## 1cheea2019010 ## Source details **Canonical URL:** [1cheea2019010](https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019010.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1cheea2019010.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1cheea2019010.pdf.json) --- ### Executive summary — key findings - Systemically important FMIs in Switzerland are generally well developed and observe the PFMI at a high level, but internal governance and crisis management arrangements require further work. - SIX Group AG operates systemically important FMIs (SIC, SIX SIS, SIX x‑clear); strong internal governance independent from commercial incentives is important. - Swiss arrangements largely meet the PFMI Responsibilities, but FINMA should dedicate more resources to FMIs. - Swiss authorities and SIX Group should strengthen FMI crisis management arrangements. ### FMI landscape and systemically important FMIs - Systemically important Swiss‑domiciled FMIs (all operated by SIX Group AG): - SIC — RTGS payment system operated by SIX Interbank Clearing AG (SIC AG); ownership noted as 75 percent SIX Group and 25 percent PostFinance AG (note: in March 2019, SIX increased stake in SIC AG to 100 percent). - SIX SIS — CSD and SSS operated by SIX SIS AG (wholly owned subsidiary of SIX Group); custody, settlement, collateral management; links including T2S; applying to ESMA for equivalence with CSDR. - SIX x‑clear — CCP operated by SIX x‑clear AG; clears equities, derivatives, ETFs, bonds and securities lending; interoperable with LCH Ltd and EuroCCP NV; recognized as a third‑country CCP by ESMA. - SIX Group also operates a trade repository (SIX Trade Repository), securities exchange and MTFs, and provides payments and financial information services. - Several foreign FMIs operate in Switzerland; three foreign FMIs are considered systemically important to Switzerland. ### Regulation, supervision and oversight - Revised framework in force January 2016: FMIA and FMIO. - FINMA: authorizing and supervising FMIs; resolution authority for FMIs; consolidated supervision powers. - SNB: oversight of systemically important CCPs, CSDs and PSs; designates systemically important FMIs. - FINMA and SNB cooperate closely; resources at FINMA for FMI supervision and for recovery and resolution should be increased. - PFMI Responsibilities A–E used as assessment framework. ### Governance and risk management of SIX Group FMIs - Ownership and board composition: - SIX Group owned by about 130 domestic and international financial institutions; share distribution: big Swiss banks 30 percent; foreign banks 17 percent; commercial and investment banks 17 percent; cantonal banks 14 percent; private banks 9 percent; regional and raiffeisen banks 8.5 percent; other banks 1 percent; SIX Group and its companies 3 percent. - Board composition reflects ownership. - Governance concerns and recommendations: - SIX x‑clear and SIX SIS Boards identical; composition: Head of Securities & Exchanges Division; Group Head of IT; Group CFO; and two external members (two of five members are independent; three are executives). - Recommendations include increasing independent members, differentiating Boards for SIX SIS and SIX x‑clear, meeting regularly with independent Board members, clarifying FMI Board vs Group Board responsibilities, and considering separate Board risk committees for FMIs. - Management‑level changes since 2014: - Created Group Risk Management Unit (about 95 staff) headed by Group CRO; Group CRO member of Executive Board. - Separated risk management from business units; new remuneration scheme for control functions. - 2018: merged post‑trading and exchange businesses into a single Securities & Exchanges business unit; implications for governance independence. ### Resources, capacity, and internal authority arrangements - FINMA resources: - Department for Financial Market Infrastructures and Derivatives: - Supervision Unit: three staff — ongoing supervision of SIX Group, SIX x‑clear, SIX SIS and SIX TR; engagement in cooperative arrangements; supervision of exchanges and MTFs. - Legal Unit: five staff — authorization and recognition of FMIs, authorization of changes, trading and derivatives regulation. - Assessment: Department (particularly Supervision Unit) does not appear to have sufficient resources to fulfil responsibilities; resource pressures expected to persist. - SNB resources: - Oversight Unit: 10.4 full‑time‑equivalent (FTE) — oversight of systemically important FMIs, SNB input on recovery and resolution, FMI policy issues. - Assessment: SNB appears to have sufficient resources. - Internal decision making: - FINMA: internal committee includes Heads of FMI Legal Unit, FMI Supervision Unit, and Department; assessment letters discussed with CEO; certain key decisions made at FINMA Board level. - SNB: Governing Board ultimate responsibility; Oversight Unit reports at least annually to Governing Board. ### Supervision practices, audits, and model validation - External supervisory audits: annual audit by external firm selected and paid by FMI; FINMA may veto auditor; SNB receives results and may request scope items. - For SIX Group a single supervisory audit covers SIX FMIs. - SNB requires detailed annual audit of SIX Group covering IT and operational risk; SNB may veto audit firm. - Prior approval required for material changes; FMIO sets outsourcing and audit requirements. - FINMA and SNB rely on FMI risk validations, may require additional external audits, and draw on internal specialists. ### Crisis management, recovery and resolution — key points - Recovery: - SIX x‑clear, SIX SIS and SIC AG have recovery plans; FMIA requires systemically important FMIs to draw up recovery plans. - Recovery plans broadly cover international guidance but further work needed to ensure effectiveness in extreme scenarios. - SIX x‑clear should ensure scenarios beyond “extreme but plausible,” sufficient tools to address credit losses, assess Top Up contribution calibration, ensure re‑establishing a matched book in equity and derivatives segments, reconsider reliance on voluntary tools, test new tools including with participants, and undertake holistic testing of recovery arrangements. - Non‑default loss allocation: SIX x‑clear will allocate 25 percent of its regulatory required capital to absorb non‑default losses; losses beyond this could be allocated to participants up to a cap. - Resolution: - FMI resolution planning is at an early stage; FINMA is the resolution authority and required to draw up resolution plans for systemically important FMIs (SIX x‑clear and SIX SIS). - FINMA’s Recovery and Resolution Division has just under one FTE dedicated to FMI matters; additional resources recommended. - Further analysis required to determine adequacy of legal framework for FMI‑specific resolution tools; FINMA plans to review adequacy considering FSB Guidance. - Integrated group structure, outsourcing and interdependencies raise resolvability questions; greater ring‑fencing could enhance resolvability. - Crisis coordination: - FINMA has established a crisis management group (CMG) for SIX x‑clear. - FINMA and SNB are developing crisis management cooperation plans; detailed documented crisis management plans between the two authorities do not yet exist and should be finalized and tested. - Swiss Financial Crisis Committee (Department of Finance, FINMA and SNB) will be responsible for coordination in extreme crises. ### New clearing platform, liquidity risk and model changes (paragraphs 49–67) - New SIX x‑clear system: - Will replace SECOM and CLARA and existing add‑ons with a single system covering the whole CCP. - Includes replacement of core clearing risk models, including margining and stress testing. - SIX x‑clear intends to launch the new system in late 2020, subject to regulatory approval. - SNB may seek its own external validation in addition to validations by SIX. - Liquidity risk management: - Daily liquidity stress testing at Cover 2 level for SIX x‑clear and SIX SIS individually and collectively. - Stress tests assume settlement on intended date; questions remain on assumptions for excess collateral availability and market movements. - SIX intends to amend assumptions in early 2019 and should ensure analytical justification and conservatism. - Additional liquidity resources introduced: committed credit line from SIX Group; SIX SIS multicurrency FX swap agreements with commercial banks; SNB establishing emergency FMI liquidity facility for FX (not guaranteed). - SNB intends a full review of SIX x‑clear and SIX SIS liquidity framework in 2019. - Dependencies and diversification: - SIX should analyze dependencies on commercial banks and diversify or establish backup arrangements where required. - Examples: single custodian for USD funds; reliance on limited liquidity providers in Norwegian branch; general exclusion of liability for losses from default of cash or custodian banks. - Default management and porting: - SIX x‑clear technically able to port positions, but high concentration in client clearing in derivatives (CLARA) may delay porting effectiveness. - Default management tests do not include all clearing participants; including participants would increase awareness. - SIX conducted analysis in 2017 on client failure causing a GCM default; repeating analysis regularly recommended. - Procyclicality: - Current margin models include some procyclicality management but lack a holistic documented approach. - Risk coefficient margin add‑on multipliers: 1.3 for AAA to A-; 1.8 for BBB+ to BBB-; 2.3 for BB+ to BB-; B+ or lower determined case by case. - Add‑on can trigger material increases in margin requirements; SIX x‑clear should consider alternative approaches to mitigate cliff‑edge effects and use system replacement to introduce a holistic approach. ### SNB settlement, deposit services and liquidity facilities - Sight deposit accounts: - Regulated “domestic and foreign clearing and settlement companies” may open a sight deposit account with the SNB — precondition for participation in SIC; participation enables CHF settlement in central bank money. - SNB liquidity facilities for domestic systemically important FMIs: - Standing liquidity facility in CHF — liquidity up to a certain limit against SNB repo‑eligible collateral provided at time of request. - Emergency liquidity facility in CHF and some foreign currencies — available only for solvent and viable FMIs, against SNB eligible collateral; SNB does not guarantee provision of FX liquidity. - FMIs required to demonstrate private sources of liquidity can meet liquidity risk management requirements. - SNB expects facilities to be in place and tested with SIX x‑clear and SIX SIS in the course of 2019. ### Cyber resilience, fintech, and SIX Digital Exchange (SDX) - Supervisory focus: - Cyber resilience is a continuing focus; authorities use NIST Framework and CPMI‑IOSCO Guidance on cyber resilience. - FINMA and SNB conduct regular meetings, detailed annual assessments and can use external experts; coordinate with SIF and MELANI. - SIX Group cyber program: - Risk Committee of SIX Group Board oversees cyber risks; Group CSO reports to CRO. - Dedicated cyber security program, 24/7 cyber security operations center, threat monitoring and intelligence; engagement with MELANI and international organizations. - Cross‑sectoral simulations: - SIX plans simulations with several market participants; SNB intends to participate; authorities encouraged to undertake cross‑sectoral work. - Fintech and SDX: - SIX Digital Exchange (SDX): planned integrated digital asset trading, settlement and custody service using distributed ledger technology; service to be provided by SIX Digital Exchange AG within Securities and Exchanges Division; SIX intends to seek full licensing from FINMA and announced intention to launch first services about mid‑2019. - Authorities will need thorough analysis of regulatory and risk implications and may use external specialist resources. ### PFMI implementation, CPMI‑IOSCO assessment and outstanding gaps - Authorities apply PFMI via FMIA, FMIO and NBO special requirements; refer to CPMI‑IOSCO guidance (e.g., Resilience of central counterparties, Recovery of FMIs, Guidance on cyber resilience). - CPMI‑IOSCO Implementation Monitoring: - Level 1: Highest rating of ‘4’ for CCPs, PSs, CSDs and SSSs, and TRs, for both Principles and Responsibilities (final implementation measures in force). - Level 2/3: For CCPs, CSDs and SSSs, and PSs — rating ‘Observed’; Responsibility E for CCPs and CSDs and SSSs rated ‘Observed with minor gap(s) identified’ (inter‑agency arrangements for FMI resolution not yet developed). - TRs: rated ‘Not ready for assessment’ as of 9 January 2015. - Identified gaps: - Certain legislative gaps (e.g., liquidity risk) have not limited PFMI implementation in practice. - TRs: no legislative requirement in Switzerland for TRs to develop recovery or wind‑down plans or plans to raise additional equity if equity falls close to or below needed amounts. - Suggested follow‑up: - Address gaps identified in CPMI‑IOSCO assessment to support implementation and enforcement of PFMI. - FINMA to finalize supervisory approach for FMIs including consolidated group supervision and quantitative/qualitative group‑level requirements. - FINMA to develop approach for supervision of TRs. - Authorities to consider regular discussions with FMI participants and deepen engagement with relevant foreign authorities where interoperability or Swiss‑franc clearing/settlement is involved. ### Recommendations (summary with timing and priority) - FMI Regulation, Supervision and Oversight 1. Increase resources dedicated to FMI supervision (FINMA; ¶34) I H 2. Address gaps identified in the CPMI‑IOSCO assessment of implementation of the PFMI in the Swiss regulatory framework (FDF & SNB; ¶18) ST M 3. Finalize work to refine the supervisory approach for FMIs, in particular regarding consolidated group supervision (FINMA; ¶25) I M 4. Consider introducing regular discussion with FMI participants and/or market participants more broadly (FINMA & SNB; ¶27) ST L - FMI crisis management, recovery and resolution 5. Increase resources dedicated to FMI recovery and resolution (FINMA; ¶63) I H 6. Finalize work to develop FMI crisis coordination plans (FINMA & SNB; ¶40) I H 7. Continue to improve recovery plans to ensure each FMI fully meets the requirements of the PFMI (SIX; ¶60) I H 8. Develop resolution plans for SIX x‑clear and SIX SIS and assess the adequacy of the legislative framework for FMI resolution (FINMA; ¶64 & 65) ST‑MT H - FMI governance and risk management 9. Improve independence of SIX x‑clear and SIX SIS governance arrangements to support sound FMI risk management (SIX; ¶42) I H 10. Monitor the effectiveness of the revised SIC governance arrangements (SNB; ¶46) ST H 11. Meet regularly with the independent members of the SIX x‑clear and SIX SIS Boards of Directors (FINMA & SNB; ¶43) C M 12. Ensure full implementation of the relevant PFMI for the SIX x‑clear clearing system replacement (SNB & FINMA; ¶49) ST M 13. Ensure a strong analytical justification for all assumptions in the liquidity stress testing model (SIX; ¶50) ST M 14. Undertake further analysis and/or testing of portability in the derivatives segment (SIX; ¶53) ST M 15. Include participants in default management tests (SIX; ¶54) ST M 16. Analyze dependencies on commercial banks as service providers and, where required, take steps to diversify or establish back up arrangements (SIX; ¶55) I M 17. Consider alternative approaches to mitigate potential cliff edge effects of the risk coefficient margin add on. Use the replacement of the clearing system to introduce a holistic approach to manage and assess procyclicality in margin models (SIX; ¶57) ST M 18. Undertake work on cross‑sectoral cyber resilience (SIX, FINMA & SNB; ¶74) ST M - Timing key: C=Continuous; I=Immediate (within one year); ST (Short Term)=1–2 years; MT (Medium Term)= 3–5 years - Priority key: H=High; M=Medium; L=Low ### Selected statistics and participation figures (as reported) - SIC (daily average) - Number of transactions (thousands): 2016: 1,766; 2017: 2,042 - Turnover (CHF millions): 2016: 153,614; 2017: 172,939 - SIX x‑clear (daily average) - Contracts Cleared (Volume, thousands): Total 2016: 1,716,960; 2017: 1,288,080 - Value (CHF millions): Total 2016: 13,154; 2017: 11,637 - Exchange traded derivatives: Volume 2016: 674; 2017: 771 — Value (CHF millions) 2016: 115; 2017: 118 - OTC derivatives: Volume 2016: 19; 2017: 18 — Value (CHF millions) 2016: 4; 2017: 4 - SIX SIS (end of year / daily averages) - Securities held (thousands): Total 2016: 633; 2017: 640 - Securities held (CHF millions): Total 2016: 3,153,226; 2017: 3,342,215 - Debt securities (thousands): 2016: 164; 2017: 166 — Value (CHF millions) 2016: 770,087; 2017: 779,649 - Equities (thousands): 2016: 216; 2017: 217 — Value (CHF millions) 2016: 1,830,862; 2017: 2,020,910 - Delivery instructions (daily average) Total: 2016: 123; 2017: 124 — Value (CHF millions) 2016: 24,226; 2017: 23,761 - Delivery versus Payment breakdowns (2016 / 2017): - Debt securities: 2016: 101; 2017: 98 - Equities: 2016: 7; 2017: 7 - Other: 2016: 72; 2017: 70 - Additional value rows: 2016: 24,226 / 4,683 / 17.853 / 1,690; 2017: 23,761 / 4,103 / 18,085 / 1,573 - Participation counts - SIC: Domestic 231; Foreign 94; Total 325 - Domestic: Central banks 1; Banks 205; FMIs 2; Other 23 - Foreign: Banks 86; FMIs 4; Other 4 - Total: Central banks 1; Banks 291; FMIs 6; Other 27 - SIX x‑clear: Domestic 46; Foreign 37; Total 83 - Domestic: Banks 46 - Foreign: Banks 28; CCPs 2; Broker 7 - Total: Banks 74; CCPs 2; Broker 7 - SIX SIS: Domestic 278; Foreign 133; Total 411 - Domestic: Banks 183; Brokers 7; Other financial institutions 3; Insurance companies* 20; Other 65 - Foreign: Banks 115; Brokers 6; Other financial institutions 3; Other 9 - Total: Banks 298; Brokers 13; Other financial institutions 6; Insurance companies* 20; Other 74 - SIX TR: Domestic 137; Foreign 18; Total 155 - Domestic: Banks 111; Brokers 8; Other non‑financial institutions 2; Insurance companies 7; Other 9 - Foreign: Banks 3; Brokers 13; Other non‑financial institutions 1; Insurance companies 1 - Total: Banks 114; Brokers 21; Other non‑financial institutions 3; Insurance companies 8; Other 9 - * Participation in the SIX SIS collateral management service. _International Monetary Fund — content unit 1cheea2019010._ ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Key findings - While systemically important financial market infrastructures (FMIs) in Switzerland are generally well developed and subject to close supervision and oversight, their internal governance and crisis management arrangements require further work. - Swiss FMIs appear to generally observe the Committee on Payment and Settlement Systems (CPSS)-International Organization of Securities Commissions (IOSCO) Principles for Financial Market Infrastructures (PFMI) at a high level. - SIX Group AG (SIX Group) operates in a competitive environment; it is important that the systemically important FMIs it operates have strong internal governance arrangements that are sufficiently independent from the commercial incentives of the group to support sound risk management. - The Swiss arrangements for FMI supervision and oversight largely meet the Responsibilities set out in the PFMI, but the Swiss Financial Market Supervisory Authority (FINMA) should dedicate more resources to FMIs. - The Swiss authorities and SIX Group should strengthen FMI crisis management arrangements. ### FMI landscape and systemically important FMIs - The Swiss authorities consider three Swiss-domiciled FMIs to be systemically important, each operated by SIX Group AG: - SIC, a Real Time Gross Settlement (RTGS) payment system (PS), operated on behalf of the Swiss National Bank (SNB) by SIX Interbank Clearing AG (SIC AG), which was 75 percent owned by SIX Group and 25 percent owned by PostFinance AG (note: in March 2019, SIX increased its stake in SIC AG to 100 percent, acquiring the shares of PostFinance). - SIX SIS, a Central Securities Depository (CSD) and Securities Settlement System (SSS) operated by SIX SIS AG, a wholly owned subsidiary of SIX Group. SIX SIS provides custody and settlement of tradable financial instruments and collateral management services; it maintains links with other CSDs, including through TARGET2-Securities (T2S), and is applying to ESMA for equivalence with the Central Securities Depository Regulation (CSDR). - SIX x-clear, a central counterparty (CCP) operated by SIX x-clear AG. SIX x-clear provides CCP services for equities, derivatives, ETFs, bonds and securities lending transactions; it is interoperable with LCH Ltd and EuroCCP NV and is recognized as a third-country CCP by ESMA. - SIX Group also operates a trade repository (SIX Trade Repository), securities exchange and multilateral trading facilities (MTFs), and provides services in payments and financial information. - Several foreign FMIs operate in Switzerland; three of these are considered systemically important. - euroSIC facilitates RTGS settlement in euros (EUR) for Swiss and some foreign banks; it is managed by Swiss Euro Clearing Bank and operated by SIC AG. The SNB has assessed that euroSIC is not systemically important with respect to financial stability considerations in Switzerland at this stage. ### Regulation, supervision and oversight - A revised regulatory framework for FMIs came into effect in Switzerland in January 2016. - FINMA has responsibility for supervision of FMIs, and the SNB has responsibility for oversight of systemically important FMIs. - There is close cooperation between FINMA and the SNB where their responsibilities overlap, and the authorities have been effective in inducing change in several areas. - Resources at FINMA dedicated to FMI supervision, and to FMI recovery and resolution, should be increased to ensure that FINMA can fulfil its mandate in these areas. - The analysis in this note is based on the five Responsibilities for authorities in the PFMI (Responsibility A–E). ### Crisis management, recovery and resolution - FMI crisis management work should continue to be a priority. - The systemically important SIX Group FMIs have implemented recovery plans, broadly covering the issues considered in international guidance on FMI recovery. - Further work is required to ensure that the recovery arrangements would be fully effective in supporting the continuity of the FMIs’ critical services, even in extreme scenarios; the authorities are closely engaging with the FMIs on this topic. - FMI resolution planning is at an early stage in Switzerland. While this work is likely to take several years, FINMA—in consultation with the SNB—should progress expeditiously with the development of FMI resolution plans. - FINMA has recently established a crisis management group (CMG) for SIX x-clear to support recovery and resolution planning for the CCP. - The authorities are strongly encouraged to complete broader ongoing work to develop crisis management cooperation plans among Swiss authorities and with relevant foreign authorities. ### Governance and risk management of SIX Group FMIs - SIX x-clear and SIX SIS should ensure that the independence of their governance arrangements places a high priority on sound risk management and financial stability considerations. - Competitive pressures weigh on incentives to implement best practice risk management. FMI risk governance arrangements should be reviewed to ensure sufficient attention to risk management of the systemically important FMIs and that decisions about these matters are sufficiently independent from broader business decisions of SIX Group. - Elements of the FMIs’ risk management arrangements considered in this note generally appear to observe the PFMI. - FMI risk management has been strengthened in several areas over recent years, e.g., the management of liquidity risk and cyber resilience. - Some areas require further improvement, e.g., managing dependencies on commercial banks for provision of services, and management of procyclicality. ### Upcoming projects and risks - SIX x-clear will be introducing new risk models, including for margining and stress testing, as part of a planned replacement of its existing clearing systems. This project presents risks and opportunities to implement improvements. - SIX Group announced the launch of an integrated digital trading and settlement system in 2019. This new service will present novel regulatory and risk issues. - For both projects, FINMA and the SNB will need to hold to a strong stance regarding the observance of regulatory requirements. - Current political risks, associated with ongoing EU-Swiss framework negotiations and with Brexit, create uncertainties for the Swiss FMIs; SIX Group and the Swiss authorities continue to monitor developments. ### Recommendations (Table 1. Switzerland: Recommendations) - FMI Regulation, Supervision and Oversight 1. Increase resources dedicated to FMI supervision (FINMA; ¶34) I H 2. Address gaps identified in the CPMI-IOSCO assessment of implementation of the PFMI in the Swiss regulatory framework (FDF & SNB; ¶18) ST M 3. Finalize work to refine the supervisory approach for FMIs, in particular regarding consolidated group supervision (FINMA; ¶25) I M 4. Consider introducing regular discussion with FMI participants and/or market participants more broadly (FINMA & SNB; ¶27) ST L - FMI crisis management, recovery and resolution 5. Increase resources dedicated to FMI recovery and resolution (FINMA; ¶63) I H 6. Finalize work to develop FMI crisis coordination plans (FINMA & SNB; ¶40) I H 7. Continue to improve recovery plans to ensure each FMI fully meets the requirements of the PFMI (SIX; ¶60) I H 8. Develop resolution plans for SIX x-clear and SIX SIS and assess the adequacy of the legislative framework for FMI resolution (FINMA; ¶64 & 65) ST-MT H - FMI governance and risk management 9. Improve independence of SIX x-clear and SIX SIS governance arrangements to support sound FMI risk management (SIX; ¶42) I H 10. Monitor the effectiveness of the revised SIC governance arrangements (SNB; ¶46) ST H 11. Meet regularly with the independent members of the SIX x-clear and SIX SIS Boards of Directors (FINMA & SNB; ¶43) C M 12. Ensure full implementation of the relevant PFMI for the SIX x-clear clearing system replacement (SNB & FINMA; ¶49) ST M 13. Ensure a strong analytical justification for all assumptions in the liquidity stress testing model (SIX; ¶50) ST M 14. Undertake further analysis and/or testing of portability in the derivatives segment (SIX; ¶53) ST M 15. Include participants in default management tests (SIX; ¶54) ST M 16. Analyze dependencies on commercial banks as service providers and, where required, take steps to diversify or establish back up arrangements (SIX; ¶55) I M 17. Consider alternative approaches to mitigate potential cliff edge effects of the risk coefficient margin add on. Use the replacement of the clearing system to introduce a holistic approach to manage and assess procyclicality in margin models (SIX; ¶57) ST M 18. Undertake work on cross-sectoral cyber resilience (SIX, FINMA & SNB; ¶74) ST M - Timing key: C=Continuous; I=Immediate (within one year); ST (Short Term)=1–2 years; MT (Medium Term)= 3–5 years - Priority key: H=High; M=Medium; L=Low *Source: EXECUTIVE SUMMARY, Switzerland, International Monetary Fund.* ### 8. SIX Group AG is an unlisted public limited company, based in Zurich. It is owned by ### 8. SIX Group AG is an unlisted public limited company, based in Zurich. It is owned by ### Ownership, structure, and businesses - SIX Group AG is an unlisted public limited company, based in Zurich. - Ownership: - Owned by about 130 domestic and international financial institutions, which are also the main users of its services. - The shares are distributed in a way that mirrors shareholders’ utilization of SIX and so that no category of owner holds an absolute majority. - The shareholders are: the big Swiss banks (30 percent); foreign banks (17 percent); commercial and investment banks (17 percent); cantonal banks (14 percent); private banks (9 percent), regional and raiffeisen banks (8.5 percent), and other banks (1 percent). SIX Group and its companies hold 3 percent of shares. - Board of Directors composition reflects the ownership structure. - SIX Group activities: - Operates Swiss-domiciled FMIs and SIX Swiss Exchange. - Provides retail payment services, financial data services and cards services. - Per end of November 2018, sold its card acquiring business to French company Worldline, in return for a 27 percent stake in Worldline and two seats on its board of directors. - SIX retains its business of issuing domestic debit cards for Swiss banks. - In January 2019, SIX Group increased its stake in Swiss Euro Clearing Bank to 100 percent, acquiring the shares of UBS, Credit Suisse, and PostFinance. ### Foreign FMIs designated systemically important to Switzerland - Three foreign FMIs designated as systemically important: - Continuous Linked Settlement (CLS), a U.S.-based international system for foreign exchange settlement. - LCH Ltd, a U.K.-based CCP. LCH Ltd clears (among other products) equities and ETF transactions entered into on SIX Swiss Exchange; it interoperates with SIX x-clear for clearing of these products. It also clears over-the-counter (OTC) interest rate derivatives, including transactions denominated in Swiss francs. - Eurex Clearing AG, a German-based CCP. Eurex Clearing AG provides CCP services for, among others, Eurex Stock Exchange which is used (among other things) for trading derivatives based on underlying Swiss assets. Eurex Clearing also clears OTC interest rate derivatives. - Other foreign FMIs recognized by Swiss authorities provide services in Switzerland; with the exception of LCH Ltd and Eurex Clearing, these CCPs are not considered systemically important to the Swiss financial system. - REGIS-TR, a TR domiciled in Luxembourg, has been recognized by the Swiss authorities. - DTCC Derivatives Repository, a TR domiciled in the U.K., was recognized by the Swiss authorities in January 2019. ### Legislative and regulatory framework for FMIs - A revised legislative framework came into effect in January 2016: - FMIA: Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading. - FMIO: Ordinance of the Federal Council of 25 November 2015 on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading. - The FMIA is principles-based and establishes an insolvency and resolution framework for FMIs, and a framework for regulation of OTC derivatives. - FMIO sets out more detailed requirements; FMIA and FMIO together support implementation of the PFMI. - Prior to FMIA, SIX x-clear and SIX SIS were authorized by FINMA as banks; they have been re-authorized under the FMIA. - The FMIA provides specific provisions for foreign CCPs or TRs that have been recognized by FINMA, including recognition criteria such as being subject to appropriate regulation and supervision. ### Supervision and oversight responsibilities - Supervisory and oversight authorities: - FINMA: responsibility for authorizing and supervising FMIs (except those operated by or on behalf of the SNB). FINMA has powers for consolidated supervision for FMIs that are part of a financial group and is established as the resolution authority for FMIs. - SNB: oversight responsibilities for systemically important CCPs, CSDs and PSs; responsibilities set out in the NBA and FMIA. SNB designates FMIs as systemically important (after consulting with FINMA), designates systemically important business processes, and may impose special requirements on systemically important FMIs. - PSs require authorisation from FINMA only if necessary for proper functioning of the financial market or protection of financial market participants, and if the PS is not operated by a bank, or by the SNB or on its behalf. - Swiss legislation does not provide for TRs to be designated as systemically important; consequently TRs are not subject to SNB oversight. - For foreign CCPs and TRs to provide services to Swiss participants or other Swiss FMIs, they must be recognized by FINMA and comply with FINMA information and reporting requirements. - SNB oversight extends to FMIs domiciled overseas if they have substantial parts of their operation or leading participants in Switzerland, or clear or settle significant transaction volumes in Swiss francs. ### Cooperation, disclosure, and risk-based approach - FMIA requires FINMA and the SNB to jointly carry out activities regarding systemically important FMIs, to regularly exchange information and to avoid overlaps in execution of tasks; authorities cooperate closely in practice. - FINMA and the SNB publicly disclose criteria and the FMIs subject to their supervision or oversight on their websites and discuss high-level supervision/oversight activities in annual reports. - Both authorities take a risk-based approach: - FINMA’s supervision intensity is based on FMI categorization (relevance, size, complexity, risk structure) and a rating of regulatory observance and emerging risk. - SIX x-clear and SIX SIS are subject to the most intense level of supervision, including an annual assessment of observance of FMIA requirements. - SNB concentrates on aspects with largest residual risks and conducts an annual assessment of domestic systemically important FMIs (including SIC) against special NBO requirements. - Both FINMA and SNB communicate expectations and priorities in annual assessment letters. ### Oversight and supervisory practices and tools - FINMA uses external supervisory audits as part of its supervision: - Annual supervisory audit conducted by external audit firm selected and paid for by the FMI; FMI’s choice of auditor is subject to veto by FINMA. - Scope agreed with FINMA and, for systemically important FMIs, differs year-to-year. - SNB receives audit results and may request inclusion of items in scope. - For SIX Group, a single supervisory audit is conducted across the SIX FMIs. For SIX x-clear and SIX SIS, FINMA uses the supervisory audit as a confirmation tool rather than a primary source. - SNB requires a detailed annual audit of SIX Group covering IT and operational risk and security matters; audit focus determined by SNB in consultation with FINMA and SIX Group; audit firm chosen and paid for by the FMI, SNB may veto choice. - Authorized FMIs must obtain prior approval or authorization from FINMA for material changes to their operations; for systemically important FMIs, FINMA must consult SNB prior to approval. Material changes include outsourcing of “essential services” and substantial changes to risk management models. - FMIO establishes requirements for FMIs’ agreements with outsourcing providers; authorities can audit outsourcing providers directly. - For model validation, FINMA and SNB use FMI risk validations, may require additional external audits, and can draw on internal specialists. - For supervision and oversight of recognized foreign FMIs, FINMA and SNB largely rely on home authorities’ activities; engage more closely for CCP interoperability and for payment, settlement and liquidity arrangements relevant to Swiss franc transactions. - FINMA requires recognized TRs to provide a periodic audit covering policies and procedures regarding confidentiality, receipt and administration of data. ### Regulatory coverage of OTC derivatives and cross-border considerations - FMIA and FMIO provide legislative framework for OTC derivatives regulation. FINMA has primary regulatory responsibility; FMIO-FINMA provides further detail. - Timeline and scope: - First phase of obligations to report OTC derivatives transactions to TRs came into effect in October 2017. - Requirements regarding mandatory clearing of OTC derivatives came into effect in Switzerland in September 2018, covering standardized interest rate and credit derivatives; these requirements are subject to transition periods and so will begin to take effect from March 2019. - Transactions must be cleared on a CCP that is authorized or recognized by FINMA; at present no Swiss CCP clears the products subject to the mandates and so Swiss market participants must use a recognized foreign CCP. - EU-Swiss framework discussions and the U.K. exit from the EU create uncertainty: - SIX Swiss Exchange and BX Swiss Exchange had a one-year equivalence by the European Commission ending in December 2018, with extension tied to EU-Swiss framework negotiations. On 20 December 2018, the European Commission extended the equivalence by six months, until June 2019. - Decisions on equivalence extensions could have significant implications for SIX Swiss Exchange, with possible flow-on effects to CCP and CSD. - SIX Group has undertaken impact analysis for different scenarios. - Brexit has implications for SIX Group FMIs, notably the CCP interoperating with LCH Ltd (and EuroCCP), and for location of OTC derivatives clearing by Swiss financial institutions. - In November 2018, the Federal Council adopted a contingency measure to mitigate potential implications. ### PFMI implementation, gaps, and recommended follow-up - Swiss authorities apply the PFMI in regulation of systemically important FMIs through legislation and explanatory material; certain PFMI elements implemented through FMIA, FMIO and NBO special requirements for systemically important FMIs. - Authorities refer to PFMI and CPMI-IOSCO guidance (including Resilience of central counterparties: Further guidance on the PFMI, Recovery of Financial Market Infrastructures and Guidance on cyber resilience for FMIs) in supervision and oversight. - A CPMI-IOSCO deep dive assessment of PFMI implementation in Swiss framework is being conducted; Implementation monitoring of PFMI: Assessment report for Switzerland was published in January 2019. - Identified gaps: - Certain gaps in Swiss legislative framework (for example in the area of liquidity risk) do not appear to have limited PFMI implementation in practice. - Gaps with respect to TRs that cannot be addressed by supervisory approach: e.g., no requirements in Swiss legislation for TRs to develop recovery or wind down plans, or to establish plans to raise additional equity should equity fall close to or below the amount needed. - Under Article 86 of the FMIA, if a TR (or any other FMI) wished to return its authorization, it would be required to present a liquidation plan to FINMA (and systemically important FMIs are required to establish wind-down plans). - Recommendations / suggested actions: - Swiss authorities should look to address gaps identified in the CPMI-IOSCO assessment to support implementation—and, if necessary, enforcement—of the PFMI. - FINMA should finalize its work to refine its supervisory approach for FMIs, in particular its approach to consolidated group supervision; FINMA intends to set quantitative and qualitative requirements regarding potential financial and operational risks at a group level (covering non-regulated companies that are part of the group). This is important given the integrated nature of SIX Group. - FINMA is also developing its approach for supervision of TRs. - Authorities should consider introducing regular discussions with FMI participants and/or market participants more broadly to supplement existing engagement arrangements and provide useful insights. - Authorities should continue and, where appropriate, deepen engagement with relevant foreign authorities for recognized foreign FMIs, especially where interoperability or significant Swiss-franc clearing/settlement is involved. _International Monetary Fund_ ### 32. FINMA and the SNB have the authority to obtain information from FMIs in a timely ### 1cheea2019010 - 32. FINMA and the SNB have the authority to obtain information from FMIs in a timely ### Authority to obtain information and audit powers - FINMA and the SNB have the authority to obtain information from FMIs in a timely manner, including provision of data and documentation to enable the SNB to assess the systemic importance of an FMI. - Supervised or overseen FMIs and their auditors are required to provide FINMA and, as relevant, the SNB with all information and documentation necessary for the authorities to carry out their tasks, and are required to notify the authorities of certain events or incidents. - Legislation provides FINMA and the SNB with the authority to carry out audits (either directly or through a third party) of FMIs subject to their supervision or oversight. - Footnote detail: For PSs, this disclosure obligation only applies to systems that settle payments in excess of CHF 25 billion (gross) per financial year. The SNB requires these statistics to be provided regularly, and has determined that no domestic PS other than SIC is systemically important at this stage. ### Enforcement powers - FINMA powers include: - issuing rulings; - preventing persons from acting in a management capacity; - confiscation of profits; - revocation of authorization or recognition. - The SNB has certain enforcement powers, more limited than FINMA’s, including the ability to issue enforceable orders to systemically important FMIs in the event of non-compliance with regulatory requirements. - Consultation between FINMA and the SNB would occur if one authority intended to use its enforcement powers with respect to a systemically important FMI. ### Resources and capacity - FINMA: - FMI supervision is conducted within FINMA’s Department for Financial Market Infrastructures and Derivatives. - The Supervision Unit comprises three staff and is responsible for ongoing supervision of SIX Group, SIX x-clear, SIX SIS and SIX TR, engagement in cooperative arrangements for CCPs recognized in Switzerland, and supervision of exchanges and MTFs. - The Legal Unit comprises five staff and handles authorization and recognition of FMIs and authorization of changes to FMI operations and rules, as well as trading and derivatives regulation. - FINMA takes a risk-based approach to resource allocation and can use external supervisory audits to extend its reach. - Assessment: The Financial Market Infrastructures and Derivatives Department (particularly the Supervision Unit) does not appear to have sufficient resources to fulfil its supervisory responsibilities given its broad scope and the systemically important nature of several FMIs it supervises. - Resource pressures are expected to persist as the Department will support FINMA’s recovery and resolution work for FMIs and supervise several major projects ongoing at SIX Group. - SNB: - The Oversight Unit comprises 10.4 full-time-equivalent (FTE) and is responsible for oversight of systemically important FMIs, SNB input on FMI recovery and resolution, and FMI policy issues. - Resources focus on oversight responsibilities regarding domestic FMIs. - The Oversight Unit employs staff with expertise in information and cyber security, can access resources with specific skills in other SNB departments, and may use external auditors. - Assessment: The SNB appears to have sufficient resources to meet its responsibilities. ### Internal governance arrangements at FINMA and SNB - FINMA: - An internal committee discusses assessments of, and takes material decisions concerning, supervised FMIs. Committee members include Heads of the FMI Legal Unit, the FMI Supervision Unit, and the Financial Market Infrastructures and Derivatives Department, and for certain decisions, the Head of the Markets Division. - FMI assessment letters are discussed with the CEO of FINMA. - Certain key decisions (e.g., re-authorization of important Swiss FMIs under the FMIA) are made at the FINMA Board level. - SNB: - The Governing Board has ultimate responsibility for FMI oversight and policy activities, final responsibility for designation of systemically important FMIs and systemically important business processes, and issuance of any orders if a FMI did not comply with regulatory requirements. - Approval for material decisions is required from the Head of the Financial Stability Unit or the Head of Department, and in some cases the Governing Board. - The Oversight Unit reports at least annually to the Governing Board about its oversight of domestic and foreign FMIs; FMI assessment letters (produced only for domestic FMIs) are provided to the Board. ### Organizational separation: SNB oversight of SIC vs SIC system manager role - The SNB’s oversight of SIC is conducted separately from its role as SIC system manager. - Banking Operations Unit fulfils the SNB’s responsibility as SIC system manager. - Oversight Unit and Banking Operations Unit are separated within the SNB organizational structure and report to different Governing Board members. - An escalation process exists in case of disagreement, ultimately up to the Governing Board. - The Oversight Unit holds regular meetings with the Banking Operations Unit, with SIC AG, and with relevant areas of SIX Group. - Responsibility for ensuring compliance with relevant regulatory requirements is split between SNB Banking Operations and SIC AG; this split is documented. ### Cooperation in normal and stressed circumstances - FINMA and the SNB: - Cooperate closely in supervision and oversight of FMIs; legislation permits and in some cases requires cooperation, including information sharing. - Cooperation is supported by an exchange of letters outlining split of responsibilities. - In practice, cooperation includes joint meetings with SIX Group, regular coordination meetings, coordination of the annual supervisory audit, and sharing results of assessments and regulatory priorities. - International cooperation: - Swiss authorities cooperate with foreign authorities for Swiss and foreign FMIs; legislation permits information sharing with foreign authorities subject to certain conditions. - FINMA and the SNB have bilateral and multilateral cooperative arrangements with foreign authorities with respect to SIX x-clear. - FINMA has established a CMG for SIX x-clear to support recovery and resolution planning for the CCP and is developing the cooperation agreement for the group. - Swiss authorities participate in cooperative arrangements and CMGs for foreign FMIs recognized in Switzerland. - Access by foreign authorities to data held in FINMA-authorized TRs is addressed in the FMIA. - Crisis management planning: - FINMA and the SNB are developing crisis management cooperation plans by mapping cooperation required across a wide range of potential FMI crisis events; the project was expected to run into early 2019. - Currently, detailed documented crisis management plans to support cooperation between the two authorities in the event of a financial or operational crisis involving a systemically important FMI do not exist. - It was decided that the Swiss Financial Crisis Committee (comprising senior executives from the Department of Finance, FINMA and the SNB) will be responsible for coordination among authorities in the event of an extreme crisis affecting a Swiss FMI. - The ongoing FINMA-SNB project could provide planning and documentation to support the Committee on FMI matters and cover cooperation arrangements for crises that may not require Committee involvement. - Given cooperative agreements with overseas authorities for SIX x-clear, mapping crisis coordination plans and making those plans appropriately transparent to relevant foreign authorities is important. - Once finalized, crisis management coordination arrangements should be regularly tested. ### Governance of SIX Group FMIs and SIX organizational structure (Analysis of selected issues) - General observations: - Strong governance arrangements are essential for effective risk management at FMIs. - SIX Group is a user-owned, for-profit group (except SIC AG, which operates according to a non-profit, cost-recovery model including a certain return to equity holders). - Securities & Exchanges business unit applies a “target profit” model (cost-recovery plus mark-up). - SIX Group operates in a highly competitive environment across exchanges, clearing and CSD spaces, and has interests in payments, data services, fintech and innovation. - Given integrated business structure, incentives must align to prioritize strong risk management at the FMIs. For SIC AG, oversight of the risk management function—including definition of the risk appetite—lies with its independent Board. - FMI Boards and independence: - SIX x-clear and SIX SIS should ensure governance independence to support sound risk management; FMI risk decisions should be taken without undue influence from broader business decisions. - Current structure: Membership of the Board of SIX x-clear and SIX SIS is identical. Two of the five members are independent; the other three are executives (including the Head of the Securities & Exchanges Division). - A CPMI-IOSCO PFMI Assessment in January 2019 found legal, regulatory, and oversight frameworks broadly consistent with PFMI Principle 2 (Governance) with only minor gaps; however, practical board independence from business decisions is unclear. - Recommendations to improve independence and clarity: - Composition: - Consider increasing the number of independent members so they comprise a majority. - Review current membership of SIX Group executives on the FMI Boards. - Alternatively, increase influence of independent members within current FMI Boards and decrease influence of executives on risk management decisions; such arrangements must be carefully structured, documented, and regularly reviewed by SIX Group and Swiss authorities. - Consider differentiating membership of the Board of Directors of SIX SIS and the Board of Directors of SIX x-clear. - FINMA and the SNB should meet regularly with independent FMI Board members and consider periodic meetings with the SIX x-clear Risk Advisory Committee. - Roles and responsibilities: - Group Board should retain sight of systemically important infrastructures given Group-level resource allocation decisions. - Responsibilities of FMI Boards and Group Board should be clearly demarked so FMI risk matters are clearly the responsibility of the FMI Boards. - SIX should consider establishing specific objectives for the FMI Boards that prioritize safety and soundness and explicitly support financial stability and public interest considerations. - SIX could consider establishing separate Board risk committees for the FMIs. ### Management-level risk governance changes and structural developments - Since the 2014 FSAP, SIX Group has: - Separated risk management functions from business units and created a separate Group-wide risk management unit headed by the Group CRO. - Group CRO, who previously reported to the Group CFO, is now a member of the Executive Board. - Group risk management unit has a wide remit: financial risk, operational risk, project risks, legal, compliance, physical and information security and business continuity. - Responsibilities include second line functions in FMI risk management; operational risk management remains within business units while the centralized unit proposes methodology and parameters (subject to FMI Board approval). - Introduced a new remuneration scheme so members of control functions are not subject to profit-related performance indicators. - 2018 organizational changes: - Merged SIX Group’s securities post-trading business (SIX x-clear and SIX SIS) and exchange business into a single Securities & Exchanges business unit. - Re-organized banking services (payments) business line. - Established a dedicated innovation unit. - Sold international cards business. - The merger brings all SIX entities regulated under FMIA within a single business unit under one SIX Group executive, increasing importance of independent governance arrangements for SIX x-clear and SIX SIS. ### SIC governance and separability - SNB monitoring: - The SNB should monitor the effectiveness of SIC governance arrangements, revised following SIX Group restructure. - Restructure effects: - Greater integration of SIC AG within SIX’s Banking Services business line covering broader payments and retail product innovation. - SIC AG continues to have its own Board of Directors comprising representatives of system participants, of SIX Group and of the SNB. - Restructure shifted some non-operational matters outside the governance responsibilities of the SIC AG Board. - Some senior SIC staff now have dual-hat positions across SIC AG and the broader banking services business line; mitigation steps include contracts directly with SIC AG. - SIC AG continues to have its own IT management and operations teams. - Certain compliance and risk functions are performed by the SIX Group risk function; statutes of SIC AG and SIX acknowledge SIC AG Board responsibility for these matters as they pertain to SIC. - It is important to ensure the SIC AG Board has appropriate oversight of these functions. - Separable operations and roadmap: - On a technological and operational level, the SIC system is already separable and a roadmap for such a project has been drawn up. - SNB Banking Operations Unit is beginning work to formalize the severability of SIC AG on a firm level from the rest of SIX Group. ### Resolution planning implications for SIX Group FMIs - FINMA responsibilities: - As part of resolution planning, FINMA will need to consider whether SIX Group’s organizational structure appropriately allows for resolution of the systemically important FMIs. - Interdependencies that may complicate resolution: - Staff and IT services (including data center management) are provided by separate subsidiaries within SIX Group. - Financial dependencies include provision of liquidity and settlement services by SIX SIS to SIX x-clear and provision by SIX Group of a credit line to SIX x-clear and SIX SIS. - Dependencies are managed on a ‘business as usual’ basis through contractual arrangements, service level agreements, and joint liquidity and default management testing across SIX x-clear and SIX SIS, but may present additional challenges in resolution. - SNB and SIC separability: - SNB Banking Operations Unit is formalizing SIC AG separability from the rest of SIX Group. ### Observance of PFMI and selected FMI risk management topics - Swiss authorities have conducted multi-year work to assess and enhance SIX Group FMIs’ observance of the PFMI. - FMIs have made changes in areas including recovery planning, liquidity risk management, and disclosures; authorities continue to work with SIX Group to implement changes in some areas. - Arrangements of SIX x-clear and SIX SIS to manage credit, liquidity, investment and general business risks are summarized at high level in Appendix VIII. - At a high level, the FMIs appear to generally observe the requirements of the PFMI in these areas, though this report does not include a deep dive into the Principles. - Additional observations and work remain, notably to ensure recovery arrangements fully meet PFMI requirements (discussed further in Section C). *Source: 1cheea2019010 - FINMA and the SNB have the authority to obtain information from FMIs in a timely (excerpts).* ### 49. The planned introduction of a new clearing platform for SIX x-clear will result in ### 1cheea2019010 - 49. The planned introduction of a new clearing platform for SIX x-clear will result in ### New clearing platform and risk-model replacement - The new system will replace SECOM and CLARA (used for the Norwegian branch) and existing add-ons with a single system covering the whole CCP. - The project includes replacement of core clearing risk management models, including margining and stress testing. - SIX x-clear intends to launch the new system in late 2020, subject to regulatory approval. - The project presents an opportunity to update and enhance the CCP’s risk models, but is a significant undertaking requiring close monitoring to ensure full implementation of relevant regulatory requirements. - The SNB has indicated it may seek its own external validation in addition to validations sought by SIX; the SNB is strongly encouraged to adopt this approach. ### Liquidity Risk - Improvements since the 2014 FSAP: liquidity is managed across SIX x-clear and SIX SIS and daily liquidity stress testing is undertaken at a Cover 2 level for both entities individually and collectively. - Stress testing assumptions: - Tests appropriately assume settlement must occur on the intended settlement date. - Open questions remain regarding assumptions on availability of excess collateral and market movements, and whether the model is sufficiently conservative. - SIX intends to amend these assumptions in early 2019 and should ensure revised assumptions have a sound analytical basis and are sufficiently conservative. - SIX should analyze adequacy of liquidity resources in a situation without access to excess collateral, as anticipated by the CPMI-IOSCO Resilience Guidance. - Additional liquidity resources introduced: - A committed credit line from SIX Group. - SIX SIS entered into multicurrency FX swap agreements with commercial financial institutions. - The SNB is establishing an emergency FMI liquidity facility to support access to FX liquidity in certain currencies, although provision of FX liquidity through this facility will not be guaranteed. - SIX is beginning discussions with certain other central banks about access to liquidity in currencies not covered by the SNB facility or the multicurrency FX swap agreements and should consider extending multicurrency FX swap agreements to enhance access. - The SNB intends to conduct a full review of the SIX x-clear and SIX SIS liquidity framework in 2019. ### Default Management — Porting and Testing - Portability in derivatives: - SIX x-clear is technically able to port, but high concentration in client clearing in the derivatives segment (CLARA) could delay porting effectiveness following a large GCM or clearing administrator default. - A default management test could assess porting and related delays. - SIX x-clear conducted analysis in 2017 on client failure causing a GCM default and concluded the risk was not high; repeating this analysis regularly is recommended. - Default management tests and participant involvement: - The annual default management test considers default of participants at both SIX x-clear and SIX SIS; previous tests included simultaneous defaults in equities and derivatives; upcoming test will focus on a liquidity stress event. - SIX conducts test trades with brokers involved in the close-out process, but does not include all clearing participants in tests, focusing on market-maker participants for auctioning. - Other default management activities (porting positions and collateral, payment of top up contributions) will involve participants and this involvement may increase with new recovery tools. - Including participants in tests would increase awareness of the default management process. ### Management of Dependencies on Commercial Service Providers - SIX should analyze dependencies on commercial banks and diversify or establish backup arrangements where required. - Examples and concerns: - Diversification efforts include providers of FX liquidity swaps. - For USD funds, SIX uses a single custodian bank for investments (subject to SIX’s investment policy limits), creating operational vulnerabilities. - SIX x-clear and SIX SIS have a general exclusion of liability for financial losses from default of a cash or custodian bank and ICSD/collateral management service providers; losses from such a provider default would be allocated to participants. - In the Norwegian branch, SIX x-clear relies on one liquidity provider for intraday settlements and largely relies on two cash collateral banks, one of which is also a large provider of client clearing services — reflecting the Norwegian market structure but should be kept under review. - SIX should review dependencies across FMIs and diversify arrangements or ensure reliable back-up arrangements that can be implemented timely. - SIX uses ‘risk equivalents’ to monitor credit exposures across SIX Group, reported internally and triggering escalating approval requirements; limitations exist on using members of SIX x-clear as placement banks and liquidity stress testing removes liquidity that would have been provided by defaulting participants. ### Procyclicality - SIX x-clear should use the clearing systems replacement to introduce a holistic, documented, board-approved approach to managing and assessing procyclicality in its margin models. - Current margin models include some procyclicality management methods but lack a holistic documented approach. - Risk coefficient margin add-on: - Triggered by a reduction in a participant’s credit rating and can result in material increase in margin requirements. - Methodology is transparent to participants but a credit rating downgrade may be unanticipated, creating potential cliff-edge effects and unpredictable application. - SIX x-clear should consider alternative methods to mitigate potentially large step changes in margin requirements. ### FMI Crisis Management — Recovery - Recovery and wind down planning: - SIX x-clear and SIX SIS have established recovery and wind down plans; SIC AG has established a recovery plan. - FMIA requires systemically important FMIs to draw up recovery plans for systemically important business processes. - The SNB has required SIC AG to develop a recovery plan for SIC; the SNB oversight unit consults SNB Banking Operations prior to setting expectations for SIC AG regarding recovery. - Authorities’ focus and expectations: - Recovery arrangements have been a priority for FINMA and the SNB; the FMIs’ recovery plans are subject to at least annual review guided by CPMI-IOSCO Recovery Guidance. - Authorities are encouraged to maintain a strong stance regarding full implementation of PFMI requirements. - Improvements needed in recovery plans: - SIX Group FMIs should continue improving recovery plans to fully meet PFMI requirements. - For SIX x-clear, scenarios should be sufficiently comprehensive and stringent, including beyond “extreme but plausible.” - SIX x-clear should ensure sufficient tools to address credit losses from individual or combined participant defaults, assess calibration of its Top Up contribution, and consider whether additional tools are required. - SIX x-clear should ensure sufficient tools in both its equity and derivatives segments to re-establish a matched book in extreme circumstances. - Reliance on voluntary tools to re-establish a matched book (and a relatively small number of brokers in the Norwegian market for close out) should be reconsidered; consider enhancing reliability of voluntary processes and introducing mandatory tools where appropriate. - New tools should be tested, including with participants where necessary, and FMIs should consider more holistic testing of recovery arrangements to complement the annual default management test. - Non-default loss allocation tool: - SIX x-clear will allocate 25 percent of its regulatory required capital to absorb non-default losses; losses beyond this could be allocated to participants, up to a cap. - The tool would cover losses such as those from a placement bank default where unsecured exposures are capped. - SIX should consider whether a similar tool could be adopted for SIX SIS, ensure situations for tool use are sufficiently clear and transparent, and assess whether the arrangements to hold the allocated capital meet PFMI Principle 15; authorities will assess this during the recovery plan’s next annual review. ### FMI Crisis Management — Resolution - Legal and institutional framework: - FMIA establishes insolvency and resolution regime for FMIs; the insolvency regime applies to all FINMA-supervised FMIs. - Additional resolution planning requirements apply for systemically important FMIs to ensure continuity and avoid taxpayer-funded resolution. - FINMA, as resolution authority, is required to draw up a resolution plan for systemically important FMIs; these additional requirements apply to SIX x-clear and SIX SIS but not to SIC (operated on behalf of the SNB). - FINMA’s insolvency and resolution powers extend to group parent companies and significant group companies within FMI groups. - Resourcing and planning recommendations: - FINMA’s Recovery and Resolution Division currently has just under one FTE dedicated to FMI matters covering recovery and resolution; additional resources should be allocated to fulfil the mandate. - FINMA should progress expeditiously planned work to develop resolution plans for SIX x-clear and SIX SIS. - Legal framework adequacy: - The Swiss FMI insolvency and resolution framework applies bank resolution regime provisions by analogy unless FMIA provides otherwise; only deviations currently are obligation for FINMA to consult SNB and specific considerations about postponement of termination of contracts and exercising netting rights. - Further analysis is required to determine whether these powers suffice for FMI-specific resolution tools (e.g., returning a CCP to a matched book and comprehensively covering losses). - FINMA plans to review adequacy of current regulatory provisions for resolution of systemically important FMIs, considering FSB Guidance and other international developments. - Group structure and resolvability: - Integrated nature of SIX Group, outsourcing and interdependencies raise questions about resolvability of individual FMIs within the Group. - Greater ring-fencing of FMI operations could enhance resolvability; FINMA will consider this aspect in developing the FMI resolution framework. - Continuity of access by participants in resolution: - Swiss FMIs are considering continuity of access for participants in resolution; SIX x-clear and SIX SIS are engaging with participants. - Entry into resolution does not lead to automatic suspension of a member of SIC, provided certain conditions are met. - The SNB will consider this issue during a wider review of access policy to SNB accounts and to the SIC system. *Source: IMF staff summary of content unit 1cheea2019010 (paragraphs 49–67) of the provided PDF.* ### 68. The SNB provides settlement and deposit services to FMIs. Regulated “domestic and ### 68. The SNB provides settlement and deposit services to FMIs. Regulated “domestic and ### Settlement and deposit services; SIC participation - Regulated “domestic and foreign clearing and settlement companies” are permitted to open a sight deposit account with the SNB, which is a precondition for participation in SIC. - Participation in SIC enables FMIs to conduct CHF settlements in central bank money. - FMIs that hold a sight deposit account may deposit CHF funds at the SNB, thus mitigating exposures to commercial investment banks. - The SNB decides on the opening of a sight deposit account and reserves the right to restrict access to the giro system for monetary policy reasons. ### SNB liquidity facilities for systemically important FMIs - The SNB is establishing two liquidity facilities for domestic systemically important FMIs: - a standing liquidity facility in CHF; and - an emergency liquidity facility in CHF and some foreign currencies. - Standing liquidity facility: - The SNB will provide liquidity to FMIs up to a certain limit, against SNB repo-eligible collateral that the FMI must provide at the time that liquidity is requested. - Emergency liquidity facility: - Can provide liquidity beyond the cap of the standing facility. - Would be available only for solvent and viable FMIs, also against SNB eligible collateral. - The SNB does not guarantee its provision of liquidity in foreign currencies. - FMIs are required to demonstrate that they can meet liquidity risk management requirements using private sources of liquidity. - SIX Group’s investment and collateral policies take into account SNB collateral eligibility criteria. - The SNB expects these liquidity facilities to be in place, and tested with SIX x-clear and SIX SIS, in the course of 2019. ### Cyber Resilience — supervisory focus and arrangements - Cyber resilience is a continuing focus of FINMA and the SNB’s supervision and oversight of the SIX Group FMIs. - Authorities’ program of work includes: - regular meetings with relevant staff at SIX Group; and - detailed annual assessments (including assessments by external auditors). - Authorities refer to international standards, in particular: - National Institution of Standards and Technology (NIST) Framework for Improving Critical Infrastructure Cybersecurity; and - CPMI-IOSCO Guidance on cyber resilience for financial market infrastructures. - FINMA and the SNB have access to expertise regarding cyber resilience: - They can make use of external experts and engage with IT and cyber experts within their organizations. - FINMA’s FMI Supervision Unit engages with IT/cyber risk experts within FINMA’s banking supervision team and can benchmark SIX Group against supervised banks. - FINMA and the SNB exchange information with other Swiss authorities regarding cyber risk, including the State Secretariat for International Finance (SIF) and the Reporting and Analysis Centre for Information Assurance (MELANI). ### SIX Group governance and cyber capabilities - Board and management responsibilities: - The Risk Committee of the SIX Group Board of Directors is responsible for oversight of cyber risks. - The Group Chief Security Officer (CSO) is responsible for cyber resilience and IT security, as well as crisis management, business continuity and physical security. - The CSO’s team sits within the SIX Group CRO function and the CSO reports to the CRO. - The CSO regularly presents cyber risk trends to the Executive Board and to the Risk Committee of the Board of Directors. - The Board of Directors has received training on cyber-risk issues. - SIX Group cyber program and operations: - A dedicated cyber security program covers governance and staff awareness, testing, and interdependencies with third parties. - SIX is conducting extensive work on threat monitoring and intelligence. - A cyber security operations center operates 24/7 to monitor cyber threats; initial focus is to protect SIX Group, with an intention over time to offer threat assessment and monitoring services to market participants. - SIX engages with MELANI and international organizations to share intelligence. ### Cross-sectoral cyber resilience and simulations - Authorities and SIX Group are encouraged to undertake work on cross-sectoral cyber resilience to gain greater insight into impacts across the financial sector. - SIX plans simulations of cyber or other business-continuity events with several market participants, extending an exercise recently undertaken with one Swiss bank. - The SNB intends to participate in the simulations in its role as a major system participant (through its Banking Operations Division). - FINMA and the SNB are also considering conducting work on cross-sectoral cyber resilience. ### Fintech — authorities and SIX Group initiatives - FINMA and the SNB FMI teams contribute to broader fintech work, including assessment of whether the FMIA supports the sound legal operation of innovative firms in the exchange and FMI space. - The SNB’s banking operations team is considering the specific implications of fintech for SIC. - SIX Group innovation initiatives: - A dedicated “Digital and Innovation” business unit and a venture fund to promote innovation in the Swiss financial center. - Fintech issues relevant to specific business lines are led within those business lines. - In January 2019, the SNB decided to grant access to sight deposit accounts and to the SIC system for entities with fintech licenses provided their business model makes them significant participants in the area of Swiss francs payment transactions. ### SIX Digital Exchange (SDX) — planned service and regulatory considerations - SIX Group announced it will launch SIX Digital Exchange, an integrated digital asset trading, settlement and custody service. - Product scope likely to include tokenized versions of ‘real world’ securities and assets, as well as other digital assets. - Digital Exchange will use distributed ledger technology; certain elements will be developed with a third-party provider. - The service will be provided by a separate subsidiary, SIX Digital Exchange AG, and run operationally within the Securities and Exchanges Division. - SIX Group intends to seek full licensing from FINMA for the service. - SIX Group announced an intention to launch the first services about mid-2019. - Swiss authorities will need to conduct a thorough analysis of how the new service—and any related changes to authorized FMIs’ services—meet regulatory requirements, referring to relevant international guidance concerning evaluation of risks associated with the use of distributed ledger technology by FMIs where necessary. - FINMA and the SNB are engaging with SIX Group as the project develops and can access specialist external resources if necessary. ### CPMI–IOSCO Implementation Monitoring assessment (summary) - Level 1 — Assess whether a jurisdiction has completed the process of adopting legislation and other policies to implement the Principles and Responsibilities: - Highest rating of ‘4’ for CCPs, PSs, CSDs and SSSs, and TRs, for both the Principles and Responsibilities, indicating that final implementation measures are in force. - Level 2/3 — Assess whether content of new legislation and policies are complete and consistent with the Responsibilities and implemented by authorities: - For CCPs, CSDs and SSSs, and PSs, highest rating of ‘Observed’ (indicating the authorities fulfil the Responsibility). - ‘Responsibility E’ for CCPs and CSDs and SSSs was rated ‘Observed with minor gap(s) identified’, reflecting that inter-agency arrangements for FMI resolution had not yet been developed. - For TRs: rated ‘Not ready for assessment’ as at 9 January 2015, Switzerland had not implemented a regulatory framework for TRs and there were no existing TRs operational in Switzerland. ### Status update on 2014 recommendations (select items) - On supervision and oversight of FMIs: - The FinfraG should be passed by Parliament — Implemented. The FMIA entered into force on 1 January 2016. - FINMA should fill its vacancies — Implemented. Vacancies relevant to FMI regulation, supervision and resolution have been filled. - FINMA is encouraged to publicly disclose its policies related to FMIs — Implemented. FINMA has introduced a dedicated section on FMIs on its website. - The SNB and FINMA should hold a firm stance on full implementation of new principles — Implemented. The SNB and FINMA have undertaken a program of work to assess and enhance the SIX Group FMI’s observance of the PFMI. - The SNB and FINMA should upgrade domestic and foreign cooperation arrangements to handle crisis events — Partially Implemented. Steps taken; ongoing work should be completed. - On FMI risk management framework: - Independence of risk management functions of SIX x-clear AG and SIX SIS AG — Partially Implemented. Management and staff level improvements made; further improvements needed to governance independence. - SIC AG, SIX x-clear AG and SIX SIS AG should further improve risk management framework to comply with PFMI — Partially Implemented. High-level observance apparent; selected topics require further work. - SIX Group risk framework should explicitly address interdependencies — Partially Implemented. Some steps taken; further analysis of dependencies on commercial banks recommended. - Swiss FMIs should develop recovery plans in line with international guidance — Partially Implemented. SIX x-clear, SIX SIS and SIC have developed recovery plans; further improvement required to meet PFMI fully. ### Basic statistics on FMIs (selected figures as reported) - SIC (daily average) - Number of transactions (thousands): 2016: 1,766; 2017: 2,042 - Turnover (CHF millions): 2016: 153,614; 2017: 172,939 - SIX x-clear (daily average) - Contracts Cleared (Volume, thousands): Total 2016: 1,716,960; 2017: 1,288,080 - Value (CHF millions): Total 2016: 13,154; 2017: 11,637 - Exchange traded derivatives: Volume 2016: 674; 2017: 771 — Value (CHF millions) 2016: 115; 2017: 118 - OTC derivatives: Volume 2016: 19; 2017: 18 — Value (CHF millions) 2016: 4; 2017: 4 - SIX SIS (end of year / daily averages) - Securities held (thousands): Total 2016: 633; 2017: 640 - Securities held (CHF millions): Total 2016: 3,153,226; 2017: 3,342,215 - Debt securities (thousands): 2016: 164; 2017: 166 — Value (CHF millions) 2016: 770,087; 2017: 779,649 - Equities (thousands): 2016: 216; 2017: 217 — Value (CHF millions) 2016: 1,830,862; 2017: 2,020,910 - Delivery instructions (daily average) Total: 2016: 123; 2017: 124 — Value (CHF millions) 2016: 24,226; 2017: 23,761 - Delivery versus Payment breakdowns (2016 / 2017 figures preserved as presented): - Debt securities: 2016: 101; 2017: 98 - Equities: 2016: 7; 2017: 7 - Other: 2016: 72; 2017: 70 - Additional value rows: 2016: 24,226 / 4,683 / 17.853 / 1,690; 2017: 23,761 / 4,103 / 18,085 / 1,573 ### Participation in Swiss FMIs (counts) - SIX SIC: Domestic 231; Foreign 94; Total 325 - Of which domestic: Central banks 1; Banks 205; FMIs 2; Other 23 - Of which foreign: Banks 86; FMIs 4; Other 4 - Total breakdown: Central banks 1; Banks 291; FMIs 6; Other 27 - SIX x-clear: Domestic 46; Foreign 37; Total 83 - Domestic: Banks 46 - Foreign: Banks 28; CCPs 2; Broker 7 - Total: Banks 74; CCPs 2; Broker 7 - SIX SIS: Domestic 278; Foreign 133; Total 411 - Domestic: Banks 183; Brokers 7; Other financial institutions 3; Insurance companies* 20; Other 65 - Foreign: Banks 115; Brokers 6; Other financial institutions 3; Other 9 - Total: Banks 298; Brokers 13; Other financial institutions 6; Insurance companies* 20; Other 74 - SIX TR: Domestic 137; Foreign 18; Total 155 - Domestic: Banks 111; Brokers 8; Other non-financial institutions 2; Insurance companies 7; Other 9 - Foreign: Banks 3; Brokers 13; Other non-financial institutions 1; Insurance companies 1 - Total: Banks 114; Brokers 21; Other non-financial institutions 3; Insurance companies 8; Other 9 - * Participation in the SIX SIS collateral management service. ### Overview of key laws applicable to oversight and supervision of FMIs (selected points) - Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (Financial Market Infrastructure Act, FMIA): - Establishes FINMA as the supervisory and resolution authority for FMIs. - Requires the SNB to designate, define standards for, and oversee systemically important FMIs. - Requires cooperation between FINMA and SNB, and with overseas authorities. - Requires FMIs to be authorized by FINMA and certain foreign FMIs to be recognized by FINMA. - Governs organization and operation of FMIs; establishes minimum common standards, and additional standards for systemically important FMIs. - Requires FINMA to develop resolution plans for systemically important FMIs. - Establishes a regulatory framework for OTC derivatives. - Federal Act on the Swiss National Bank (National Bank Act, NBA): - Mandates the SNB to oversee systemically important CCPs, CSDs and PSs, with the objective of protecting financial stability. - Requires CCPs, CSDs and PSs to provide information to the SNB. - Ordinance to the Federal Act on the Swiss National Bank (National Bank Ordinance, NBO) and related FINMA ordinances elaborate on procedures, designation of systemic importance, and special requirements for systemically important FMIs. *Source: IMF staff summary of the chapter content.* ### Appendix VI. Authorities’ Cooperation Agreements Regarding ### Appendix VI. Authorities’ Cooperation Agreements Regarding FMI Oversight, Supervision and Resolution ### Cooperation agreements covering Swiss FMIs - FINMA and SNB: Exchange of letters to support legislative provisions for cooperation regarding systemically important FMIs. - Trade repositories: FINMA and ESMA — Authorization, recognition and supervision of TRs. - SIX x‑clear — FINMA and SNB, and Danish, Finnish, Norwegian and Swedish authorities: Cooperative oversight agreement. - SIX x‑clear — FINMA and SNB and U.K. authorities: Cooperative oversight agreement. - SIX x‑clear — FINMA and SNB, Dutch, French, German, Norwegian and U.K. authorities, and ECB, ESMA, SRB: Crisis management group (arrangement currently being finalized). - SIX x‑clear — FINMA and SNB, Norwegian authorities: Exchange of information regarding SIX x‑clear. - SIX x‑clear — FINMA and SNB, Dutch authorities: Exchange of information regarding clearing service providers regulated principally in the Netherlands or Switzerland, and operating in the other’s jurisdiction. - SIX x‑clear — FINMA and SNB, ESMA: Exchange of information regarding SIX x‑clear. ### Agreements covering foreign FMIs - Eurex Clearing — Swiss authorities: FINMA and SNB: Cooperative oversight agreement. - Eurex Clearing — Swiss authorities: FINMA: Crisis management group (participation ceased in 2018). - EuroCCP — Swiss authorities: FINMA: Cooperative oversight agreement. - EuroCCP — Swiss authorities: FINMA: Crisis management group. - LCH Ltd — Swiss authorities: FINMA and SNB: Cooperative oversight agreement. - LCH Ltd — Swiss authorities: FINMA: Crisis management group. - CLS — Swiss authorities: SNB: Cooperative oversight agreement. - SWIFT — Swiss authorities: SNB: Cooperative oversight agreement. - T2S — Swiss authorities: FINMA and SNB: Cooperative oversight agreement. *Source: Swiss authorities.* ### Appendix VII. SIX Governance and Group Structure ### Group legal and operational structure (summary) - Figures provided: SIX Group Legal Structure (Simplified) October 2018; SIX Group Operational Structure; SIX x‑clear and SIX SIS Governance Arrangements. - Notes: Excludes cards and financial information business lines; for other business lines a subset of subsidiaries is shown. - Governance diagram highlights roles: CEO, CRO, Head of Banking Services, Head of Cards, Head of Financial Information, Head of Securities & Exchanges, Group CFO, Group Head of IT, Two external members; Boards and Committees: SIX Group Board of Directors, Board Risk Committee, SIX Group Executive Board, SIX x‑clear Risk Advisory Committee, SIX x‑clear and SIX SIS Boards of Directors. ### Risk governance arrangements for SIX x‑clear and SIX SIS - SIX Group AG Board of Directors - Decides on Group risk appetite and risk policy. Appoints the Group CRO. - Composition: Chair + nine other members representing shareholders. - SIX Group AG Board of Directors Risk Committee - Responsible for internal controls with respect to implementation of risk policy across SIX Group. - Composition: Four members of the Board of Directors. Meetings attended by Group CEO, CRO and CFO. - SIX Group AG Executive Board - Enacts risk policies and has overall responsibility for ongoing risk management within SIX Group. - Composition: Group CEO; Group CFO; Group CRO; Head Securities & Exchanges Division; Head of Banking Services Division; Head of Financial Information Division; Head of Cards Division; Group Head of IT. - Group Risk Management Unit & Group CRO - Define systems, processes, standards and controls in accordance with Group policies. Serves as a second line of defense. - About 95 staff, headed by the Group CRO, who reports to the CEO and the Group Board of Directors, Group Board Risk Committee and Boards of SIX x‑clear and SIX SIS. - Boards of SIX x‑clear AG & SIX SIS AG - Define and approve specific risk policies for the CCP and CSD and delegate risk management tasks within Group Risk Policy and appetite. - Composition (identical for SIX x‑clear and SIX SIS): Head of Securities & Exchanges Division; Group Head of IT; Group CFO; and two external members. - SIX x‑clear Risk Advisory Committee - Advises the SIX x‑clear AG Board on key risk management issues (risk model changes; default procedures; criteria for new members; clearing of new instrument classes). Advice is not binding but must be duly considered. - Meets twice each year. - Composition: at least four members, including at least one representative of each of: direct clearing members, clients of clearing members, and independent members of the x‑clear Board of Directors. - Securities & Exchanges Division - Runs specific ‘first line’ operative risk management (day‑to‑day implementation), e.g., management and control of credit risk of daily clearing activities by monitoring exposures and collateralization against limits. ### Appendix VIII. Elements of SIX x‑clear and SIX SIS Risk Control and Recovery Arrangements ### SIX x‑clear — Credit risk and member default - Minimum participation requirements and ongoing monitoring. - Margin - Initial margin—to cover potential future exposure to a confidence level of 99 percent. - SECOM model used for equities segment: VaR calculation with two‑year historical lookback; subject to validation using a model based on monte‑carlo simulations with a historical lookback to 2008—the initial margin requirement is set at the higher output of the two models; close out period of 2 days for equities and ETFs and 7 days for bonds. - CLARA model used for Norwegian branch: monte‑carlo VaR with a two‑year historical lookback; close out period from 2 to 10 days. - Risk coefficient add‑on to initial margin, designed to increase the defaulter pays balance as creditworthiness deteriorates. Multiplier of: 1.3 for AAA to A- rated participants; 1.8 for BBB+ to BBB-; 2.3 for BB+ to BB-; and B+ or lower is determined by case. - Other margin add‑ons: stress margin add‑on based on credit stress testing results; add‑ons for large positions and concentration; wrong way risk (added to variation margin). - Variation margin—calculated every 90 minutes intraday and at end‑of‑day. Intraday margin calls (covering initial and variation margin) must be met within 60 minutes. De‑minimis threshold for calling margin. - Participant default waterfall (beyond collateral of defaulting participant) - SIX x‑clear capital contribution: 25 percent of SIX x‑clear’s required capital would be used to absorb losses prior to the default fund contributions of non‑defaulting participants. Following a drawdown, this capital contribution must be replenished after one month. Remaining SIX x‑clear capital sits at the end of the waterfall if all other resources are used. - Participant funded default fund, with ring fenced segments for cash products and derivatives products. Cover 2 for each segment. Stress tests run daily; scenarios include historical and hypothetical price changes. Value of the fund is formally reviewed monthly. Total value of each segment tends to remain stable but individual participants’ contributions vary month‑to‑month. - Non‑defaulting members required to replenish the applicable default fund segment after a 20‑day cooling off period. Stress margin add‑on could be used to ensure Cover 2 during this period. - Top Up Contribution: in case of full draw‑down of a segment, a Top Up Contribution may be required from non‑defaulting participants. For any ‘default event’ the amount of the Top Up Contribution that may be required from each non‑defaulting participant is limited to the value of that participant’s contribution to the relevant default fund segment at the time of the default. SIX x‑clear consulting on a rule change to allow calling the Top Up a maximum of three times during a six month period. Participants must provide the Top Up contribution within 24 hours. - Re‑establishing a matched book - Tools include securities buy‑ins on market, cancellation of contracts (with compensation) if buy‑in unsuccessful. Close‑out of derivatives on market through brokers or via auction. SIX x‑clear has agreements with 3 brokers for auctions, at least 2 of which are clearing participants. - Collateral requirements - Collateral limited to assets that are SNB eligible collateral. Haircuts applied; take into account potential FX risks. Wrong way risk managed through limiting acceptable collateral. - Interoperable trades - Margin requirements for exposures to interoperable CCPs are collected from members. Funded through a permanent inter‑CCP collateral fund comprising member contributions; includes a fixed component and additional contributions may be called. Contributions determined monthly based on members’ pro‑rata share of initial margin. - In 2017 x‑clear introduced an add‑on to remove any divergence with interoperating CCPs’ risk models. Regular due diligence on co‑CCPs. ### SIX x‑clear — Liquidity risk and resources - Liquidity management - Managed at level of SIX Securities & Exchanges Division. Intraday and end‑of‑day monitoring of liquidity requirements (up to T+4). - Daily Cover 2 liquidity stress testing at level of SIX x‑clear and SIX SIS individually, and for both FMIs collectively. Stressed liquidity needs calculated in all currencies. Tests assume settlement on the intended date and currently assume a mark up to allow for increased liquidity demand in extreme but plausible conditions and a reduction in available collateral. - Liquidity resources - Cash & securities collateral posted by members & SIX x‑clear equity capital. - Majority held at SIX SIS, the main liquidity provider for SIX x‑clear, in exchange for a multicurrency credit line. Collateral not held at SIX SIS is held with highly creditworthy institutions. - SIX x‑clear has direct access to repo market—pre‑arranged and tested. - SIX x‑clear access to SNB FMI liquidity facilities is being established: a standing facility, in which CHF liquidity would be provided up to a certain limit; and a (non‑guaranteed) emergency facility covering CHF and certain foreign currencies. For both facilities, liquidity provision would be against SNB eligible collateral. - Contractually agreed uncollateralized credit line from SIX Group (total amount of loan available across SIX x‑clear and SIX SIS)—subject to the condition that regulatory liquidity requirements cannot be met otherwise. The value of this credit line is excluded from Group ‘free liquidity’. - Additional recovery tools: reduction of haircuts applied to the broker lien; deferral of payment obligations (considered a tool of last resort). ### SIX x‑clear — Investment, custody and settlement risks - Investment & custody - Swiss and U.K. Clearing: members’ and own assets held with SIX SIS. SIX SIS deposits CHF cash primarily at SNB; FX held with subcustodians and cash agents. Large balances diversified via overnight repos where possible, or, if not feasible, in unsecured money market transactions (subject to a cap). - Norwegian branch: member’s assets invested with commercial banks and VPS (the Norwegian CSD). Participants’ collateral for interoperable trades held with Clearstream Bank Luxembourg. - Minimum criteria and regular due diligence for custodians and investment counterparties. - Investment in securities limited to securities eligible for repo with central bank. Application of concentration and other limits; ongoing monitoring. - CHF 40 million placement limit for unsecured exposures. Limitation of use of clearing participants for placements. Losses due to default of a placement bank covered by the “Non‑default loss waterfall”, comprising 25 percent of SIX x‑clear’s required capital and, for losses beyond that, allocation to clearing participants (capped at CHF 40 million). - General exclusion for SIX x‑clear of liability for failure of cash correspondents or custodians; losses would be allocated to participants. - Settlement risks - Use of central bank money for settlement of certain CHF (SNB) and NOK (Norges Bank) transactions. For other currencies, SIX SIS is the settlement agent, or SIX x‑clear uses a commercial bank settlement bank. - Minimum criteria for selection of CSDs, custodians and settlement banks. Ongoing due diligence. - Irrevocable settlements. ### SIX x‑clear — General business risk and recovery - Equity capital invested in liquid net assets. - Additional equity may be raised through a capital injection from SIX Group; request made to SIX Executive Board with procedures in place. - Additional recovery options: raising equity by an external third party, or retaining earnings (for gradually evolving stress). - Non‑default loss allocation waterfall could be applied in certain events, including operational risk losses. - Insurance (including cyber insurance). ### Key elements of financial risk control — SIX SIS - Credit risk — Short Term Financing Facilities - Participant credit risk assessment and ongoing monitoring. Credit limits for participants and credit extensions are collateralized. Collateral accepted limited to SNB eligible collateral. Haircuts applied. - Credit risk — Participant Default During Settlement - RTGS delivery versus payment settlement in CHF. Use of suspense accounts for cross‑border trades. Right to retention and foreclosure of custody assets in event of participant default. - Liquidity risk and resources - Liquidity managed at SIX Securities & Exchanges Division. Intraday and end‑of‑day monitoring (up to T+4). - Daily Cover 2 liquidity stress testing at level of x‑clear and SIS individually, and for both FMIs collectively. Stress tests assess all currencies and across settlement cycles. - Liquidity resources include equity capital and cash received from participants as settlement liquidity and collateral pledged to cover multicurrency secured cash credit lines. - Collateral invested with central bank or at commercial banks (subcustodians), and short‑term reverse repo. - SIX SIS has direct access to repo market—pre‑arranged and tested. - SIX SIS entered FX swap agreements (letters of intent) with four commercial banks covering CHF, USD, EUR, and GBP; providers diversified across jurisdictions. - SIX SIS access to SNB FMI liquidity facilities being established: a standing facility for CHF up to a certain limit; and a (non‑guaranteed) emergency facility covering CHF and certain foreign currencies, both against SNB eligible collateral. - Sub‑custodians provide uncommitted credit lines to facilitate settlement in local markets. - Contractually agreed uncollateralized credit line from SIX Group (collective total amount across SIX x‑clear and SIX SIS)—subject to condition that regulatory liquidity requirements cannot be met otherwise. Value of this credit line excluded from Group ‘free liquidity’. - Additional recovery tools: cancellation of customer credit lines; cessation of pre‑financing of corporate actions. - Investment & custody risks - Minimum criteria and regular due diligence for custodians and investment counterparties, including minimum credit ratings and, for custodians, asset protection (segregation) in case of bankruptcy. - CHF cash held at SNB. If possible, cash in other currencies diversified across highly creditworthy financial institutions and invested in reverse repo; sometimes larger positions held overnight with custodians to initiate next day settlement. Placement limits determined individually subject to a cap. - Investment in securities limited to securities eligible for repo with central bank. Application of concentration and other limits; ongoing monitoring. - General exclusion of liability for failure of cash correspondents or custodians; losses allocated to participants. - Settlement risks - Irrevocable settlements. - Settlement in central bank money for CHF transactions; commercial bank money used for all other currencies. - Minimum criteria for CSDs and custodians and ongoing monitoring. New CSDs or custodians subject to due diligence including PFMI questionnaire. - Exposure limits apply and credit is only given against collateral. General exclusion of liabilities from default settlement bank; losses allocated to participants. - General business risk - Equity capital invested in liquid net assets. - Additional equity may be raised via capital injection from SIX Group (request to SIX Executive Board). - Additional recovery options: raising equity by external third party, or retaining earnings. - Insurance (including cyber insurance). *Source: IMF staff; Swiss authorities.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019010.pdf_