between the Head of the Oversight Department and the two CCP supervision teams." - External expertise: DNB has arrangements to draw on quantitative experts both from within DNB and externally; example: a team composed of EuroCCP supervisors, a quantitative expert from DNB’s Market Infrastructure Policy Department and an external consultant to assess EuroCCP’s margin model. ### Remuneration cap and staffing risks - Legal background: As of "January 1, 2013, the AFM and the DNB are subject to the Law on Standards for Remuneration for Senior Officials in the Public and Semi-public Sector (‘Wet Normering Topinkomens,’/Law on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector, WNT)." - Implementation timing: Actual reduction of remunerations for board members that exceed the WNT maximum "will only take place as of January 1, 2017" due to a transitional period. - Proposed extension: "WNT-3" to extend WNT to all AFM and DNB staff "is currently out for consultation," which "may make it difficult to attract and retain staff with specialized technical skills." - Recommendation: MoF should consider exempting AFM and DNB from the proposed cap. ### Supervisory and oversight framework, transparency and disclosure (Responsibilities A, C, D) - EMIR and the Eurosystem’s Oversight Framework implement a regulatory framework for CCPs that is complete and consistent with the PFMI. - AFM and DNB have adopted the PFMI for CSDs/SSSs and systemically important payment systems. - AFM and DNB should continue to ensure all Dutch FMIs publish regular self-assessments against the PFMI and that Dutch CCPs comply with CPMI-IOSCO quarterly quantitative disclosure requirements (para. 22). - AFM and DNB plan to annually assess Dutch CCPs against PFMI requirements not covered in EMIR, and to conduct full reassessments against EMIR every two to three years. - EMIR does not require CCPs to have comprehensive recovery plans; AFM and DNB are encouraging development of such plans ahead of EU legal requirements. ### Oversight of critical service providers and cyber resilience - Dutch authorities should formally incorporate oversight of critical service providers (CSPs) in their supervisory framework (PFMI Annex F). - Outsourcing dependencies: many FMIs rely on SWIFT; Euroclear Netherlands outsources key operations to Euroclear Bank SA. - DNB conducted a thematic review of cyber resilience using the NIST Framework with additional CPMI/IOSCO draft guidance questions; this review forms the starting point for ongoing oversight of cyber resilience. ### EuroCCP risk management — Governance (Principle 2) - Management Board composition: the third Management Board position "has remained vacant for about two years," leaving the Management Board with only two members. - Mitigating factors: decisions generally made by consensus; Management Team support; Supervisory Board of six members (including two independent members) takes an active role. - Internal reporting: Risk Management, Internal Audit, and Legal and Compliance have day-to-day reporting to the CEO and direct reporting lines to independent Supervisory Board members; Internal Audit outsourced to PricewaterhouseCoopers. - Recommendation: EuroCCP should prioritize recruiting a third Management Board member to ensure full effectiveness (para. 41). ### EuroCCP credit and liquidity risk — key mechanics and findings (Principles 4, 7, 5, 6) - Counterparty exposures: clearing participants, liquidity providers, investment counterparties, central banks, commercial settlement banks, agents and CSDs/SSSs; some participants play multiple roles. - Cash margin exposure: current practice—cash margin paid into an account at a commercial bank; recommendation—use its account at the DNB to receive cash margins denominated in euros to reduce intraday exposure to commercial bank money (para. 45). - CSD/SSS access: direct access currently to 10 CSDs/SSSs; recommendation—secure direct access to the ESES CSDs and Clearstream Banking as soon as practicable and as planned after their transition to T2S (scheduled for September 2016 and February 2017 respectively) (para. 46). - Default fund and stress testing: - Daily stress testing objective: cover exposure to the two clearing participants or linked CCPs with the largest exposure in extreme but plausible scenarios. - If stress testing identifies a shortfall, EuroCCP calls for additional default fund contributions the following morning. - Default fund "is resized monthly based on 105 percent of the largest stress test result over the last 12 months." - Large position margin trigger: called if stress test losses in excess of initial margin (using the main two hypothetical scenarios) exceeds 45 percent of the default fund. - Real-time monitoring: stressed losses on intraday positions incorporated in risk management. - Calculation conservatism: uses the lower of initial margin held and initial margin required when calculating stress test losses in excess of initial margin. ### Stress testing and reverse stress testing (Principles 4, 7) - Historical scenarios: based on dates over the past 30 years with largest three-day moves in relevant equity indices combined with extreme exchange rate movements over the last 30 years. - Initial margin calibration: Correlation Haircut model calibrated to cover 99.7 percent of movements over 3 days based on the exponentially weighted moving average of price movements over the past 250 days. - Procyclicality mitigation: - Correlation Haircut model uses a 250-day exponentially weighted moving average with a decay factor of 0.94. - Volatility floor based on the maximum 3-day volatility in the relevant proxy over the last 10 years. - Collateral haircuts based on the higher of the maximum volatility over the last 30 years and an exponentially weighted moving average based on the last 250 days. - Hypothetical scenarios: currently four hypothetical scenarios—two equivalent-sized parallel market shifts higher than seen historically; two target portfolio scenarios with less than 50 equities and larger parallel shifts. - Recommendations: - Strengthen stress testing by considering intraday price movements during the closeout period when developing historical scenarios (paras. 48 and 49). - Expand scenarios to include sectoral scenarios and more realistic hypothetical scenarios; consider foreign exchange risk in scenarios. - Enhance reverse stress tests to consider a wider set of market price scenarios and combinations of participant defaults that would exhaust financial resources. - Conduct sensitivity analysis on parameters and assumptions (holding periods, correlations, historical data periods) to examine effects on stress test outcomes. ### Liquidity stress testing and currency liquidity (para. 51) - Finding: EuroCCP tests sufficiency of overall liquid resources using daily stress testing but does not separately consider liquidity needs in each relevant currency. - Current liquidity arrangements: - €150 million multicurrency liquidity line that requires collateral to be deposited on EuroCCP’s balance sheet. - Ability to minimize liquidity needs through payment splitting and recycling liquidity throughout the day. - Recommendations: - Through stress testing, confirm sufficient liquid resources to settle all payment obligations in each currency EuroCCP settles with a high degree of confidence. - Implement planned enhancements to reverse stress testing to consider a wider set of market price scenarios and participant default combinations. - Strengthen review of stress testing by conducting sensitivity analysis on parameters and assumptions. ### Margin framework, collateral and legal segregation - Margin monitoring and intraday calls: - EuroCCP monitors new trades, price movements and settlement in real time; margin collected at least daily. - Intraday margin call criteria: shortfall of at least €1 million and at least 10 percent of deposited collateral. - Clearing participants must meet intraday calls within 90 minutes; they have 30 minutes to decide cash or collateral, then initially 30 minutes to meet the call, with an option to request an additional 30 minutes. - Clearing participants choose currency for margin obligation provided it is acceptable collateral; FX add-on and FX haircut applied where currencies differ. - Initial margin model: Correlation Haircut model with add-ons for liquidity risk and large positions. - Portfolio-level approach: ensures initial margin requirement is at least 20 percent of the margin that would be required if no portfolio offsets existed; applies correlation intervals to account for stressed correlation changes. - Recommendation: Dutch authorities should review legal segregation of cash collateral from securities positions due to legal uncertainty when cash collateral is provided on a transfer of title basis; administrative segregation may not provide legal segregation unless collateral is a pledge and EuroCCP restricts proportion of collateral provided as a pledge (para. 56). - Recommendation: EuroCCP should strengthen review of its margin model by increasing scope of sensitivity analysis and expanding tests of distributional and time-scaling assumptions (para. 58). ### Participant default rules and recovery planning (Principles 13 and 3) - Default management: - Breach and Default Management Team (BDMT) responsible once participant default declared; BDMT comprises Management Board and representatives from Risk Management, Relationship Management, Legal and Compliance, Operations and Corporate Secretary. - Four main options to close-out defaulter’s positions: port client positions; close-out via a broker; auction the defaulter’s positions; allow the defaulter to settle outstanding positions. - Porting is unlikely given legal uncertainty around segregation and two-day settlement cycle. - EuroCCP has Equivalent Payment and Delivery Obligation Agreements with certain brokers; can auction portfolios to between three and five selected participants. - Recovery planning: - EuroCCP is in the process of developing a formal recovery plan. - Recovery tools: can call additional contributions from clearing participants up to their current default fund contribution (cap); holds double the minimum capital requirement specified in EMIR and has arrangements to replenish capital by issuing additional shares. - Limitations: capped additional contributions and capital-replenishment arrangements may not be sufficient in all circumstances. - DNB has identified lack of a comprehensive recovery plan as an issue and is engaging with EuroCCP to address this gap. ### Operational risk and cyber resilience (Principle 17) - Resilience and redundancy: - Dual redundancy across geographically separate data centers with synchronous mirroring. - Data centers provided by two independent suppliers, linked by two separate glass-fiber connections from different suppliers; one data center above sea-level and not under a flight path. - Identical technical configurations; redundancy tested by transferring operations between data centers regularly. - Personnel continuity relies on staff accessing systems remotely. - Operational risk management: - Management Board reviews operational risk framework annually and participates in quarterly Risk Governance Board meetings. - Systems monitored in real time; incidents logged and escalated with CTO reviewing logs monthly. - Recommendation: EuroCCP should specifically address cyber security in its operational risk management framework in line with the final CPMI-IOSCO Guidance on Cyber Resilience of Financial Market Infrastructures (para. 64). ### Key recommendations (selected, with timeframe and responsible parties) - AFM and DNB should ensure all Dutch FMIs publish regular self-assessments against the PFMI and CCPs comply with CPMI-IOSCO quarterly quantitative disclosures (para. 22). - Timeframe: I - Authorities Responsible: AFM, DNB - AFM and DNB should follow-up regularly with EuroCCP to ensure it meets agreed deadlines to address PFMI assessment recommendations (para. 23). - Timeframe: I - Authorities Responsible: AFM, DNB - AFM and DNB should confirm Dutch CCPs comply with all PFMIs, including requirements not covered by EMIR (para. 24). - Timeframe: I - Authorities Responsible: AFM, DNB - DNB should ensure Dutch CCPs develop comprehensive recovery plans ahead of regulatory requirement introduction (para. 25). - Timeframe: I - Authorities Responsible: DNB - AFM and DNB should formally incorporate oversight of critical service providers in supervisory framework (para. 27). - Timeframe: NT - Authorities Responsible: AFM, DNB - DNB should continue to augment resources devoted to EuroCCP (para. 31). - Timeframe: I - Authorities Responsible: DNB - MoF should consider an exemption to proposed remuneration cap for AFM and DNB to preserve ability to attract and retain FMI expertise (para. 32). - Timeframe: NT - Authorities Responsible: MoF - AFM and DNB should share respective annual supervisory plans to enhance coordination (para. 35). - Timeframe: I - Authorities Responsible: AFM, DNB - Dutch authority assigned CCP resolution responsibility should establish CMGs for Dutch CCPs (para. 37). - Timeframe: NT - Authorities Responsible: Dutch FMI Resolution authority Selected EuroCCP-specific recommended actions (from Table 2) - Fill the long-running vacant Management Board position as a priority (para. 41). - Timeframe: I - Responsible: EuroCCP - Use account at the DNB to receive cash margins denominated in euros to reduce intraday commercial bank exposure (para. 45). - Timeframe: I - Responsible: EuroCCP - Secure direct access to main CSDs/SSSs used (para. 46). - Timeframe: I - Responsible: EuroCCP - Strengthen stress testing methodology to consider price movements during the closeout period, including intraday, and introduce sectoral scenarios (paras. 48 and 49). - Timeframe: I - Responsible: EuroCCP - Ensure sufficient liquid resources to settle payment obligations in each currency settled with a high degree of confidence (para. 51). - Timeframe: I - Responsible: EuroCCP - Extend reverse stress testing and conduct sensitivity analysis on stress test model parameters and assumptions (para. 52). - Timeframe: I - Responsible: EuroCCP - Review legal segregation of cash collateral for securities positions (para. 56). - Timeframe: NT - Authorities Responsible: AFM, DNB, MoF - Strengthen review of margin model by increasing scope of sensitivity analysis (para. 58). - Timeframe: I - Responsible: EuroCCP - Develop a comprehensive recovery plan that ensures non-default losses are fully addressed (para. 61). - Timeframe: NT - Responsible: EuroCCP - Specifically address cyber security in the operational risk management framework in line with CPMI-IOSCO Guidance (para. 64). - Timeframe: NT - Responsible: EuroCCP *Source: IMF technical note EXECUTIVE SUMMARY and excerpts (Netherlands Financial Market Infrastructures assessment, cr1792).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Strengthening of FMI supervision in the Netherlands - The supervision of financial market infrastructures (FMIs) in the Netherlands has been significantly strengthened in recent years. - The European Market Infrastructure Regulation (EMIR) introduced legally binding requirements for central counterparties (CCPs) located in the Netherlands. - The Dutch authorities have adopted the Committee on Payments and Market Infrastructures (CPMI)-International Organization of Securities Commissions (IOSCO) Principles for Financial Market Infrastructures (PFMI) in their oversight and supervision of central securities depositories (CSDs)/securities settlement systems (SSSs) and systemically important payment systems. ### EU and Eurosystem frameworks implementing the PFMI - Significant progress has been made to ensure FMIs across the European Union (EU), including in the Netherlands, are subject to a common regulatory framework that implements the PFMI. - EMIR, in combination with the Eurosystem’s Oversight Framework for FMIs, implements regulatory frameworks for CCPs and trade repositories consistent with the PFMI. - Once it comes into effect, the EU’s Central Securities Depositories Regulation (CSDR) is expected to: - establish a clear statutory basis and enhance the transparency of policies with respect to CSDs/SSSs within the Netherlands. - Within the Euro area, systemically important payment systems are subject to the Eurosystem’s Regulation on Systemically Important Payment Systems (SIPS Regulation), which implemented the PFMI. ### Gaps and supervisory priorities for Dutch authorities - The Dutch authorities should ensure that Dutch FMIs observe all of the requirements in the PFMI, including those not covered by EMIR. - Specific supervisory priorities: - The Netherlands Authority for the Financial Markets (AFM) and the Netherlands Bank (DNB) should ensure Dutch CCPs develop comprehensive recovery plans ahead of the legally binding requirements expected to be introduced at the EU level. - The AFM and the DNB should continue to ensure all Dutch FMIs comply with the PFMI disclosure requirements on an ongoing basis. - The AFM and DNB should share their respective annual supervisory plans to enhance coordination (para. 35). ### Domestic and international cooperation - The Dutch authorities cooperate effectively with each other and relevant foreign authorities in regulation, supervision and oversight of FMIs. - Most FMIs in the Netherlands are jointly regulated, supervised and overseen by the AFM and DNB; they work closely to ensure a consistent approach. - The Dutch authorities participate in multilateral cooperation arrangements with relevant foreign authorities for specific FMIs. ### Resource allocation and crisis management - The DNB should review the allocation of resources across different FMIs to ensure they reflect the relative risks the DNB faces. - EuroCCP is highly interconnected; its failure would have significant financial stability consequences for European financial markets as a whole. - Given EuroCCP’s importance, relatively more staff resources and time should be devoted to EuroCCP (para. 31). - If the DNB is assigned resolution authority responsibilities for EuroCCP, it will need further resources to fulfill this role. - The Netherlands does not currently have a resolution regime for FMIs. - EU legislation on CCP recovery and resolution was expected to be proposed in late 2016. - Crisis management arrangements between Dutch authorities currently focus on operational incidents. Once a CCP resolution regime is in place, the Dutch authority that is given responsibility for resolution of CCPs (the working assumption is that it will be the DNB) should establish crisis management groups (CMGs) for the Dutch CCPs (para. 37). ### EuroCCP: risk management findings - Financial risk management of EuroCCP is generally robust, but several elements should be strengthened: - Stress testing methodology and review of its margin model should be strengthened. - EuroCCP monitors risks from new trades, price movements and settlement of trades in real-time and reviews its margin and stress testing models on a monthly basis; the monthly review process should be strengthened. - EuroCCP should enhance its reverse stress tests to consider a wider set of market price scenarios and combinations of participant defaults that would exhaust its financial resources. - EuroCCP should enhance and expand scenarios used in its daily stress testing. - Governance and operational points: - EuroCCP should prioritize recruiting a third Management Board member to ensure its Management Board is fully effective (para. 41). - Current dependence on a Management Board of two is mitigated by consensus decision-making, Management Team support, and active Supervisory Board involvement. - Participant and settlement risk reduction: - There is scope to minimize exposure to clearing participants that play multiple roles (liquidity providers, investment counterparties, settlement banks, settlement agents). - EuroCCP should use its account at the DNB to receive cash margins denominated in euros to reduce intraday exposure to commercial bank money (para. 45). - EuroCCP should secure direct access to the main CSDs/SSSs it uses to eliminate dependence on settlement agents (para. 46). - Legal segregation: - The Dutch authorities should review the legal segregation of cash collateral from securities positions. - EuroCCP offers administrative segregation of client margin, but there may be legal uncertainty regarding segregation of cash collateral for securities positions provided from a client via its clearing participant on a transfer of title basis; client positions vis-à-vis the administrator for the estate of the clearing participant could be unclear (para. 56). ### Key recommendations (selected, with timeframe and responsible parties) - The Dutch authorities should continue to ensure that all Dutch FMIs comply with the requirement to publish regular self-assessments against the PFMI, and that CCPs comply with the quarterly quantitative disclosures requirements (para. 22). - Timeframe: I (immediate) - Authorities Responsible: AFM, DNB - The Dutch authorities should continue to follow-up regularly with EuroCCP to ensure it meets the agreed deadlines to address the recommendations from the authorities’ assessment of EuroCCP against the PFMI (para. 23). - Timeframe: I - Authorities Responsible: AFM, DNB - The Dutch authorities should confirm that Dutch CCPs are complying with all the PFMIs, including requirements not covered by EMIR, on an ongoing basis (para. 24). - Timeframe: I - Authorities Responsible: AFM, DNB - The DNB should ensure Dutch CCPs develop comprehensive recovery plans ahead of the introduction of the regulatory requirement for CCPs to do so (para. 25). - Timeframe: I - Authorities Responsible: DNB - The Dutch authorities should formally incorporate oversight of critical service providers in their supervisory framework (para. 27). - Timeframe: NT (near term) - Authorities Responsible: AFM, DNB - The DNB should continue to augment its resources devoted to EuroCCP (para. 31). - Timeframe: I - Authorities Responsible: DNB - The authorities should consider an exemption to the AFM and the DNB from the proposed cap on salaries in the public and semi-public sector, since it would undermine their ability to attract and retain FMI expertise (para. 32). - Timeframe: NT - Authorities Responsible: MoF - The AFM and the DNB should share their respective annual supervisory plans to enhance coordination (para. 35). - Timeframe: I - Authorities Responsible: AFM, DNB - The Dutch authority that is given the responsibility should establish CMGs for the Dutch CCPs (para. 37). - Timeframe: NT - Authorities Responsible: Dutch FMI Resolution authority Selected EuroCCP-specific recommended actions (from Table 2) - EuroCCP should fill the long-running vacant position on its Management Board as a priority to ensure it is fully effective (para. 41). - Timeframe: I - Responsible: EuroCCP - EuroCCP should further minimize the risk from holding margin receipts in commercial bank money intraday by using its account at the DNB to receive cash margins denominated in euros (para. 45). - Timeframe: I - Responsible: EuroCCP - EuroCCP should secure direct access to the main CSDs/SSSs it uses (para. 46). - Timeframe: I - Responsible: EuroCCP - EuroCCP should strengthen its stress testing methodology by considering price movements during the closeout period, including intraday, when developing its historical scenarios and introduce sectoral scenarios (paras. 48 and 49). - Timeframe: I - Responsible: EuroCCP - Through its stress testing, EuroCCP should confirm that it has sufficient liquid resources to settle all payment obligations in each of the currencies that it settles with a high degree of confidence (para. 51). - Timeframe: I - Responsible: EuroCCP - EuroCCP should strengthen its review of its stress testing methodology by extending its reverse stress testing approach and conducting sensitivity analysis to examine the parameters and assumptions in its stress test model (para. 52). - Timeframe: I - Responsible: EuroCCP - The Dutch authorities should review the legal segregation of cash collateral for securities positions (para. 56). - Timeframe: NT - Authorities Responsible: AFM, DNB, MoF - EuroCCP should strengthen its review of its margin model by increasing the attention on and scope of its sensitivity analysis (para. 58). - Timeframe: I - Responsible: EuroCCP - EuroCCP should develop a comprehensive recovery plan that ensures that non-default losses are fully addressed (para. 61). - Timeframe: NT - Responsible: EuroCCP - EuroCCP should specifically address cyber security in its operational risk management framework in line with the CPMI-IOSCO Guidance on Cyber Resilience of Financial Market Infrastructures (para. 64). - Timeframe: NT - Responsible: EuroCCP *Source: IMF technical note EXECUTIVE SUMMARY (Netherlands Financial Market Infrastructures assessment).* ### 5. The Dutch authorities have largely addressed the FMI related recommendations from ### 5. The Dutch authorities have largely addressed the FMI related recommendations from ### Progress on 2004 FSAP and subsequent reforms - Following the launch of the Euroclear Settlement of Euronext-zone Securities platform, the proportion of transactions not settled on a delivery-versus-payment (DvP) basis has been reduced from 30 to 10 percent. - Euroclear Nederland’s planned migration to the Target2Securities (T2S) platform in September 2016 is expected to further enhance DvP settlement by using cross-border links. - Investment firms and supervised non-European Economic Area credit institutions are eligible for admission as participants to Euroclear Netherlands, consistent with the 2004 recommendation. - The Central Securities Depository Regulation (CSDR), expected to come into effect in the second half of 2016, is expected to resolve the lack of a statutory basis for supervision of CSDs/SSSs and to harmonize the approach to implementing the PFMI for CSDs/SSSs across the EU. - CPMI and IOSCO implementation monitoring found that the Netherlands have final implementation measures for the Principles in place for all types of FMIs and the relevant responsibilities for authorities; CCPs overseen by the AFM and the DNB are subject to a regulatory framework that is complete and consistent with the PFMI Principles and that the Dutch Authorities observe all relevant PFMI Responsibilities. ### FMI landscape and key statistics - Number and types of FMIs domiciled in the Netherlands: - Two CCPs: EuroCCP and ICE Clear Netherlands B.V. - One CSD/SSS: Euroclear Netherlands (part of the Euroclear Group). - No trade repositories are currently domiciled in the Netherlands. - EuroCCP specifics: - Centrally clears equity transactions traded at 16 different trading venues across 19 different markets. - 47 active clearing participants, with headquarters across 14 jurisdictions in Asia, Europe, and North America. - In 2015 cleared an average of 6.8 million trade sides per day, of which 1.3 million were cleared over a link with one of two other CCPs. - Majority of transactions sourced from France, Germany, Sweden, and the United Kingdom. - Formed in December 2013 as a result of a merger. - EuroCCP Staff located in Amsterdam, London and Stockholm; operations located across two sites in the Netherlands. - Received regulatory authorization under EMIR in April 2014. - Ownership: equal shares by ABN AMRO Clearing Bank, BATS Chi-X Europe, NASDAQ, and The Depository Trust & Clearing Corporation. - Governance: two-tier board structure (Supervisory Board and Management Board) and a Risk Committee composition as specified in the source. - Operates stakeholder forums: Advisory Board, Nordic Advisory Council, Platform Advisory Council. - Relevant external FMIs referenced: - EURO1 and STEP2 operated by the Euro Banking Association. - Interoperable links with LCH.Clearnet Ltd (United Kingdom) and Six x-clear AG (Switzerland). - LCH.Clearnet SA clears securities and derivatives trades executed on Euronext Amsterdam. - Continued Linked Settlement (CLS) is a United States-based settlement system for foreign exchange transactions. ### Supervisory and oversight framework - Legal and regulatory sources: - CCPs are subject to EMIR and its associated technical standards; EMIR implements a common set of rules for CCPs based on the PFMI. - Supervision of CSDs/SSSs currently based on the Securities Giro Act 1977 (Wet Giraal Effectenverkeer, WGE) and the non-public Oversight Framework Clearing and Settlement tied to licensing of the regulated market. - CSDR implementation will establish a clear statutory basis and public requirements for CSDs/SSSs. - Systemically important payment systems in the euro area are subject to the Eurosystem’s SIPS Regulation. - Trade repositories are subject to EMIR; ESMA is the sole supervisor for trade repositories established in the EU. - Allocation of responsibilities: - CCPs and CSDs/SSSs are jointly regulated, supervised and overseen by the AFM and the DNB. - For CCPs, the WFT allocates primary responsibility for each EMIR article to one authority, with formal consultation required for some articles. - The DNB is the National Competent Authority (NCA) responsible for licensing and authorizing CCPs; the AFM has a formal advisory role. - Under the (then forthcoming) CSDR, one authority will be allocated primary responsibility for each CSDR article; the AFM will be the NCA responsible for licensing and authorizing CSDs, with the DNB in a formal advisory role. - The DNB chairs the EMIR colleges of CCPs established in the Netherlands and participates in colleges for other CCPs; AFM and DNB participation in cooperative arrangements and international colleges is detailed. - Cooperative arrangements: - AFM and DNB cooperate with non-EU authorities as relevant (e.g., invitation to Norges Bank, Financial Supervisory Authority of Norway, Swiss Financial Market Supervisory Authority). - Participation in Interoperability Roundtable and ESES framework for Euroclear Group CSDs (coordinated by the National Bank of Belgium). - TARGET2 oversight: - TARGET2 is centralized in operation but decentralized legally; oversight responsibility is split between the Eurosystem and the DNB for domestic arrangements and relationships with Dutch participants. - Domestic payment systems: - Under the Dutch Financial Supervision Act, Dutch payment systems not identified by the Eurosystem as systemically important are required to be licensed and comply with the PFMI; DNB is the licensing authority. Equens SE and CCV are licensed; MasterCard Europe is in the process of being licensed. ### Analysis of supervision and oversight — Regulation, supervision and transparency (Responsibilities A, C and D) - Regulatory completeness and PFMI adoption: - EMIR and the Eurosystem’s Oversight Framework implement a regulatory framework for CCPs that is complete and consistent with the PFMI. - The Dutch authorities have adopted the PFMI in their oversight and supervision of CSDs/SSSs and systemically important payment systems. - Transparency and disclosure expectations and actions: - The AFM and the DNB should continue to ensure that all Dutch FMIs publish regular self-assessments against the PFMI; while all Dutch FMIs have recently done so, for some the most recent assessment is the first time they have published a self-assessment. - The AFM and the DNB should ensure that all Dutch CCPs comply with the quarterly quantitative disclosure requirements set by CPMI and IOSCO. - EuroCCP-specific supervisory actions: - AFM and DNB have used EuroCCP’s self-assessment and supervisory information to produce their own assessment of EuroCCP against the PFMI. - Under EMIR, AFM’s and DNB’s ongoing supervisory activities include regular monthly reporting and monthly meetings with each CCP, supplemented by specific information requests and ad hoc meetings. - The Dutch authorities have provided their findings from this PFMI assessment to EuroCCP and agreed deadlines by which EuroCCP should address these recommendations; authorities should continue to follow-up regularly to ensure deadlines are met. - Assessment cadence and gap analysis: - AFM and DNB plan to annually assess Dutch CCPs against PFMI requirements not covered in EMIR. - Under EMIR, AFM and DNB are required to assess Dutch CCPs against EMIR on an annual basis. - AFM and DNB plan to conduct a full reassessment of each CCP against all EMIR requirements every two to three years, with incremental assessments of changes between full assessments. - The DNB has conducted a gap analysis between the PFMI and EMIR and intends to assess Dutch CCPs against the gaps in EMIR it has identified on an annual basis. - Recovery planning: - EMIR does not require CCPs to have comprehensive recovery plans; AFM and DNB are encouraging CCPs to develop such plans through oversight. Legally binding requirements are expected to be introduced at the EU level. - AFM and DNB should continue to engage with CCPs to ensure development of comprehensive recovery plans even ahead of EU requirements. - Oversight of critical service providers (CSPs): - The Dutch authorities should formally incorporate oversight of CSPs in their supervisory framework; the PFMI include oversight expectations for CSPs (Annex F). - Outsourcing is a key issue: many FMIs are reliant on SWIFT (DNB participates in NBB’s oversight arrangements for SWIFT); Euroclear Netherlands outsources key operations to Euroclear Bank SA (NBB applies same requirements to these services as to CSDs/SSSs); AFM and DNB have insight via cooperative arrangements. - EuroCCP sources identical services from multiple providers to mitigate dependency and uses EMIR outsourcing requirements in assessing dependencies. - Cyber resilience: - The DNB conducted a thematic review of cyber resilience at core financial infrastructure via a self-assessment based on the National Institute of Standards and Technology’s Framework for Improving Critical Infrastructure Cybersecurity with additional questions from draft CPMI/IOSCO guidance; this review forms the starting point for ongoing oversight of cyber resilience. ### Analysis of supervision and oversight — Powers and resources (Responsibility B) - Legal powers: - For CCPs, powers are vested in the WFT and include information-gathering powers, the power to impose penalties, remove board members, appoint a caretaker and revoke a CCP’s license to operate. - For CSDs/SSSs, the WGE gives the AFM powers over the designated central institute with respect to the settlement of securities transactions; under the terms of the Dutch securities exchange license the CSD/SSS is required to adhere to the Oversight Framework Clearing and Settlement. - Once the CSDR is in effect, statutory powers for AFM and DNB will mainly flow from this EU Regulation. - Resourcing: - DNB conducted a bottom-up assessment of resourcing needs following EMIR responsibilities; this resulted in three additional full-time employees in the Oversight Department, bringing the total number of staff overseeing and supervising systemically important FMIs to eight including the Head of Department. - AFM has five full-time employees working on FMI oversight and supervision, who spend approximately 40 percent of their time on day-to-day supervision of FMIs; the remainder of their time is spent on projects related to FMI issues such as a thematic assessment of incident management. - Staff responsible for regulation, supervision and oversight at AFM and DNB generally have an appropriate mix of skills; recruitment strategy aims to build staff with legal, IT audit, risk management, economics, and econometrics expertise. *International Monetary Fund — cr1792 chapter 5* ### 31. The DNB should continue to augment its resources devoted to EuroCCP. Following the ### cr1792 - 31. The DNB should continue to augment its resources devoted to EuroCCP. Following the ### DNB resourcing and oversight of EuroCCP - Finding: Being the NCA primarily responsible for regulation of EuroCCP—one of the largest securities CCPs in Europe—"comes with significant reputational risk." EuroCCP clears "19 different equities markets." - Current staffing: "the staff resources devoted to EuroCCP oversight should be further increased from the current two staff members assigned to EuroCCP supervision full time." - Context on Oversight Department staffing: "In total there are 13 staff in the Oversight Department, but 5 of them work on oversight of retail payments systems, i.e., Equens, CCV and Mastercard Europe." - Recommendation: Broaden management involvement from the FMI Oversight Department in supervisory meetings with EuroCCP to discuss substantive issues (e.g., EMIR assessment findings), including periodic attendance (e.g., quarterly) in addition to current ad hoc arrangements. - Rationale: Periodic managerial attendance would "provide additional depth to cover any unexpected turnover in the staff responsible for FMI regulation, supervision, and oversight" and "would reduce reliance on the interpretation of front-line supervisors" when reporting to management. - Existing enhancements referenced: thematic reviews across all FMIs (e.g., the cyber resilience review) and "fortnightly coordination meetings between the Head of the Oversight Department and the two CCP supervision teams." - Note on external expertise: "the DNB also has arrangements in place to draw in expertise from outside the areas responsible for FMI regulation, oversight and supervision." ### Remuneration cap and staffing risks - Finding: "A cap on salaries at the AFM and the DNB in future may make it more difficult for them to attract staff with appropriate skills and experience." - Legal background: As of "January 1, 2013, the AFM and the DNB are subject to the Law on Standards for Remuneration for Senior Officials in the Public and Semi-public Sector (‘Wet Normering Topinkomens,’/Law on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector, WNT)." - Implementation timing: Actual reduction of remunerations for board members that exceed the WNT maximum "will only take place as of January 1, 2017" due to a transitional period. - Proposed extension: A proposal ("WNT-3") to extend WNT to all AFM and DNB staff "is currently out for consultation," which "may make it difficult to attract and retain staff with specialized technical skills." - Recommendation: "Consequently, the MoF should consider exempting the two institutions from the proposed cap." - Footnote: "A recommendation on this issue will be finalized in the second FSAP mission in September 2016. The mission’s recommendation will incorporate cross-sectoral assessments." ### Use of external and internal expertise - Arrangements: Both the AFM and the DNB "have arrangements in place to draw in expertise from outside the areas responsible for FMI regulation, oversight and supervision." - Examples: - The DNB’s Oversight Department "has drawn on expertise elsewhere within the DNB to assist in assessing whether senior management and board members of CCPs are fit and proper." - The DNB "has arrangements to draw on quantitative experts both from within DNB and externally." - Recent use-case: a team composed of "the EuroCCP supervisors, a quantitative expert from the DNB’s Market Infrastructure Policy Department and an external consultant to assess EuroCCP’s margin model." - The AFM’s arrangements "are through the projects, discussed above, that its staff are involved in." ### Cooperation in normal and stress circumstances - Inter-agency cooperation: "The Dutch authorities cooperate effectively with each other in their regulation, supervision and oversight of CCPs and CSDs/SSSs." - Allocation and joint meetings: Each jointly regulated FMI "is allocated one or more regulatory contacts within either the AFM or the DNB" and "The Dutch regulators typically meet jointly with each CCP or CSD/SSS." - Recommendation: "The AFM and the DNB should share their respective annual supervisory plans to enhance coordination." Current practice: each authority has its own formal sign-off processes and there is "not currently a process for the AFM and the DNB to share their respective annual supervisory plans." - Crisis management arrangements: A Triparty CMG market exists; its scope "encompasses all payments and securities processing of the core financial infrastructure—which includes the Dutch FMIs." Arrangements "focus on operational incidents." - Resolution regime status: - "The Netherlands does not currently have a resolution regime for FMIs." - EU CCP recovery and resolution legislation is "expected to be proposed in late 2016" and FSB guidance is "expected" in late 2016. - Working assumption: "the DNB will be the CCP resolution authority." - Recommendation: Once resolution legislation is in place, "the Dutch authorities should implement their plans to establish CMGs for the CCPs for which they are the resolution authority." - Resource implication: "If the DNB is assigned the resolution authority responsibilities for EuroCCP, it will need further resources to fulfill this role." - Emergency central bank liquidity: - DNB has arrangements to address technical obstacles to Dutch FMIs accessing emergency central bank liquidity, "without committing to the provision of liquidity." - Multicurrency liquidity: DNB "has started to make arrangements to address this multicurrency liquidity need." - Eurosystem policy: upon ECB Governing Council approval, Dutch CCPs are entitled to an intraday credit facility; "Both EuroCCP and ICE Clear Netherlands have such a facility with the DNB, and EuroCCP uses this facility on a daily basis to fund securities settlement at CSDs." - DNB facilities: DNB "does not offer a deposit facility for CCPs" but CCPs "can retain balances in their real-time gross settlement account" and "CCPs can also use their account at the DNB to receive cash margin, but currently neither CCP does so." ### Cooperation with foreign authorities - For CCPs: "the DNB has implemented the EMIR requirements on regulatory colleges." DNB chairs these colleges and "provides sufficiently granular information" and "forward-looking information" to members; it "facilitates cooperation by inviting [non-EU] authorities to be observers at the EMIR college." - EMIR college feature: includes an emergency protocol "based on guidelines issued by ESMA"; DNB has "added specific post-incident information sharing obligations." - For CSDs/SSSs: The CSDR "is expected to expand the cooperation arrangements with foreign authorities for CSDs/SSSs" and will require NCAs to share information with additional EU authorities and central banks; "it is expected that the NCA for each CSD/SSS will retain sole responsibility for supervision and oversight of that CSD/SSS." ### Analysis of EuroCCP risk management — Governance (Principle 2) - Management Board composition: The third Management Board position "has remained vacant for about two years," leaving the Management Board with only two members. - Mitigating factors: Decisions "are generally made by consensus" and the Management Board "is supported in its review of issues by the Management Team." The Supervisory Board has "six members (including two independent members), all with relevant knowledge and experience" and "takes an active role in all aspects of EuroCCP’s operations." - Independence arrangements: Risk Management, Internal Audit, and Legal and Compliance Departments have day-to-day reporting to the CEO, and direct reporting lines from the Chief Risk Officer, Head of Legal and Compliance, and Head of Internal Audit to independent members of the Supervisory Board (one chairs the Risk Committee; the other the Audit Committee). - Internal Audit outsourcing: "EuroCCP has also outsourced its Internal Audit function to PricewaterhouseCoopers." - Risk Committee: Comprised of participants and chaired by an independent Supervisory Board member; its role is advisory. If EuroCCP does not follow its advice, EuroCCP "must provide written reasons and inform the DNB." ### Analysis of EuroCCP risk management — Credit and Liquidity Risk (Principles 4 and 7) - Counterparty exposures: EuroCCP has exposures to "clearing participants, liquidity providers, investment counterparties, central banks, commercial settlement banks, and agents and CSDs/SSSs." Clearing participants may also act in multiple roles. - Treatment of dual-role defaults: If a defaulting clearing participant is also a liquidity provider, "it is assumed that this liquidity is no longer available." Risks from different roles are "managed ... separately" though combined measures generally cover risks simultaneously. - Recommendation on cash margin: "EuroCCP should further minimize this risk by using its account at the DNB to receive cash margins denominated in euros." - Current practice: cash margin is paid into an account at a commercial bank; this uncollateralized exposure is "limited to the intraday balance that has yet to be invested." Funds with investment counterparties are collateralized with a supplementary haircut and marked to market daily. - Investment policy: direct investments restricted to "certain European government securities with a remaining tenor of 12 months or less," held in EuroCCP’s name at the relevant CSD. - CSD/SSS access recommendation: "EuroCCP should promptly seek direct access to the ESES CSDs and Clearstream Banking as soon as practicable." - Current coverage: "direct access to 10 CSDs/SSSs." - Operational constraints: legal restrictions and operational considerations have prevented direct membership of the ESES CSDs or Clearstream Banking despite significant clearing of French and German equities. - Planned timing: EuroCCP "intends to join these CSDs as a direct member after they have transitioned to T2S, which is scheduled for September 2016 and February 2017, respectively." - Settlement agent risk: where indirect access is used, settlement agents provide intraday credit and securities are held in segregated accounts in EuroCCP’s name; nevertheless, "if a settlement agent defaulted EuroCCP would lose access to that CSD/SSS and would be unable to settle transactions involving securities held at that CSD/SSS." - Default fund and stress testing: - Coverage objective: "Through daily stress testing, EuroCCP ensures that it can cover its exposure to the two clearing participants or linked CCPs with the largest exposure in extreme but plausible scenarios." - Remedial action: "If stress testing identifies a shortfall, EuroCCP calls for additional default fund contributions the following morning." - Default fund sizing: default fund "is resized monthly based on 105 percent of the largest stress test result over the last 12 months." - Large position margin trigger: "large or concentrated positions are covered by a large position margin, which is called if the stress test losses in excess of initial margin (using the main two hypothetical scenarios described below) exceeds 45 percent of the default fund." - Real-time monitoring: "Since EuroCCP monitors margin obligations, including large position margins, on a real-time basis, the stressed losses on intraday positions under these two scenarios are incorporated in EuroCCP’s risk management." - Note on calculation conservatism: "In calculating stress test losses in excess of initial margin EuroCCP takes a conservative approach in that it uses the lower of initial margin held and initial margin required." - Stress testing methodology recommendations: - Consider intraday price movements during the closeout period when developing historical scenarios. Current historical scenarios "are based on the dates over the past 30 years on which the largest three-day moves in relevant equity indices occurred" and combine relative price movements with "the most extreme exchange rate movements over the last 30 years." - Haircuts: "the haircuts on collateral are also calibrated to cover the highest volatility over the last 30 years." - Implement planned additional hypothetical scenarios based on shifts in particular markets or industry sectors that EuroCCP clears; EuroCCP currently runs four hypothetical scenarios: - Two scenarios: "equivalent-sized parallel market shifts that are higher than seen historically." - Two scenarios: target portfolios "with less than 50 equities" applying "an even bigger parallel market shift to account for the lack of diversification in small portfolios." - EuroCCP recognizes parallel market shifts "are not likely to occur in practice and therefore is in the process of developing more realistic hypothetical scenarios." - Foreign exchange consideration: Consistent with its approach for historical stress tests, EuroCCP "should consider foreign exchange risk when developing these scenarios." - Securities settlement liquidity risk: - As a securities CCP, EuroCCP faces liquidity requirements from timing mismatch between paying for securities the defaulter was due to buy and when it sells the securities. - Settlement model impact: size of liquidity risk differs by settlement model used by CSDs/SSSs; under a DvP Model 1 settlement model, settlements are split into smaller parcels to minimize liquidity and "liquidity can be recycled over the settlement day." - Equivalent Payment and Delivery Obligation Agreements: EuroCCP "has Equivalent Payment and Delivery Obligation Agreements with certain brokers, under which the broker would take on the settlement obligations of the defaulted participant." *IMF staff report content unit cr1792 (excerpt).* ### 51. Through its stress testing, EuroCCP should confirm that it has sufficient liquid ### cr1792 - 51. Through its stress testing, EuroCCP should confirm that it has sufficient liquid ### Liquidity Stress Testing and Currency Liquidity - Finding: EuroCCP tests the sufficiency of its overall liquid resources using daily stress testing but does not separately consider its liquidity needs in each relevant currency. - Current liquidity arrangements: - €150 million multicurrency liquidity line. - Requires collateral to be deposited on its balance sheet. - Can minimize liquidity needs through payment splitting and recycling liquidity throughout the day. - Recommendation: Through its stress testing, EuroCCP should confirm that it has sufficient liquid resources to settle all payment obligations in each of the currencies that it settles with a high degree of confidence. - Recommendation: EuroCCP should implement planned enhancements to its reverse stress testing to consider a wider set of market price scenarios and combinations of participant defaults that would exhaust its financial resources. - Recommendation: EuroCCP should further strengthen its review of its stress testing approach by conducting sensitivity analysis to examine how the parameters and assumptions (e.g., holding periods, correlations, historical data periods) affect the outcomes of its stress tests. - Current practice: EuroCCP conducts daily reverse stress testing; results are considered as part of its monthly review of its credit and liquidity stress testing approach. EuroCCP’s liquidity stress testing has been externally validated. - Limitation: Currently, EuroCCP’s reverse stress tests are limited to identifying the parallel market movements that exhaust EuroCCP’s total financial resources. ### Margin Framework and Collateral (Principles 5 and 6) - Monitoring and margin calls: - EuroCCP monitors risks from new trades, price movements and settlement of trades in real-time. - Margin is collected at least daily. - If real-time monitoring identifies a shortfall in margin (initial plus variation margin) of at least €1 million and the shortfall is at least 10 percent of deposited collateral, margin is called intraday. - If margin is called intraday, clearing participants must meet the call within 90 minutes. - Clearing participants have 30 minutes to decide whether to meet the intraday margin call with cash or collateral; initially another 30 minutes is allowed to meet the call, but the clearing participant can request an additional 30 minutes if necessary. - Clearing participants can choose in which currency their margin obligation is denominated, as long as it is a currency that is acceptable as collateral. - An FX add-on is applied if margin obligations stemming from positions in individual securities are denominated in a different currency to that chosen by the clearing participant. - EuroCCP also applies an FX haircut on collateral that is not denominated in the same currency as the currency in which the margin obligation is denominated. - Initial margin model: - Core component: Correlation Haircut model. - Calibration: calibrated to cover 99.7 percent of movements over 3 days based on the exponentially weighted moving average of price movements over the past 250 days. - Add-ons: applies an add-on for liquidity risk and large positions. - Portfolio-level correlation approach: - Consistent with EMIR, EuroCCP calculates the initial margin that would be required for each individual security within a portfolio if there were no margin offsets and ensures that the initial margin requirement is at least 20 percent of this. - Considers correlation between individual products and applies an interval around this correlation, with a larger interval for lower correlations. - Uses this approach to calculate an initial margin requirement that takes into account the potential for correlations to change in stressed markets. - Calls margin based on the approach that results in the higher initial margin requirement. - Procyclicality mitigation: - Correlation Haircut model is based on a 250-day exponentially weighted moving average, with a decay factor of 0.94. - A volatility floor mitigates procyclicality: - Volatility floor based on the maximum 3-day volatility in the relevant proxy over the last 10 years (prevents margins falling below a certain level in periods of low volatility). - Collateral haircuts based on the higher of the maximum volatility over the last 30 years (calibrated at the indices level) and an exponentially weighted moving average based on the last 250 days. - Recommendation: The Dutch authorities should review the legal segregation of cash collateral from securities positions. - Issue: legal uncertainty on segregation of cash collateral for securities positions provided from a client via its clearing participant on a transfer of title basis. - Consequence: EuroCCP’s administrative segregation of client margin does not provide legal segregation for cash collateral unless that collateral is provided as a pledge; EuroCCP restricts the proportion of collateral that can be provided as a pledge. - Risk: If a clearing participant defaults, the position of its clients vis-à-vis the administrator for the estate of the clearing participant might be unclear. - Linked CCP exposures and add-ons: - To cover exposures to linked CCPs, EuroCCP collects both initial margin and an add-on known as Co-CCP Equivalent Clearing Fund Add-On (CECFA), which is equivalent to a participant’s default-fund contribution from linked CCPs. - Arrangements exist to collect buffer margin around known peaks in activity to smooth changes in margin requirements. - In the event that a linked CCP defaults and this margin proves insufficient, EuroCCP can use the default fund to cover any shortfall. - All three linked CCPs use their own risk management methodology to calculate margin obligations, which can result in differences in margin obligations between CCPs. - Recommendation: EuroCCP should strengthen its review of its margin model. - Current review: daily backtesting and sensitivity analysis on a monthly basis; sensitivity analysis tests the number of standard deviations assumed, the decay factor used in the exponentially weighted moving average, the minimum volatility assumed, and the correlation assumptions. - Backtesting compares total margin received at the account level with observed price movements, looking at both the number and size of breaches. - Suggested enhancement: expand sensitivity analysis to test the normal distribution and square root of time assumptions. ### Participant Default Rules (Principle 13) - Default management: - Once a participant default has been declared, the Breach and Default Management Team (BDMT) is responsible for managing the default. - BDMT composition: Management Board, and representatives from Risk Management, Relationship Management, Legal and Compliance, and Operations Departments as well as the Corporate Secretary. - First phase: informing all relevant parties (including the regulators and linked trading platforms) and ensuring that the defaulter, and any related entities that will also be in default, cannot clear any further trades. - Options for closing-out defaulter’s positions (four main options, usable in combination): - Port client positions. - Close-out via a broker. - Auction the defaulter’s positions. - Allow the defaulter to settle outstanding positions. - Practical considerations: - Porting is unlikely to be an option given legal uncertainty around segregation of cash margin and the fact that the settlement cycle is only two days. - EuroCCP has Equivalent Payment and Delivery Obligation Agreements with certain brokers under which the broker would take on the settlement obligations of the defaulted participant. - EuroCCP can auction the portfolio to between three and five selected participants; this option is more likely for larger and more complex portfolios. - If Risk Management and Compliance conclude that the defaulting participants can still comply with its settlement obligations, EuroCCP can allow the participant to settle the positions and thereby close-out the exposure. ### Recovery Planning (Principle 3) - Status: EuroCCP is in the process of developing a formal recovery plan. - Recovery tools and limitations: - In addition to the default waterfall, and in the case of a participant default, EuroCCP has the power to call for additional contributions from the clearing participants up to the amount of their current contribution to the default fund (tool is capped). - For non-default losses, EuroCCP holds double the minimum capital requirement specified in EMIR and has arrangements to replenish this capital by issuing additional shares either to existing or new shareholders. - Limitations: It is not clear that the capped additional contributions or the capital-replenishment arrangements would be sufficient in all circumstances. - Regulatory action: The DNB has identified the lack of a comprehensive recovery plan as an issue and is engaging with EuroCCP to address this gap in the near future. ### Operational Risk (Principle 17) - Resilience and redundancy: - EuroCCP systems operate with dual redundancy across geographically separate data centers with synchronous mirroring to facilitate timely recovery in the event of an incident. - Data centers: - Provided by two independent suppliers. - Linked by two separate glass-fiber connections provided by different suppliers. - One data center is located above sea-level and not under a flight path. - Identical technical configurations. - Redundancy tested by transferring part or all of the operations between data centers on a regular basis. - Personnel continuity: business continuity arrangements rely on staff accessing the system remotely. - Operational risk management framework: - Management Board reviews the operational risk framework annually and participates in quarterly Risk Governance Board meetings. - Systems monitored in real time; all incidents logged in an incident management system with reporting to the responsible manager and the operational risk team, and escalation procedures in place. - Chief Technology Officer reviews logs with the relevant manager and a member of the operational risk team on a monthly basis. - Recommendation: EuroCCP should specifically address cyber security in its operational risk management framework in line with the final CPMI-IOSCO Guidance on Cyber Resilience of Financial Market Infrastructures. - Current practice: cyber security is addressed in the context of information security and business continuity more generally, not specifically in the operational risk management framework. - Action: EuroCCP is in the process of responding to the outcome of the DNB’s thematic review of cyber resilience. *International Monetary Fund — cr1792 (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1792.pdf_