## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024007-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1espea2024007-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1espea2024007-print-pdf.pdf.json) --- ### Introduction and scope - Focus: selected topics on regulation, oversight and supervision of two FMIs in Spain — Bolsas y Mercados Españoles Clearing (BMEC), a central counterparty (CCP), and Iberclear (IC), a central securities depository (CSD). - Technical note scope: - Responsibilities of Spanish authorities regarding BMEC and IC in relation to the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs) and the Disclosure framework and Assessment methodology. - Supervision of BMEC’s margin models and practices (PFMIs’ Margin principle). - Crisis preparedness (recovery plans) of BMEC and IC and resolution procedures for BMEC (FSB and BIS standards). - Objective: identify regulatory and supervisory challenges with potential financial stability implications given BMEC and IC’s central positions in the Spanish financial system. ### Authorities, supervision, and oversight — key findings - CNMV (Comisión Nacional del Mercado de Valores): - Proactive supervisor with high engagement via regular supervisory duties, onsite visits and thematic reviews. - Sufficient powers to request information, require cessation of activities, summon individuals, and impose sanctions to fulfill responsibilities under EMIR, the CCPRRR, and the CSDR. - Lacks full autonomy over recruitment of staff; government approvals required case-by-case, hampering recruitment, retention, and succession planning. - Recommendation: CNMV should gain full autonomy over recruitment and retention processes to align resources to current and projected workloads. - Banco de España (BdE): - Acts as overseer of BMEC and IC; BdE has oversight role and provides settlement accounts as Eurosystem central bank of issue. - Cooperation CNMV–BdE: - Works closely and effectively in practice; FSAP recommends formalizing cooperation agreement documenting collaborative framework for FMIs’ oversight. - Other process notes: - CNMV should ensure market participants adjust IT systems and find alternative data sources once the Post-trade Interface (PTI) is removed. - CNMV should enhance preparedness for implementation of new regulatory initiatives and further document internal procedures for supervising IC. - Continue efforts to improve settlement efficiency rates. ### BMEC — role, activity, and collateral arrangements - BMEC is the sole CCP authorized by the CNMV in Spain; acts as buyer to every seller and seller to every buyer. - Cleared amounts in 2022: - Energy segment (including electricity and gas): total nominal cash value was around EUR 2 billion and 2,248 transactions. - Equity segment: total cash value was around EUR 711 billion and 78 million trades. - Fixed income segment: EUR 99.5 billion of cash value and 1,142 number of trades. - Authorized segments (six; five active at mission time): Equity, Financial Derivatives, Energy, Fixed Income, Interest Rate Derivatives (IRDs), Derivatives linked to crypto assets (inactive). - Cross-border and multicurrency: - Authorized to operate cross-border and with multiple currencies; can accept multicurrency cash collateral (AUD, CHF, GBP, JPY, USD) but at time of drafting only accepts euro cash collateral. - Accepts as collateral sovereign debt denominated in USD and GBP; plans to accept CHF sovereign debt. ### IC — role, activity, and settlement - IC is the only CSD authorized by CNMV in Spain and dominant in registry and settlement of securities issued under Spanish law. - End-2022 statistics: - Number of issues registered with IC: 8,431. - Nominal amount of registered issues: EUR 1.87 trillion. - According to ESMA data for 2021, 91 percent of the total value of issues carried out by Spanish entities was initially registered with IC. - Settlement inefficiency ratios in 2022: 5.8 percent for the number of transactions and 4.1 percent for the amount. - IC outsources settlement operations to TARGET2-Securities (T2S); migrated in September 2017. - In 2022, settlement efficiency in T2S: daily average 93.74 percent in volume terms and 93.29 percent in value terms. - ARCO uses T2S engine; DVP settlement against Euro accounts in a Eurosystem central bank. ### Responsibilities of authorities, reporting and supervisory information - PFMIs adoption and legal embedding: - CNMV adopted PFMIs December 2014; PFMIs incorporated via EMIR and CSDR; CNMV issues guidelines and requires self-assessments. - Colleges and ESMA: - CNMV chairs BMEC’s College of Supervisors (CoS); certain CCP actions require ESMA and CCPSC opinion. - Reporting schedules (selected): - BMEC annual: updated recovery plan, minutes of risk committees and Board, user complaints, pending legal claims, audit plans. - BMEC quarterly: Key Risk Indicators on credit, liquidity, concentration, operational risk. - BMEC monthly: inventory of operational issues and statistical information per ESMA template. - IC: reports on substantive changes, audited financial statements, operational incidents, SSS performance, monthly settlement volumes and values, daily matched settlement instruction status. - CNMV internal documentation gap: - CNMV’s ongoing supervisory work towards IC is not fully documented internally; an internal manual recommended. ### Budget, supervisory resourcing and constraints - CNMV’s budget is integrated into the General Budget of the Government; fees from supervised entities contribute. - Staffing: - Post-trading division: deputy director and seven officers to oversee BMEC; two officers assigned for IC. - BdE oversight resources: two full time equivalent experts for CCP and CSD oversight. - Constraints: CNMV lacks full autonomy over recruitment; government approval required, creating uncertainties and limiting hiring of specialists (quantitative risk management, post-trading policy, CCP/CSD operations). - New skillset needs: DLT Pilot regime, MiCA, DORA, EMIR and CSDR Refit expected to require intensified expertise. ### Strengths and challenges (selected) - Strengths: - PFMI adoption and active CNMV analysis. - Good CNMV–BdE collaboration; CNMV has relevant powers and technical expertise despite tight headcount. - Effective coordination at EU and international levels (CoS, ESMA, T2S, AMI-SeCo Spain, MoU with FINMA). - Challenges: - Resource constraints and recruitment rigidities at CNMV as responsibilities grow. - Decommissioning PTI may require market participant IT adjustments. - Regulatory restrictions on securities lending in Spain may reduce access to securities for borrowing counterparties and adversely affect settlement efficiency. ### Main recommendations (excerpted with priority, timing, and agency) - Responsibilities of the Authorities - 1. Formalize a cooperation agreement between the CNMV and BdE. Priority: MH; Timing: NT; Agency: CNMV, BdE - 2. Grant full autonomy to the CNMV over its recruitment and retention processes; and align human resources to current and expected future workloads, including needed expertise. Priority: H; Timing: I; Agency: Government, CNMV - 3. The CNMV should ensure that, where necessary, steps are taken by market participants to adjust their IT systems and find relevant alternative sources of data once the Post-trade Interface (PTI) is removed. Priority: H; Timing: NT; Agency: CNMV - 4. Enhance preparedness for implementation of new regulatory initiatives. Priority: M; Timing: NT; Agency: CNMV, BdE - 5. Further document internal procedures for supervising IC. Priority: M; Timing: NT; Agency: CNMV - 6. Continue working towards improving settlement efficiency rates. Priority: MH; Timing: NT; Agency: CNMV - Supervision of Margin Practices – BMEC - 7. Ensure that the implementation of CNMV’s recommendations takes place in a timely fashion. Priority: MH; Timing: NT; Agency: CNMV - 8. Require BMEC to implement additional necessary and identified measures to complete the migration to the new HVaR model. Priority: MH; Timing: MT; Agency: CNMV, CoS - 9. BMEC should be required to disclose to clearing members (CMs) the results from the sensitivity analysis. Priority: MH; Timing: NT; Agency: CNMV - 10. Require all relevant procedures related to BMEC’s risk management to be adequately documented. Priority: H; Timing: NT; Agency: CNMV - 11. Ensure that practices and enhancements to BMEC’s margin model to be adopted from SIX group are aligned with CNMV and BMEC requirements and objectives respectively. Priority: MH; Timing: NT; Agency: CNMV - Recovery and Resolution – BMEC and IC - 12. Initiate joint recovery planning exercises with FINMA. Priority: M; Timing: MT; Agency: CNMV - 13. Ensure that all tools identified in the recovery plan can be deployed in a timely fashion and consider a wide range of scenarios in the resolution plan, including through assessing whether it would be necessary to consider the transfer of functions to another FMI to ensure the continuity of critical services in resolution. Priority: MH; Timing: MT; Agency: CNMV - 14. Communicate with CMs to raise awareness about resolution work by BMEC’s Crisis Management Group (CMG) and the College of Resolution authorities (CoR) (once established) and about the coordination in place with the CMs’ resolution authorities. Priority: H; Timing: I; Agency: CNMV - 15. Encourage IC to improve the narrative of recovery plan. Priority: MH; Timing: NT; Agency: CNMV ### Supervision of BMEC’s margin practices — findings and enhancements - Overall supervisory assessment: - CNMV’s supervision is comprehensive and thorough: stress tests, back tests, sensitivity analyses, independent validation, and approval of significant margin model changes (by CNMV and CoS). - CNMV views BMEC’s margin model as more conservative than EMIR in some respects (e.g., higher confidence levels and longer close-out periods in some segments). - Identified enhancements and gaps: - Ensure CNMV recommendations to BMEC are implemented in a timely fashion. - Integrate wrong-way risk and anti-procyclicality (APC) measures across all segments, not only those using HVaR. - Require BMEC to disclose sensitivity analysis results to clearing members (CMs). - Require BMEC to implement additional measures to complete migration to the HVaR model across segments. - Ensure all relevant procedures related to BMEC’s risk management are adequately documented. - Align SIX group–adopted practices with CNMV and BMEC requirements; CNMV should review new systems imported from SIX. ### BMEC margin framework — structure and parameters (selected specifics) - Loss absorption waterfall components (five): Variation Margin (VM); Initial Margin (IM); Individual members’ additional and extraordinary margins; BMEC “skin-in-the-game” (SITG); Members’ contributions to the BMEC default fund (DF). - IM model underpinnings: - Portfolio risk measured at account level; correlated instruments can be offset subject to restrictions; objective to capture potential future price and volatility changes; worst result obtained is estimate of exposure. - Core IM parameters and segmental calibration (summary): - Equity & Ibex 35: Margin Model MEFFCOM2; Confidence Interval (percent) 99.0; MPOR 2; Review Frequency Minimum a monthly review - FX: Margin Model HVaR; Confidence Interval (percent) 99.0; MPOR 2; Review Frequency Daily scenario review - Electricity (Energy): MEFFCOM2; Confidence Interval (percent) 99.0; MPOR 2; Review Frequency Minimum a monthly review - Gas (Energy): MEFFCOM2; Confidence Interval (percent) 99.5; MPOR 5; Review Frequency Minimum a monthly review - Fixed-Income Securities: MEFFCOM2; Confidence Interval (percent) 99.9; MPOR 2; Review Frequency Minimum a monthly review - Equities: MEFFCOM2; Confidence Interval (percent) 99.0; MPOR 2; Review Frequency Minimum a monthly review - IRD (OTC derivatives): HVaR; Confidence Interval (percent) 99.65; MPOR 5; Review Frequency Daily scenario review - Variation margin (VM) and intraday: - VM models aligned with EMIR and PFMIs; VM for futures and IRDs settled daily; BMEC can request intraday margin when a CM exceeds Intraday Risk Limit (IRL); CMs must post intraday margin within 60 minutes. - IRL determined by solvency limit equal to a percentage of CM’s shareholders’ equity; maximum inversely proportional to CM’s credit rating. - Extraordinary intraday margin and margin call levels: - If intra-day risk exceeds IRL, BMEC requests additional funds so intra-day risk does not exceed 80 percent of the new IRL. - Extraordinary margin call levels: 80 percent of IM for Derivatives, Equities, Energy and Fixed Income; 60 percent of IM for FX products; 50 percent of IM for IRDs. - Posting margin and end-of-day breaches: - Margin can be posted via TARGET2, IC, Euroclear, Clearstream, SIX SIS no later than 60 minutes after notice. - If within 90 days a CM exceeds its end-of-day risk limit twice, CCP requests an Individual fund in force at end of session and for at least the following 30 days. - Default Fund sizing: - DF calculated by segment to cover maximum combined daily risk from the two largest CMs in each segment (Cover 2) plus buffer of 10 percent (20 percent for Financial Derivatives segment); BMEC runs daily stress tests to size DF. - Margin models and migration: - MEFFCOM2: proprietary model similar to SPAN®, used for derivatives (except rolling FX), cash equities, energy, fixed income. - HVaR: Historical Value at Risk model with expected shortfall add-on, used for IM in IRD segment and new rolling FX; BMEC plans progressive migration to HVaR across segments. - Anti-procyclicality (APC): - APC measures integrated; BMEC assesses APC monthly for most relevant products; combination of Article 28 options used depending on product. - Wrong-way risk: - Specific wrong-way risk monitored; CNMV requested element sensitive to wrong-way risk implemented in HVaR but not yet across all segments. - Portfolio margining and offsets: - Portfolio margining across products with similar risk profiles within same segment; offsets allowed up to maximum 70 percent (product dependent) and only when average correlation ≥ 70 percent. ### Close-out periods, concentration and lookback - Close-out periods used for IM: - two days for Financial Derivatives, Energy (Electricity only), Cash Equities and Fixed Income segments; - five days for Energy (Natural Gas) and IRDs segments. - Concentration add-ons triggered when contracts held exceed average daily volume (ADV); applies to equity, IRS, financial derivatives, fixed income, energy segments. - Historical sample periods (lookback): BMEC’s lookback periods go up to 13 years (minimum recommended by PFMI is 12 months). ### Testing, validation, and governance - Fire drills: - At least one annual fire drill per segment; hypothetical portfolio includes at least 15 percent of overall IM for that segment; IRDs mandatory participation. - BMEC participated in international fire drill November 2023. - Stress tests, back tests, sensitivity and reverse stress tests: - Daily back tests, daily stress tests for DF, daily liquidity stress tests, monthly sensitivity analysis with reverse stress tests. - Sensitivity analysis includes wrong-way-risk scenario with CM default and securities issued by that CM falling -100 percent. - Review, validation, and model change governance: - Material changes require authorization and independent validation; implementation upon authorization by CNMV and ESMA in consultation with CoS. - Fast-track exceptional approval exists; example November 2021 calibration implemented in two and a half months via fast-track with post-implementation validation; FSAP recommends further streamlined fast-track allowing urgent implementations in a couple of weeks. ### Thematic review — Energy segment (selected outcomes) - Market volatility in Q4 2021 through 2022 prompted supervisory focus on margin coverage, DF and SITG, concentration, and member creditworthiness. - Additional measures by BMEC: - Intraday stress test calculations with additional CM requirements. - 50 percent reduction of credits granted to CMs related to their solvency score. - Implementation of a 50 percent risk appetite level in the Cover-2 ratio with additional margins if approached. - Introduction of voluntary margins (March 2022) allowing CMs to deposit additional margins to cover client positions. - Outcome: - No breach on DF coverage since December 2022 after measures; CNMV deems measures effective though smaller clients found operational impacts. ### Recovery and resolution — CNMV role, BMEC and IC preparedness - Regulatory background: - CCPRRR adopted December 2020; resolution provisions entered into force August 12, 2022; phased application between February 11, 2021 and February 12, 2023. - CNMV designated as national resolution authority (NRA) for FMIs in Spain; Resolution Unit created 2015, staffed with four people with 1.5 FTE dedicated to BMEC resolution duties. - Resolvability and CMG: - BMEC identified as systemically important CCP in more than one jurisdiction in 2017; CNMV created BMEC’s Crisis Management Group (CMG) in 2019 and engaged in resolvability analysis. - Status of resolution planning: - CNMV working on CCP resolution plan; planned actions include internal seminar, playbook, resolution drill, digitalizing information processes. - College of Resolution (CoR) setup finalizing; CoR expected to be established in January 2024; first meeting expected Q4 2023 (source timeline in document). - BMEC recovery plan submission and review: - BMEC submitted recovery plan October 2022; CNMV requested revision due to deficiencies (ten material deficiencies related to lack of resolution scenarios and detailed procedures). - Revised plan submitted May 2023; approved with additional non-material recommendations to be implemented before next annual review. - CNMV satisfied with severity and indicators; plan covers default, non-default and combined scenarios and includes early warning indicators and recovery triggers. - Recovery options and default waterfall (selected): - Pre-funded resources: enforce IM, individual funds, execution of defaulting CM’s DF contribution, SITG, non-defaulting members’ contributions, SSITG. - Non-pre-funded resources: cash calls (maximum aggregate replenishment twice the amount of contribution for 90 calendar days), contribution for service continuity (up to one time original DF), VM gains haircutting, voluntary margins, remaining free capital, tear-up tool. - Liquidity measures: aggregate 50 percent cash collateral requirement; CCP historically receives around 60 percent to 70 percent cash collateral; BMEC monitors and contacts members below 30 percent cash collateral. - Recovery framework specifics: - BMEC holds total own resources substantially above regulatory and PFMI requirements; holds at least 25 percent of gross operational expenses to cover business risks as of end-March 2023. - Portability and onboarding: onboarding to alternative CCP could take up to 12 months; many contracts have maturity shorter than six months (period BMEC resources cover). - Recovery tools include SSITG, cash calls, VM haircutting, voluntary margins, non-default loss allocation, tear-up, substitution of pledge collateral by title transfer collateral. - Allocation of non-default investment losses: - Recovery waterfall: SITG; allocation of 80 percent of investment losses to CMs up to EUR 32 million; SSITG; allocation of 20 percent of investment losses to CMs up to EUR 8 million; equity covers remaining uncovered losses (allocation applies only to CMs that agreed to have margins invested). - IC recovery highlights: - CNMV reviews IC’s recovery plan annually; trigger defined as any losses reducing IC capital below 110 percent (reviewed monthly and reported to Risk Committee). - IC holds separate resources to cover business risk amounting EUR 10.4 million as of end of March 2023. - IC considers transfer to alternative licensed CSDs under CSDR but portability and interoperability pose complexity. ### Recovery and resolution — challenges and recommended actions - Coordination and CoR: - CoR yet to be established; timeline designed by CNMV aligns with peers per ESMA discussions. - Recommendations — BMEC: - Coordinate with FINMA to test BMEC’s recovery plan combined with SIX group contingency plans; participate in joint exercises. - Ensure deployability of recovery tools and assess transfer of functions to another FMI in resolution; preparatory work to identify alternative providers, address technical and legal barriers, and seek advance agreements. - Intensify engagement with peer authorities supervising CCPs that could potentially onboard BMEC’s critical functions. - Communicate with CMs to raise awareness about resolution work, CoR scope, and coordination with CMs’ resolution authorities; disseminate information on CoR meetings and coordination protocols. - Recommendations — IC: - Joint recovery exercises with FINMA. - Ensure all tools in recovery plan can be deployed timely and advance interoperability to facilitate transfer of business to alternative CSDs. - Encourage IC to improve recovery plan narrative, particularly results of scenario materialization and consequences of combined scenarios. - Challenges: - Cross-border group membership (SIX) requires intensified international cooperation (CNMV–FINMA). - Portability and interoperability constraints, onboarding timelines (9 to 12 months) and lack of interoperability across CCPs/CSDs impede practical transfer of critical functions. ### Supervision of BMEC’s margin model — follow-up recommendations - CNMV should undertake follow-up supervisory actions to ensure timely implementation of its recommendations; consider corrective supervisory actions where implementation lags persist. - CNMV should encourage BMEC to complete migration to HVaR where enhancements improve robustness and efficiency. - CNMV should require disclosure to CMs of sensitivity analysis results (PFMI Principle 6). - CNMV should require comprehensive documentation of all relevant BMEC risk management policies and procedures (default management, governance, accountability, auction mechanisms). - CNMV should ensure proposed changes from adoption of SIX methodologies are aligned with CNMV and BMEC requirements and that imported systems are thoroughly reviewed. ### Annex highlights — IM parameters, add-ons and close-out matrices (selected numeric thresholds preserved) - Fixed Income sovereign yield spread increases and corresponding Close-Out period (days) and Increase of Margin Percentage for Long Positions (percent): - Lower than 350 basis points / 2 / 0 - Between 350 and 400 basis points / 3 / 22 - Between 400 and 425 basis points / 4 / 41 - Between 425 and 450 basis points / 5 / 58 - Between 450 and 475 basis points / 6 / 73 - Between 475 and 500 basis points / 7 / 87 - Between 500 and 525 basis points / 8 / 100 - Between 525 and 550 basis points / 9 / 112 - Higher than 550 basis points / 10 / 124 - IRDs credit quality multipliers: - S1 – S6: 1 - S7 (A- equivalent): 1.25 - S8 (BBB equivalent): 1.50 - S9 (BB+ equivalent): 1.80 - Annex I close-out/increase grids (structure preserved): Equity/F. Derivatives/Fixed Income and Energy segment grids with Close-out Periods and Increase of Margin Percentage tiers as presented in source. - APC Article 28 options (text excerpt preserved): CCP shall employ at least one of: applying a margin buffer at least equal to 25 percent; assigning at least 25 percent weight to stressed observations in lookback; ensuring margin requirements not lower than those using volatility over a 10-year lookback. BMEC uses a combination depending on product. *Source: 1espea2024007-print-pdf - EXECUTIVE SUMMARY (https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024007-print-pdf.pdf)* ### EXECUTIVE SUMMARY __________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### Introduction and Scope - Focus: selected topics on regulation, oversight and supervision of two FMIs in Spain — Bolsas y Mercados Españoles Clearing (BMEC), a central counterparty (CCP), and Iberclear (IC), a central securities depository (CSD). - Technical note scope: - Responsibilities of Spanish authorities regarding BMEC and IC in relation to the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs) and the Disclosure framework and Assessment methodology. - Supervision of BMEC’s margin models and practices (PFMIs’ Margin principle). - Crisis preparedness (recovery plans) of BMEC and IC and resolution procedures for BMEC (FSB and BIS standards). - Objective: identify regulatory and supervisory challenges with potential financial stability implications given BMEC and IC’s central positions in the Spanish financial system. ### Key Findings on Authorities, Supervision, and Oversight - CNMV (Comisión Nacional del Mercado de Valores): - Is a proactive supervisor with high engagement with market participants and FMIs via regular supervisory duties, onsite visits and thematic reviews. - Has sufficient powers to request information, require cessation of activities, summon individuals, and impose sanctions to fulfill responsibilities under EMIR, the CCPRRR, and the CSDR. - Lacks full autonomy over recruitment of staff, including key specialist areas; government approvals are required case-by-case, hampering recruitment, retention, and succession planning. - Recommendation: CNMV should gain full autonomy over recruitment and retention processes to align resources to current and projected workloads. - Banco de España (BdE): - Acts as overseer of BMEC and IC. - Cooperation between CNMV and BdE: - Works closely and effectively in practice, but the FSAP recommends formalizing a cooperation agreement documenting the collaborative framework for FMIs’ oversight. - Other process notes: - CNMV should ensure market participants adjust IT systems and find alternative data sources once the Post-trade Interface (PTI) is removed. - CNMV should enhance preparedness for implementation of new regulatory initiatives and further document internal procedures for supervising IC. - Continue efforts to improve settlement efficiency rates. ### Supervision of BMEC Margin Practices — Findings and Enhancements - Overall assessment: - CNMV’s supervision of BMEC’s margin practices is comprehensive and thorough, covering stress tests, back tests, sensitivity analyses, independent validation, and approval of significant margin model changes (by CNMV and the college of supervisors, CoS). - CNMV views BMEC’s margin model as more conservative than EMIR in some respects (e.g., higher confidence levels and longer close-out periods in some segments). - Identified enhancements: - Ensure CNMV recommendations to BMEC are implemented in a timely fashion. - Improvements such as comprehensive integration of wrong-way risk and anti-procyclicality (APC) measures should be implemented across all segments, not only those using the Historical Value-at-Risk (HVaR) model. - Require BMEC to disclose results of sensitivity analyses to clearing members (CMs). - Require BMEC to implement additional necessary measures to complete migration to the new HVaR model. - Ensure all relevant procedures related to BMEC’s risk management are adequately documented. - Align practices and enhancements adopted from the SIX group with CNMV and BMEC requirements and objectives. ### Crisis Management, Recovery and Resolution — Findings and Enhancements - Recovery planning: - CNMV performs extensive periodic reviews of BMEC’s and IC’s recovery plans for compliance with EU regulation and international standards. - Since adoption of the CCPRRR framework, CNMV worked closely with BMEC on recovery planning, requested several changes, and supervised severity of recovery scenarios. - BMEC’s recovery plan foresees a range of tools and procedures to ensure continuity of critical functions. - CNMV reviews IC’s recovery plan annually as part of its review and evaluation process. - Recommended enhancements: - Strengthen IC’s recovery plan narrative, especially results of materialization of recovery scenarios and consequences where several scenarios occur simultaneously. - Coordinate with FINMA to participate in joint exercises testing BMEC’s and IC’s recovery plans in combination with contingency plans for other entities in the SIX group. - Ensure all tools identified in recovery plans can be deployed timely and consider a wide range of scenarios in resolution plans, including assessing whether transfer of functions to another FMI would be necessary to ensure continuity of critical services in resolution. - Communicate with CMs to raise awareness about resolution work by BMEC’s Crisis Management Group (CMG) and the College of Resolution authorities (CoR) and coordination with CMs’ resolution authorities. ### Main Recommendations (excerpted with priority, timing, and agency) - Responsibilities of the Authorities - 1. Formalize a cooperation agreement between the CNMV and BdE. Priority: MH; Timing: NT; Agency: CNMV, BdE - 2. Grant full autonomy to the CNMV over its recruitment and retention processes; and align human resources to current and expected future workloads, including needed expertise. Priority: H; Timing: I; Agency: Government, CNMV - 3. The CNMV should ensure that, where necessary, steps are taken by market participants to adjust their IT systems and find relevant alternative sources of data once the Post-trade Interface (PTI) is removed. Priority: H; Timing: NT; Agency: CNMV - 4. Enhance preparedness for implementation of new regulatory initiatives. Priority: M; Timing: NT; Agency: CNMV, BdE - 5. Further document internal procedures for supervising IC. Priority: M; Timing: NT; Agency: CNMV - 6. Continue working towards improving settlement efficiency rates. Priority: MH; Timing: NT; Agency: CNMV - Supervision of Margin Practices – BMEC - 7. Ensure that the implementation of CNMV’s recommendations takes place in a timely fashion. Priority: MH; Timing: NT; Agency: CNMV - 8. Require BMEC to implement additional necessary and identified measures to complete the migration to the new HVaR model. Priority: MH; Timing: MT; Agency: CNMV, CoS - 9. BMEC should be required to disclose to clearing members (CMs) the results from the sensitivity analysis. Priority: MH; Timing: NT; Agency: CNMV - 10. Require all relevant procedures related to BMEC’s risk management to be adequately documented. Priority: H; Timing: NT; Agency: CNMV - 11. Ensure that practices and enhancements to BMEC’s margin model to be adopted from SIX group are aligned with CNMV and BMEC requirements and objectives respectively. Priority: MH; Timing: NT; Agency: CNMV - Recovery and Resolution – BMEC and IC - 12. Initiate joint recovery planning exercises with FINMA. Priority: M; Timing: MT; Agency: CNMV - 13. Ensure that all tools identified in the recovery plan can be deployed in a timely fashion and consider a wide range of scenarios in the resolution plan, including through assessing whether it would be necessary to consider the transfer of functions to another FMI to ensure the continuity of critical services in resolution. Priority: MH; Timing: MT; Agency: CNMV - 14. Communicate with CMs to raise awareness about resolution work by BMEC’s Crisis Management Group (CMG) and the College of Resolution authorities (CoR) (once established) and about the coordination in place with the CMs’ resolution authorities. Priority: H; Timing: I; Agency: CNMV - 15. Encourage IC to improve the narrative of recovery plan. Priority: MH; Timing: NT; Agency: CNMV ### Additional Notes and Methodology - The technical note is based on document reviews, questionnaires from CNMV and BdE, additional requested data, public documentation from BMEC and IC websites, national laws, regulations, rules and procedures governing BMEC and IC, and meetings with CNMV, BdE, ESMA, BMEC, IC, market participants and a Ministry of Economy, Trade and Enterprise (MINECO) representative. - BMEC and IC are entities of the BME Group, a wholly owned subsidiary of SIX. BME Group operates all regulated markets in Spain (Stock Exchanges, MEFF, and AIAF), the only CCP (BMEC), and the only CSD (IC) established in Spain, and several MTFs (MARF, SENAF, Latibex, BME Growth, and BME MTF Equity). *Source: 1espea2024007-print-pdf - EXECUTIVE SUMMARY (https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024007-print-pdf.pdf)* ### 5. In addition to the infrastructures operated by the BME Group, there are some other ### 5. In addition to the infrastructures operated by the BME Group, there are some other ### A. BMEC — role, activity, and collateral arrangements - BMEC is the sole CCP authorized by the CNMV in Spain. - BMEC acts as a buyer to every seller and a seller to every buyer, thereby mitigating counterparty credit risk. - Objective: ensure that in the event of a default by one of its participants or clearing members (CMs), the remaining participants would not suffer losses. - BMEC cleared the following amounts for the energy, equity and fixed income segments in 2022: - Energy segment (including electricity and gas): total nominal cash value was around EUR 2 billion and 2,248 transactions. - Equity segment: total cash value was around EUR 711 billion and 78 million trades. - Fixed income segment: EUR 99.5 billion of cash value and 1,142 number of trades. - BMEC is authorized to offer clearing services in six segments; five were active at the time of the FSAP mission: - Equity segment: for securities listed on BME equity markets (shares, rights, warrants, certificates, and exchange-traded funds (ETFs)). - Financial Derivatives segment: for contracts listed and traded on MEFF for all its activity of Equity and FX Derivatives and futures on Spanish sovereign bonds. - Energy segment: for electricity contracts listed on MEFF, as well as natural gas OTC contracts. - Fixed Income segment: for Fixed Income Securities traded on stock exchanges, electronic trading systems or OTC. BMEC clears buy/sell-back or repo transactions on Spanish as well as Austrian, Dutch, French, German, Italian, and Portuguese Sovereign Debt. It is expected that clearing repo transactions on the European Commission’s debt will start in in Q4 2023. - Interest Rate Derivatives (IRDs) segment: for Interest Rate Swaps (IRS), Forward Rate Agreements (FRA) and Overnight Indexed Swaps (OIS) OTC transactions. - Derivatives linked to crypto assets: for futures on crypto indexes traded on MTFs. This segment is currently inactive. - Cross-border and multicurrency operations and collateral: - BMEC is authorized to operate cross-border and with multiple currencies. - BMEC can accept multicurrency cash collateral (besides euro, also AUD, CHF, GBP, JPY, and USD). However, at the time of drafting this technical note, BMEC only accepts cash collateral denominated in euro. - BMEC accepts as collateral sovereign debt denominated in foreign currencies (from the United States, in USD; from the United Kingdom, in GBP; and it plans to accept sovereign debt from Switzerland in CHF). - The new and currently inactive segment for derivatives linked to crypto assets is denominated in USD. ### B. IC — role, activity, and settlement - IC is the only CSD authorized by the CNMV in Spain and has a dominant position in the registry and settlement of the securities issued under Spanish law. - Under current European regulation (CSDR), other European CSDs can provide notary services for securities issued under Spanish law; two international CSDs have a share of initially recorded securities, mainly for corporate debt instruments. IC has links to several EU-CSDs. - End-2022 statistics: - Number of issues registered with IC: 8,431. - Nominal amount of registered issues: EUR 1.87 trillion. - According to ESMA data for 2021, 91 percent of the total value of issues carried out by Spanish entities was initially registered with IC. - Settlement inefficiency ratios in 2022: 5.8 percent for the number of transactions and 4.1 percent for the amount. - IC outsources settlement operations to TARGET2-Securities (T2S): - T2S is a common securities settlement platform owned, operated, and overseen by the Eurosystem; money settlement in T2S takes place in central bank money. - Currently, 24 CSDs from 23 European countries are connected to the platform. IC migrated to T2S in September 2017. - In 2022, settlement efficiency in T2S reached a daily average of 93.74 percent in volume terms and 93.29 percent in value terms. - ARCO (Securities Settlement System) and settlement characteristics: - ARCO is the settlement system for all securities settled on IC. - Validation, matching, and settlement of instructions take place using the T2S engine and systems. - Delivery-versus-Payment (DVP) settlement takes place against Euro accounts opened in a Eurosystem central bank. - Participants can use auto-collateralization facilities provided by the Eurosystem through T2S (IC does not provide this nor any other credit facility). - IC can establish interoperable links with other CSDs connected to T2S. - IC operates cross-border by registering and settling securities issued by foreign issuers or under foreign law or through a linked CSD; IC does not operate in multiple currencies. ### Responsibilities of authorities: regulation, oversight, and supervision of BMEC and IC - Adoption and implementation of standards: - The CNMV's executive board adopted the PFMIs in December 2014; principles were incorporated into the legislative framework through EMIR and CSDR. - The CNMV, as a member of IOSCO, supported the elaboration of the PFMIs. PFMIs were adopted by the ECB’s Governing Council in 2013 and therefore also apply to the BdE. - The EMIR and the CSDR make express reference to the PFMIs; authorities in Spain ensure BMEC and IC comply with the PFMIs by supervising adequate implementation of EU regulation. - CNMV adopted guidelines and recommendations to safeguard compliance with PFMIs; BMEC and IC are required to self-assess their compliance with the PFMIs as part of documentation submitted to CNMV for annual review and evaluation. - Colleges, EU coordination, and ESMA involvement: - The College of Supervisors (CoS) for CCPs, and ESMA broadly, ensure consistent implementation of European legislation across jurisdictions. - The CNMV chairs BMEC’s CoS. The CoS issues opinions during authorization and is consulted on surveillance aspects (e.g., significant changes in BMEC’s risk model or service extensions). - Certain CCP actions require an opinion from ESMA and the CCP Supervisory Committee (CCPSC). - IC outsources matching and settlement to T2S, which has been assessed by the ECB against the PFMI. - CNMV and BdE powers, roles, and information flows: - CSDs and CCPs in Spain—systemic and non-systemic—are subject to regulation, supervision and oversight of CNMV, which also holds sanctioning powers. - Spanish Securities Market Law (SML) assigns CNMV and BdE responsibilities to ensure operation of national securities clearing, settlement, and registry systems preserves financial system stability. - CNMV maintains a public register of CCPs and CSDs authorized in Spain. - The BdE has no powers over supervision but oversees these FMIs and works closely with CNMV; BdE is a member of the Eurosystem, central bank of issue, and provider of settlement accounts. - CNMV and BdE have cross-representation on each other’s governing bodies (Vice Chair of CNMV is a member of BdE’s Governing Council; Deputy Governor of BdE sits on CNMV’s Board). - CNMV generally has sufficient powers to comply with CSDR and EMIR obligations, including information access, onsite inspections, freezing assets, requesting cessation of practices, and referral to criminal prosecution. According to ESMA, CNMV does not need government approval for supervisory decisions; however, the General Secretary of the Treasury and International Financing sits and votes at the CNMV Board (abstention is not allowed). - European framework (EMIR and CSDR) provides direct powers to CNMV (authorization, extension of services, withdrawal, authorization of outsourcing, validation of CCP models, access to records, approval of interoperability and links). - Settlement Finality Directive: transfer orders and netting agreements are legally enforceable and binding on third parties in the event of insolvency proceedings; if entered before opening of insolvency proceedings, BMEC and IC should enforce transfer and netting of positions. - Reporting and supervisory information: - BMEC and IC report annually to CNMV on fulfillment of EMIR and CSDR requirements (article-by-article); both must annually report intended fees to CNMV, which can impose limits. - BMEC reporting to CNMV includes: - Annual: updated recovery plan, minutes of risk committees and Board, user complaints, pending legal claims, audit plans. - Quarterly: Key Risk Indicators report with metrics on credit, liquidity, concentration, and operational risk. - Monthly: inventory of operational issues. - BMEC also provides monthly statistical information per ESMA template; CNMV has on occasion requested daily and weekly information under exceptional circumstances. - BdE receives BMEC information as a CoS member and can access additional information from CNMV; BdE is requested to issue a report before approval of rulebook changes and is responsible for reporting to the Eurosystem any issues detected in the CCP in Spain. - IC reporting to CNMV includes: report on substantive changes, latest audited financial statements, pending proceedings, operational incidents, performance of the securities settlement system (SSS), manual interventions, changes to CSD links, statistical documentation on participants, settlement volumes and values, and initial recording of securities. Regular duties include changes to governance and organization (annually or when material), monthly reports on settlement volumes and values and details on settlement fails, and daily reports on matched settlement instructions status, securities accounts balances, and registered issuances. - CNMV’s ongoing supervisory work towards IC is not documented internally; an internal manual was identified as helpful to systemize supervisory know-how and assist future staff. - Recent regulatory action and market access: - CNMV promoted removal of entry barriers by decommissioning the Post-Trade Interface (PTI), an information system used by IC and participants to report data on shares’ beneficiaries. PTI applies exclusively in Spain and will cease to exist in two-years’ time. - Rationale: PTI was identified as a barrier to entry for foreign participants; EU regulatory developments (MiFIR reporting field to identify the person giving the order; EU shareholders’ rights Directive allowing issuers to trace chain of owners) rendered PTI superfluous. - Market participants favored removing PTI but noted they need time to adjust systems, as some used PTI as a data source. *Source: 1espea2024007-print-pdf (IMF technical note excerpt).* ### 30. The CNMV’s budget is integrated into the General Budget of the Government and ### 1espea2024007-print-pdf - 30. The CNMV’s budget is integrated into the General Budget of the Government and ### Budget and fees - The CNMV’s budget is integrated into the General Budget of the Government and includes fees paid by supervised entities and participants. - BMEC, IC and their respective CMs and participants pay a fee calculated over the volume cleared and the security balances maintained. ### Supervisory structure and resourcing - CNMV Secondary Markets Department (Markets Directorate General) is responsible for supervising the CCP and the CSD. - Post-trading division staffed with a deputy director and seven officers to oversee and supervise BMEC. - Two officers assigned for IC. - Other common issues for the SIX/BME group (for instance Cyber resilience) are handled jointly with the market infrastructures division. - BdE oversight resources: - Two full time equivalent experts oversee the CCP and the CSD, from the Oversight and Analysis of infrastructures division. - BdE reports available resources allow compliance with EU and national regulations but do not allow deep dives nor in-depth thematic analysis. - Constraints on CNMV recruitment: - CNMV lacks full autonomy over recruitment of supervisors; government approval is required on a case-by-case basis, introducing significant uncertainties. ### New regulatory skillset needs - New EU financial regulatory provisions requiring specialized expertise include: - Distributed Ledger Technology (DLT) Pilot regime (expertise on FMIs and DLT). - Markets in Crypto Assets (MiCA) regulation. - Digital Operational Resilience Act (DORA). - EMIR and CSDR are under review and may be subject to significant changes requiring intensified efforts for governance, market awareness, and implementation support. - BdE reports no specific training foreseen on FMIs. ### Cooperation with other authorities - Cooperation through the CoS of BMEC facilitates information flow and coordination among authorities with direct or indirect interest in CCP supervision. - Since May 2023, BMEC’s CoS is composed of: - CNMV, BdE, ESMA, European Central Bank (ECB), Autorité de Contrôle Prudentiel et de Resolution (ACPR), Autorité des Marchés Financiers (AMF) (France), Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) (Germany), and Autoriteit Financiële Markten (AFM) (Netherlands). - CNMV coordination via ESMA: - Through ESMA CCP Directorate, CCP Standing Committee (CCP SC), and Markets Standing Committee. - ESMA’s CCP Directorate coordinates EU NCAs supervising CCPs, leads peer reviews, and coordinates the annual EU-wide CCP stress test. - CCP SC objective: enhance supervisory convergence and ensure a resilient CCP landscape; composes all supervisory authorities in the EU that supervise a CCP. - CNMV participates actively and contributes high quality, in-depth analysis to ESMA groups. - CNMV cooperation in relation to IC: - CNMV cooperates with BdE (as overseer and Eurosystem member), ESMA, and NCAs supervising linked entities (other CSDs, CCPs, payment systems, markets and trading platforms). - CSDR mandates annual exchange of information between ESMA and NCAs on CSDs’ activity involving non-resident issuers or activity by IC participants outside the CSD’s jurisdiction. - CNMV agreed to a quarterly exchange of information with another EU-country regarding an IC participant of substantial importance based there. - Cooperation with FINMA: - CNMV has comprehensive arrangements and fluid, regular exchanges with FINMA (Swiss supervisor of the SIX Group). - In 2023 CNMV collaborated in two FINMA supervisory actions: one on outsourcing (May) and one on governance of the post-trading business unit at SIX group level. - CNMV does not rely on FINMA’s assessments and continues to perform all responsibilities as direct supervisor of BMEC and IC. - CNMV and FINMA have an MoU last amended in 2022. - Bilateral and multilateral MOUs exist; CNMV is part of the T2S cooperative arrangement and participates in AMI-SeCo Spain (chaired by the BdE). ### Crisis coordination examples - CNMV coordinated closely with ESMA and peer authorities via CCP SC during recent events: - COVID-19 pandemic. - Extreme volatility in energy markets around the Russian invasion of Ukraine. - ION cyberattack. - March 2023 merger of Credit Suisse into UBS. - Example: early days of the pandemic—CNMV shared sensitive settlement fails’ data with ESMA. - BdE follows the Oversight Crisis Communication (OCC) framework for FMIs, participants, and critical service providers. ### Strengths (selected) - PFMI adoption: CNMV regularly analyses BMEC and IC documentation and accompanies market participants in EU regulation implementation that integrates the PFMIs. - Good collaboration between CNMV and BdE; BdE’s recommendations (under oversight function per CSDR) are incorporated by CNMV. - Relevant powers to access information: under the SML CNMV and BdE can request information, summon people, request documentation, conduct on-site inspections under EMIR and CSDR to ensure PFMI compliance. - Expertise in FMI supervisory function: CNMV teams bring a comprehensively wide and technically strong range of skill sets despite tight headcount. - Coordination at EU and international levels: participation in CoS of BMEC, ESMA committees, T2S arrangement, AMI-SeCo Spain, MoU with FINMA, and bilateral information exchanges. - High engagement and communication with market participants; regulated entities trust CNMV and communicate continuously. ### Challenges (selected) - New regulatory requirements entering in coming months/years requiring intensified effort: EMIR Refit, CSDR Refit, DORA, MICA, DLT pilot regime, and other delegated act adjustments. - Resource constraints at CNMV will increase oversight challenges as responsibilities grow; recruitment rigidities and government approval process limit hiring of expert staff (e.g., quantitative risk management, post-trading policy, CCP/CSD operations). - Cooperation between CNMV and BdE could be further formalized as foreseen in the SML. - Decommissioning the PTI may remove entrance barriers but require market participants to adjust IT systems as PTI was a data source. - Regulatory restrictions on securities lending in Spain (funds cannot lend securities they hold) may reduce access to securities for borrowing counterparties and adversely affect settlement efficiency according to market participants. ### Recommendations (51–56) - 51. Further enhance and formalize the cooperation framework between CNMV and BdE to document and reinforce existing good cooperation for oversight duties. - 52. Grant CNMV full autonomy over recruitment and retention processes; align resources and recruitment, including hiring of experts, to expected workload. CNMV should estimate current and projected future workload, ensure resource alignment, and have full autonomy over recruitment and retention. - 53. Ensure market participants take steps to adjust IT systems and find alternative data sources once the PTI is decommissioned. - 54. Enhance preparedness for implementation of new regulatory initiatives: develop outreach strategy to market participants, increase staff for new functions, and adjust internal procedures and governance structures as needed. - 55. Further document internal supervisory and oversight practices for CSDs (for example, an internal manual) to support continuity when staff join or rotate. - 56. Continue working to improve settlement efficiency rates. Consider facilitating access to securities lending and borrowing and undertake a cost-benefit analysis of removing regulatory restrictions that limit securities lending in Spain. ### BMEC margin practices — description and findings - CCP loss absorption waterfall components (five): - Variation Margin (VM). - Initial Margin (IM). - Individual members’ additional and extraordinary margins. - BMEC “skin-in-the-game”. - Members’ contributions to the BMEC default fund (DF). - Purpose of margins: - VM covers mark-to-market of net positions in each segment. - IM covers potential future exposure from each account’s position; IM calculation included in the procedure for margin calculation circulars available on the BMEC website. - Additional margin (“individual funds”) and extraordinary margin cover risk in extraordinary situations such as extreme market volatility. - BMEC “skin-in-the-game” is CCP equity funds committed to covering losses under different scenarios. - DF contributions by CMs cover risk arising in the event of a default by a CM when IM is insufficient. - Margin and testing practices: - All margin calculations are performed per segment for each of the six segments BMEC clears: - Financial derivatives. - Foreign exchange (FX) contracts. - Energy derivatives. - Interest rate derivatives (including interest rate swaps (IRS), forward rate agreements (FRA) and overnight interest swaps (OIS)). - Cash equities. - Fixed income (repos). - Newly approved segment of instruments linked to crypto assets (futures on Bitcoin and Ethereum) — no open positions yet. - Stress tests, back testing, sensitivity analysis, and fire drills are performed segment-wise. - Back testing and sensitivity analysis are used per Principle 6 of the PFMIs to assess margin model coverage and identify shortcomings. *Source: 1espea2024007-print-pdf - 30. The CNMV’s budget is integrated into the General Budget of the Government and* ### 59. The IM model is based on the following underpinnings, and follows the same ### The IM model is based on the following underpinnings, and follows the same assumptions used to calculate intraday and the end-of-day margin requirements ### Initial margin (IM) model underpinnings - Portfolio risk must be measured at the account level. - Correlated instruments can be offset, subject to restrictions for the margins to remain prudent. - The objective of the model is to take account of any potential future change in prices and any potential future change in volatility for options. - The worst result obtained is the estimate of exposure. ### Core IM parameters and segmental calibration (summary of Table 2) - Equity & Ibex 35 - Margin Model: MEFFCOM2 - Confidence Interval (percent): 99.0 - MPOR: 2 - Review Frequency: Minimum a monthly review - FX - Margin Model: HVaR - Confidence Interval (percent): 99.0 - MPOR: 2 - Review Frequency: Daily scenario review - Electricity (Energy) - Margin Model: MEFFCOM2 - Confidence Interval (percent): 99.0 - MPOR: 2 - Review Frequency: Minimum a monthly review - Gas (Energy) - Margin Model: MEFFCOM2 - Confidence Interval (percent): 99.5 - MPOR: 5 - Review Frequency: Minimum a monthly review - Fixed-Income Securities - Margin Model: MEFFCOM2 - Confidence Interval (percent): 99.9 - MPOR: 2 - Review Frequency: Minimum a monthly review - Equities - Margin Model: MEFFCOM2 - Confidence Interval (percent): 99.0 - MPOR: 2 - Review Frequency: Minimum a monthly review - IRD (OTC derivatives) - Margin Model: HVaR - Confidence Interval (percent): 99.65 - MPOR: 5 - Review Frequency: Daily scenario review ### Variation margin (VM) and intraday margin calls - VM models aligned with EMIR, applicable regulation, and the PFMIs. - VM for futures and IRDs is settled daily; for instruments such as gas derivatives or repos, VM is a component of IM. - Open positions are marked to current market prices and funds collected/paid to settle gains/losses; regular VM collection limits growth in unmargined exposure. - BMEC can request intraday margin when a Clearing Member (CM) exceeds the Intraday Risk Limit (IRL); CMs must post intraday margin within 60 minutes. - IRL is determined by the solvency limit assigned by the CCP to each CM, equal to a percentage of a CM’s shareholders’ equity; maximum amount inversely proportional to the CM’s credit rating and differs for intra-day vs end-of-day calculations. - BMEC performs an end-of-session IRL stress test; if IRL exceeded, BMEC requests additional funds. - BMEC is importing the SIX internal scoring model for more diversified creditworthiness data; CNMV will perform an independent assessment. ### Extraordinary intra-day margin and margin call levels - BMEC may request extraordinary margins per segment or generally. - If a CM's Intra-day Risk exceeds its IRL, BMEC will request additional funds so intra-day risk does not exceed 80 percent of the new IRL. - Extraordinary margin call levels defined as: - 80 percent of the IM level for Derivatives, Equities, Energy and Fixed Income segments. - 60 percent of the IM level for FX products. - 50 percent of the IM level for IRDs. ### Posting margin and end-of-day risk breaches - Margin can be posted via TARGET2, IC, Euroclear, Clearstream, SIX SIS no later than 60 minutes after notice. - If within 90 days a CM exceeds its end-of-day risk limit twice, the CCP will request an Individual fund to cover the overnight risk, in force at the end of the session and for at least the following 30 days. ### IM parameters, add-ons, and documentation - IM methodology incorporates segment-specific criteria and add-ons (detailed in Annex 1 under IM parameters and add-ons). - Margin methodology is documented and published via BMEC circulars; margin parameters are published and updated monthly. - Members receive end-of-day files including common reports and individual reports with relevant margin parameters and breakdowns. - Independent external validators annually review models, assumptions, procedures, and parameters; validator rotation was recommended by CNMV and implemented for the energy segment. ### Default Fund (DF) sizing and stress testing - DF calculated by segment and should cover the maximum combined daily risk from the two largest CMs in each segment (Cover 2) under the same stress scenario, plus an additional buffer of 10 percent (20 percent in the case of the Financial Derivatives segment). - BMEC runs daily stress tests to size the DF. ### BMEC’s margin models and planned migration - Two margin model types in use: - MEFFCOM2: proprietary model similar to SPAN®, used for derivatives (except rolling FX), cash equities, energy, and fixed income; includes add-ons for concentration risks and large positions; allows bilateral offsetting across different instruments with average correlation ≥ 70 percent. - HVaR: Historical Value at Risk model developed by BMEC, augmented with an expected shortfall add-on, used for IM in the IRD segment and for new rolling FX contracts. - BMEC plans to obtain authorizations to progressively migrate from MEFFCOM2 to HVaR across all segments. - Transition to HVaR expected to optimize margins via increased netting while complying with EMIR; CNMV closely monitors tests and documentation. - HVaR facilitates implementing CNMV recommendations on concentrated positions and wrong-way risk accounting. ### Cross-default and no-contamination principles - Margins managed under “cross default” and "no contamination": - A member default applies across all segments (cross default); the member’s individual guarantees must cover overall close-out costs. - A member active only in one segment will not be exposed to losses from defaults of other members in other segments (no contamination). ### Anti-procyclicality measures (APC) - APC measures integrated into margin calibration; BMEC assesses APC efficiency monthly for the most relevant products. - Risk appetite for procyclicality of margins is set by the CCP’s Executive Committee. - BMEC uses a combination of EU-regulation options to limit procyclicality depending on instrument type (details in Annex 1). - BMEC performed satisfactorily in ESMA’s APC stress test, with FSAP inferring above-average performance. ### Wrong-way risk - Specific wrong-way risk is monitored (dependency estimates between a CM’s counterparty risk and portfolio market risk) and additional margins requested where appropriate. - CNMV requested in 2021 that BMEC introduce an element sensitive to wrong-way risk in the IM model to avoid ex post, potentially procyclical adjustments. - Wrong-way risk sensitivity was implemented in the HVaR model but is not yet implemented in all segments. ### Portfolio margining and offsets - BMEC allows portfolio margining across products with similar risk profiles within the same segment; no offsets across different segments or across products cleared in other CCPs. - Offsets allowed up to maximum 70 percent, depending on the product. - Correlation sample exceeds one year and includes stress periods; offsets allowed only when average correlation ≥ 70 percent and stable in stress. - Correlation parameters and offsetability are tested monthly; CNMV considers offset parameters conservative for equity and sovereign bond segments. ### Credit exposures from issuer default and segmental treatments - Fixed Income (Repos) - Sovereign credit default risk included in yield volatility used to calculate margin parameters. - CCP considers credit risk in price fluctuation parameters and uses a reference euro-area basket excluding the relevant sovereign bond. - If the yield spread is higher than the return of the reference basket over two consecutive days, the close-out period and margin percentages for that sovereign bond are increased for long (bond buyer) positions. - Increase of margin percentage depending on yield spreads (Spread / Close-Out period (days) / Increase of Margin Percentage for Long Positions (percent)): - Lower than 350 basis points / 2 / 0 - Between 350 and 400 basis points / 3 / 22 - Between 400 and 425 basis points / 4 / 41 - Between 425 and 450 basis points / 5 / 58 - Between 450 and 475 basis points / 6 / 73 - Between 475 and 500 basis points / 7 / 87 - Between 500 and 525 basis points / 8 / 100 - Between 525 and 550 basis points / 9 / 112 - Higher than 550 basis points / 10 / 124 - IRDs - Margin required for each member is multiplied by a factor determined by the internal solvency score assigned by the CCP (Credit Quality Multipliers): - S1 – S6: 1 - S7 (A- equivalent): 1.25 - S8 (BBB equivalent): 1.50 - S9 (BB+ equivalent): 1.80 - Financial Derivatives and Equities - BMEC monitors issuer solvency in real time and would increase IM percentages in near-to-insolvency situations; under stressed circumstances margins could increase close to 100 percent if price suffers two consecutive falls and press questions solvency. - Energy contracts have no issuer risk exposure for the CCP. ### Liquidity risk management and cash collateral - BMEC conducts daily liquidity stress testing and quantifies liquid resources and potential needs under regular and stressed scenarios. - CNMV notes BMEC follows conservative margin calibration; around 60 percent to 70 percent of margins received are cash and liquidity stress tests show a significant surplus relative to EMIR liquidity requirements. - CCP requires an aggregated 50 percent of cash collateral. - If aggregated cash collateral falls below 50 percent, Risk Department staff contact members whose percentage of cash collateral is below 30 percent to request adjustment. - Historically, average cash collateral ranged between 60 percent and 70 percent. - Percentage of cash collateral is monitored daily. ### Sources of price data and price estimation - Price data sources are well-recognized data vendors or data gathered directly from exchanges; end-of-day information communicated via MEFF terminals. - Same sources used for end-of-day and intra-day margin calculations. - Once the closing price is official, it is used to calculate exposures and margin (except Financial Derivative IBEX 35 contracts which use the average bid-ask until end-of-day calculations). - When pricing data is unavailable or unreliable, CCP employs a documented methodology to estimate prices for margin calculations; methodology reviewed by CNMV (details in Annex 1). *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024007-print-pdf.pdf* ### 82. The CNMV and BMEC provided evidence supporting that BMEC is compliant with ### The CNMV and BMEC provided evidence supporting that BMEC is compliant with ### Close-out periods and initial margin (IM) calculation - Close-out periods used to calculate IM at the account level: - two days for Financial Derivatives, Energy (only for Electricity), Cash Equities and Fixed Income segments; - five days for the Energy (only for Natural Gas contracts) and IRDs segments. - These close-out periods are set in line with EMIR. ### Concentration risk and add-ons - BMEC margin models include add-ons for extended close-out periods that increase IM for concentrated positions. - Trigger for concentration add-on: when the number of contracts held in a particular instrument is above the average daily volume (ADV) for that instrument. - Concentration adjustment applies to: equity, IRS, financial derivatives, fixed income, and energy segments. - Methodology to determine add-ons varies by segment; details referenced in Annex 1 (Close-out and Sample Periods). - FSAP notes BMEC had an above average performance with respect to concentration risk in the EU-wide stress test performed by ESMA. ### Historical sample periods (lookback) - CCPs should use at least a 12-month lookback period for calculation of historical volatility. - BMEC’s lookback periods go up to 13 years. ### Fire drills - Frequency and scope: - BMEC performs at least one annual fire drill per segment, simulating the default of a CM. - Hypothetical portfolio chosen to be representative and include at least 15 percent of the overall IM in that segment. - Execution options: - Close-out in the open market; or - Hedge the portfolio and organize a subsequent closing auction (all members of a segment are invited). - Objectives: - Test BMEC procedures, hedging strategy, communication channels with CMs, and CMs’ capacity to provide realistic auction quotes in real time. - Performance: - CCP manages to close the market risk of the portfolio a few hours after declaration of default to return to a matched portfolio. - BMEC participated in the international fire drill scheduled for November 2023. - Participation and governance: - Fire drills are voluntary for all segments except IRDs. - For IRDs, a consultative group of members (diversified by size, exposure, and client type) provides advice on default management and hedging strategy. - CNMV considers exercises satisfactory and EMIR compliant; CNMV participated in a 2022 fire drill and requested procedural and governance enhancements. - Operational note: - BMEC shares a calendar of fire drills at the beginning of the year; CNMV notes fore-knowledge can make results less realistic by allowing members to allocate extra resources ex-ante. ### Default management measures - Measures BMEC may adopt on behalf and at the expense of the defaulter: - Suspend the defaulting member or client. - Immediately restrict registration of new trades of the defaulter. - Execute any trades necessary to reduce unhedged risks. - Close-out the defaulter’s positions. - Transfer or close accounts of clients of the defaulting CM. - Execute posted collateral in whole or in part. - Obtain professional advice or assistance, including mandates to another firm to manage closing-out. - Any other measure required to mitigate risk to BMEC or participants, informing competent authorities. - These measures are described in article 42 of BMEC’s rulebook. ### Stress tests, back tests, and sensitivity analysis - Daily and monthly testing framework: - Daily back tests to validate IM coverage and haircuts. - Daily stress tests to validate the model for determining the DF. - Daily liquidity stress tests to check sufficient liquid resources. - Monthly sensitivity analysis, complemented by reverse stress test. - Scenarios and liquidation periods: - Daily stress tests use the most unfavourable between maximum historical fluctuations and hypothetical price scenarios. - Liquidation periods used mirror IM calculation: up to D+2 for Equities, Financial Derivatives, Electricity and Fixed Income; up to D+5 for Gas contracts and IRDs. - BMEC monitors that the Cover-2 risk is within its risk appetite and regulatory limits. - In cases of extreme volatility, BMEC may require extraordinary individual margins. - Risk Appetite and reporting: - BMEC established a Risk Appetite Framework using Key Risk Indicators (KRIs); the risk appetite is usually below regulatory requirements. - Stress test and back test results are sent monthly to BMEC’s Executive Committee, BME’s Risk & Continuity Committee, and SIX’s Executive Board; daily back testing results are sent to the CCP’s CRO, the CMs and the CNMV at account level. - Back testing details: - Daily back tests compare, for each account, the IM required at close with the largest loss between close on “T” and “T+1”, or between close on “T” and the MPOR for the segment. - If back testing shows insufficient coverage, BMEC reviews model parameters (granularity, frequency of adjustment of offsetting parameters, variability vs latest review, differences in volatility variation across expiries). - CEO and/or CRO notify the Board of proposals from the Executive Risk Committee; CEO may increase margin parameters at end of session with immediate effect if coverage falls below minimum regulatory requirement (decision reported to CNMV and the Board). - CRO will review immediately and inform Executive Committee when IM model shows excesses, specifically: - fluctuation of an underlying surpasses its IM interval three times within three consecutive days; or - two times within two consecutive days for an amount greater in absolute terms than EUR 1 million each day if not caused by a deficit in the IM interval. - Sensitivity and reverse stress tests: - Monthly sensitivity analysis selects portfolios from CMs most exposed; assesses coverage under realised and hypothetical stressed market conditions. - Sensitivity analysis includes correlations, monthly frequency, and a wrong-way-risk scenario where a CM defaults and the securities issued by that CM fall in value by -100 percent. - Liquidity reverse stress tests determine conditions under which liquid resources would become insufficient. - Reverse stress tests analyze exhaustion of resources by: increasing number of CMs defaulting simultaneously; or stressing parameters to more extreme levels from the sensitivity scenario starting point. - Results are reported to the CCP’s CRO for validation and disclosed to the EMIR Risk Committee. ### Review, validation, and model change governance - Material changes to margin methodology require authorization and independent validation: - Implementation upon authorization by CNMV and ESMA, in consultation with the College of Supervisors (CoS) of BMEC. - CCP must submit independent validator report including self-assessment and EMIR compliance analysis. - CNMV and ESMA conduct risk assessments and share reports with CoS; college votes to approve or reject change. - If urgent, validation can be performed after implementation. - Fast-track and exceptional approval: - Under exceptional circumstances CNMV, with ESMA, can approve material changes before full authorization (EMIR article 49.1e). - Example: November 2021 BMEC identified excesses in back testing and introduced a more conservative calibration for IM; implemented in two and a half months using a fast-track process requiring post-implementation full validation; ESMA Board of Supervisors approved in March 2023. - FSAP team notes a further streamlined fast-track process that allows urgent implementations in a couple of weeks would be beneficial for prompt conservatism. ### Thematic review — Energy segment (Box summary) - Context: - Energy markets experienced high volatility starting in Q42021, peaking from February to August 2022; war in Ukraine added to extreme fluctuations, especially electricity and natural gas prices. - BMEC clears derivatives contracts on electricity and natural gas. - CNMV supervisory focus in 2021–2022: - Risk management measures to address credit exposures and liquidity strains. - Coverage capacity of the margin model. - Coverage capacity of the DF and the SITG resources. - Concentration risk in the energy segment from CMs and clients perspective. - Creditworthiness of most active members. - Additional measures adopted by BMEC (some still in place): - Intra-day stress test calculations with additional requirements to CMs depending on results (previously only end-of-day stress test). - 50 percent reduction of the credits granted to CMs related to their solvency score. - Implementation of a 50 percent risk appetite level in the Cover-2 ratio, with additional margins requested if the ratio approaches the 50 percent level. - Introduction of voluntary margins proposed in March 2022 allowing CMs to deposit additional margins to cover client positions to reduce frequency of margin calls; measure still in place. - Outcomes and member feedback: - No breach on DF coverage since December 2022 after measures; CNMV considers measures effective to reduce credit risk and enhance intra-day risk management. - CMs and clients satisfied with CNMV and BMEC management and transparency; smaller clients more affected operationally by increased margins. - At BMEC only financial counterparties (per EMIR definition) can become CMs, which improved capacity to respond to intraday margin calls. - Some smaller client entities faced operational challenges responding to intraday margin calls. ### Strengths identified - CNMV’s supervision: - CNMV performs rigorous controls and thorough reviews of BMEC’s risk management; CNMV staff have deep understanding of margin models. - Continuous dialogue between CNMV and BMEC on changes and enhancements. - Conservatism and compliance: - In certain aspects BMEC’s IM model applies more conservative requirements than EMIR (e.g., longer close-out periods or higher confidence levels for some segments). - According to CNMV’s Supervision Department, BMEC complies with EMIR and PFMIs and has mechanisms to test margin model robustness through daily stress tests, daily back tests, daily liquidity stress tests, and monthly sensitivity analysis with reverse stress tests; results are shared with CNMV. *Source: Excerpt from the BMEC/CNMV supervisory review as presented in the provided IMF document.* ### 105. The CNMV takes a proactive role in the supervision of BMEC’s margin model. In the ### 1espea2024007-print-pdf - 105. The CNMV takes a proactive role in the supervision of BMEC’s margin model. In the ### Supervision of BMEC’s margin model — Findings - The CNMV took a proactive role in supervision and, in the past two supervisory cycles: - conducted several thematic reviews; - participated onsite in the 2022 fire drill; - conducted a deep-dive assessment of BMEC’s crypto-initiative; - reviewed APC measures, margin practices in the energy segment, and BMEC’s participation requirements. - Transparency: - BMEC provides a significant amount of information to the authorities and to its participants. - A diverse sample of CMs considered BMEC as “transparent”. - The CNMV, with all the data it receives, is able to replicate BMEC’s calculations and, when a divergence arises, BMEC provides the CNMV with the templates for calculation they use to facilitate the CNMV’s reconciliations. ### Supervision of BMEC’s margin model — Challenges - Implementation lags: - Changes requested by the CNMV are not always implemented in timely fashion; some recommendations are addressed timely, others will only be fully implemented in the future. - Example: changes on how BMEC accounts for concentration and wrong-way risk in some segments will only be effective after all clearing segments have transitioned to the HVaR model. - Example: the thematic review on APC measures (CNMV 2021) concluded some aspects merited strengthening; the APC framework for consumption and replenishment rules for the APC buffer was addressed, but other APC aspects signaled by the CNMV in 2021 are yet to be implemented. - Note in source: BMEC has presented to the CNMV the metrics they intend to use for such adjustments; BMEC did not implement them, as they await the publication of a forthcoming EU delegated act that might impact any adjustments performed; the future is uncertain and there is no clarity on when or if that delegated act will be adopted in the near term. - Partial adoption of best practices: - Rotation of independent validators of the margin models recommended by the CNMV was applied only partially (to the energy segment but not the other segments). - Standards and disclosure gaps: - Some international standards in the PFMIs regarding sensitivity analysis may have been overlooked by BMEC and the CNMV; Principle 6 of the PFMIs (see 3.6.15) states that the results of the sensitivity analysis should be disclosed to CCP members. - Controls and documentation: - Certain controls, even if they work well, are not fully documented, standardized, and automated. - All details in the procedures to manage a default should be properly documented. - Assessment of procyclicality of BMEC’s margin requirements and the credit worthiness of CMs should be more standardized. - Inconsistent implementation of risk methodology enhancements: - Some enhancements to integrate wrong-way risk into the model, instead of covering it as an add-on, apply only to segments that use the HVaR model. ### Supervision of BMEC’s margin model — Recommendations - The CNMV should undertake follow-up supervisory action targeted at ensuring implementation of its recommendations in timely fashion. - Implementation lags are long in some cases and the CNMV should consider follow-up corrective supervisory actions where appropriate. - Examples of outstanding items: 2021 thematic review APC recommendations; adoption of concentration and wrong-way risk measures as part of BMEC’s risk model; rotation of independent validators — these do not yet apply to all segments. - The CNMV should encourage BMEC to complete the migration to the new HVaR model, where BMEC has implemented further enhancements to make the model more robust and efficient. - The CNMV should require BMEC to disclose to CMs the results from the sensitivity analysis, as noted in the PFMIs. - The CNMV is encouraged to require that all relevant BMEC risk management policies and procedures are adequately documented, especially: - procedures for default management, including procedures, governance, lines of responsibility and accountability, and the auction mechanism for all segments. - The CNMV should review and ensure that proposed changes to BMEC’s margin model resulting from adoption of methodologies and models designed by SIX group are aligned with its own requirements and BMEC’s objectives. - New systems to be imported from SIX should be thoroughly reviewed by the CNMV in its capacity of direct supervisor. - The CNMV should ensure that BMEC continues enhancing its internal system to assess CMs’ credit worthiness. ### Crisis management — Recovery and resolution framework (overview and CNMV role) - Regulatory background: - In December 2020, a European framework for the recovery and resolution of central counterparties (CCPRRR) was adopted. - The CCPRRR provisions related to resolution entered into force on August 12, 2022 and progressively entered into application between February 11, 2021 and February 12, 2023. - The CCPRRR requires designation of a national resolution authority (NRA) and creates Colleges of Resolution (CoRs). - CNMV responsibilities and organization: - The CNMV (Resolution Unit) is the NRA designated in Spain for the resolution of FMIs. - The CNMV created the Resolution Unit in 2015; the Unit is integrated into its Policy and International Affairs Directorate-General and is independent from supervisory functions. - The Resolution Unit is staffed with four people, with experience and technical capacity in resolution of financial entities and 1.5 fully dedicated equivalent staff members to BMEC resolution duties. - International coordination and preparatory work: - In 2017, BMEC was identified as a systemically important CCP in more than one jurisdiction by the CPMI-IOSCO; the CNMV extended the scope of the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions to BMEC. - In 2019, the CNMV approved creation of BMEC’s Crisis Management Group (CMG). - Since 2019 the CNMV has worked on resolvability analysis following FSB Guidelines on CCP resolution; in 2021 BMEC CMG members signed a confidentiality agreement including cross-border cooperation. - The CNMV performed analysis of available financial resources and shared it with the CMG and the fmiCBCM group of the FSB. - Status of resolution planning: - The CNMV is still working on the preparation of the CCP resolution plan; analysis will focus on identification of critical functions and preliminary characterization of possible resolution strategies. - Planned CNMV actions include organizing an internal seminar, developing a playbook, performing a resolution drill, and digitalizing processes for obtaining information and managing BMEC’s resolution plans. - The CNMV reported being on track in preparatory work relative to peer authorities. - College of Resolution (CoR): - The CNMV is finalizing BMEC’s CoR setup, including authorities from countries whose competence would be affected by a CCP failure, including non-EU authorities. - The CNMV identified CoR members and plans to have the CoR established in January 2024. - The first meeting of the BMEC CoR was expected to take place in Q4 2023. - CoR functions include: - Exchange information relevant for drawing up resolution plans, including systemic impact and application of preparatory, preventative measures and resolution; - Draw up resolution plans; - Assess resolvability of CCPs; - Identify, address, and remove impediments to resolvability; - Coordinate public communication about resolution plans and strategies. ### BMEC’s recovery plan — Submission and review - Timeline and compliance: - BMEC submitted a recovery plan to the CNMV in October 2022. - Due to several deficiencies, the CNMV (acting as the NRA) requested a thorough review and a revised submission. - The plan was submitted to the supervisory college and to the NRA; the NRA reviews the plan and issues recommendations to the supervisory authority if issues are detected. - Several deficiencies were identified, including ten material deficiencies related to the lack of resolution scenarios and detailed procedures. - The plan was deemed non-compliant with the CCPRRR and related guidance. - BMEC submitted a revised plan in May 2023 with deficiencies amended; it was approved with some additional (non-material) recommendations by the CNMV in its role as supervisor, the BMEC CoS, and the CNMV in its role as NRA. - The additional recommendations should be implemented before the next annual review. - Review frequency and governance: - Recovery plans are reviewed on at least an annual basis, and whenever the CNMV or the Executive Risk Committee considers it relevant. - The plan needs review whenever there are significant changes to any of the CCP’s critical services and in other events prescribed by the CCPRRR. - Any update needs to involve BMEC’s CRO, the Chief Operations Officer and the Chief Compliance Officer and must be submitted to BMEC’s Executive Committee for feedback before submission to BMEC’s Board of Directors. - If BMEC’s Board decides to ignore the Executive Committee’s advice, it must inform the CNMV of the reasons. - Significant changes are submitted to the CNMV, who in turn submits them to the CoS for approval. ### BMEC’s recovery plan — Scenarios covered - General: - BMEC’s recovery plan considers a broad range of scenarios, going beyond the default of the two CMs to which the CCP has the largest exposures, under extreme but plausible market conditions. - The recovery plan covers scenarios from default events, non-default events and combinations of both, under severe distress. - Examples include losses from the CCP’s investment activities and operational problems such as severe external threats or cyber-related incidents. - Default event scenarios: - Causing financial losses that propagate through BMEC’s default waterfall with return to a matched book (through voluntary market-based tools). - Causing financial losses that require use of mandatory rules-based arrangements to re-establish a matched book: - BMEC clears different asset classes in a total of five different segments; this scenario is divided into two with different risk factors considered. - First scenario: mainly affects the Equities segment, where the three largest CMs default, impacting the financial derivatives and energy segments. - Second scenario: affects exclusively the energy segment, where the outcome of a voluntary auction is insufficient to cover losses. - Causing a liquidity shortfall: - Focus on a default event that causes a liquidity shortfall that exceeds business-as-usual liquidity management tools. - Scenario relates to an economic downturn in a specific European country where some main CMs are located, leading to joint default of several (more than two) CMs, including firms in the same company group, depleting BMEC’s liquid resources. - Non-default event scenarios: - Preventing BMEC from performing critical functions: - Representative event: critical system outage affecting trade novation, risk management and collateral management. - Outages in data centers may stem from external events, failures, manual intervention, etc. - Scenario requires starting BMEC’s critical systems on the secondary Data Processing Center (DPC); to compound the full recovery scenario there must also be failure on the secondary DPC. - BMEC is considering the setup of a third DPC offline. - Causing financial losses: - Two scenarios where a non-default event causes financial losses to either the CCP or the CMs from investment losses and a cyber-crime and treasury fraud scenario. - Causing a liquidity shortfall: - Scenario focuses on collusion of an employee enabling withdrawal of a huge amount of cash from BMEC’s cash account in TARGET2, funds redirected to a third-party bank account, leaving BMEC without enough funds to fulfill obligations (e.g., return collateral). - Combined default and non-default event scenarios: - Causing simultaneous default and non-default losses (internally referred to as the “game over”): - Mixes a default event in the Financial Derivatives segment where the three largest CMs default under very adverse market circumstances, together with a non-default losses event where the two largest CMs (defaulted) are also counterparties to BMEC in reverse repo transactions carried out by BMEC for investment purposes. - BMEC assesses how different paths of loss propagation are simultaneously handled for default and non-default losses. ### CNMV assessment of the recovery plan - The CNMV is satisfied with the severity of scenarios and the indicators included in the recovery plan, deeming them compliant with the FSB guidance and the CCPRRR. - The recovery scenarios cover all relevant types and sources of risk that may severely affect the financial soundness or operational viability of the CCP and create extreme but plausible stress situations. - Example of conservative coverage: BMEC includes a scenario where a third party providing critical services or another linked FMI fails, even if not required by the CCPRRR framework nor the FSB guidance. - The CNMV performs checks on indicators that should trigger recovery plan actions: - early warning indicators for recovery actions; - indicators that signal the move from business-as-usual risk management to the recovery phase; - indicators that signal usage of specific recovery measures. *Source: 1espea2024007-print-pdf* ### 129. For the purpose of implementing the recovery plan, BMEC holds an amount of eligible ### Recovery Framework—BMEC ### Capital, liquidity, and pre-positioned resources - BMEC holds an amount of eligible capital in highly liquid assets and cash that is well above the minimum requirement. - The FSAP team was given evidence that BMEC’s total capital is substantially above the applicable regulatory and PFMI requirements. - BMEC has a provision of capital allocated for the skin-in-the-game (SITG) and for the second SITG (SSITG). - The CCP needs to have own resources to cover at least a minimum of six months of its gross operational expenses. - CNMV supervises—at least annually, but usually on a quarterly basis—that the CCP’s own resources meet these capital requirements. - According to the CNMV, the sum of margins from the defaulting members, DF contributions and BMEC’s equity would be sufficient to cover losses in case any of the scenarios described in the recovery plan materialize. - BMEC holds at least 25 percent of its gross operational expenses to cover for business risks as of end-March 2023. - The CCP’s total own resources are by law separated from cash and assets from its clearing members and clients. ### Identification of critical functions and interdependencies - BMEC identified its ‘critical functions’ using FSB guidance and the CCPRRR, considering expected revenues, expected profitability, number of CMs by segment, country of residence and market share. - Critical segments identified: Financial Derivatives and Equities. - Recovery plan considers links with: - other FMIs; - CSDs and SSSs (IC, Clearstream Banking Luxembourg, Euroclear Bank SA/NV, and SIX SIS (part of the SIX Group)); - Trading Venues; - Payment systems and other platforms (providers of information and market data, collateral management, securities providers, messaging systems, etc.). ### Portability, onboarding, and alternative arrangements - Recovery plan analyses suitability of transfers to alternative CCPs but highlights complexity of portability. - Portability depends on existence of other CCPs clearing the same instruments; some products (e.g., derivatives on IBEX35) are only cleared at BMEC and have no alternative. - An onboarding process for a CM could take up to 12 months. - A large percentage of contracts have a maturity shorter than six months (the established period for which BMEC has resources to continue functioning) which supports the recovery strategy. - Preparatory work is paramount for portability; CNMV has yet to determine whether it would consider transferring functions to another CCP in resolution to ensure continuity of critical services. ### Emergency separation and divestment arrangements - Recovery plan includes an “Emergency separation plan” following ESMA guidance to separate assets as stand-alone for divestment to a third party; discusses M&A and separation steps. - Success of the emergency plan depends on interoperability across CCPs and capacity of CMs to connect (be on-boarded) to the receiving CCP. ### Recovery options and tools (when regular risk management is insufficient) - SSITG (CCP own resources). - Cash calls for additional contributions to the DF. - Cash calls and VM haircutting for the continuity of services. - Voluntary margins. - Non-default losses allocation. - Tear-up of positions (full or partial). - Substitution of pledge collateral by title transfer collateral. ### Default waterfall — pre-funded resources (first stage) - Enforcement of all the IM held by the defaulting CM to the extent not yet executed and used to obtain the net balance. - Execution of (i) the individual funds for each segment and (ii) extraordinary margins posted by the defaulting CM, if any. - Enforcement of the defaulting CM’s pre-funded contribution to the DF of the segment(s) in which the member operates. - SITG: BMEC will bear, against its own resources, the losses equivalent to the part specifically allocated to the segment(s) in which the default occurred. - Enforcement of the non-defaulting members’ contributions relating to the segment(s) in which the default caused losses. - SSITG: additional layer of capital that exposes the CCP’s capital before relying on further contributions from CMs and shall be used before any recovery arrangements; covers losses arising from default(s) and nondefault losses. ### Default waterfall — non-pre-funded resources (second stage) - Additional contributions to the Default Fund—Cash calls: - Maximum aggregate amount that the rest of CMs can be asked to replenish shall be twice the amount of their contribution, prior to the declaration of the default, and for a period of 90 calendar days starting on the day of the default. - Contribution for the service continuity—cash calls: total maximum amount of the contribution is up to one time the original Default Fund contribution. - Contribution for the service continuity—VM gains haircutting: similar to the cash-call service-continuity contribution but handled through VM gains. - Voluntary margins. - Remaining free capital. - Tear-up tool: objective is to establish a matched book in case of a significant CM default event after voluntary or market-equivalent measures have failed. ### Liquidity-specific measures - Under normal business circumstances (not in recovery), BMEC may temporarily use margins from non-defaulting CMs, provided margins are promptly returned if required. - In recovery, BMEC could substitute pledge collateral by transfer of title collateral; mandatory substitution to title transfer (rehypothecatable) is activated when other recovery measures are depleted and no other liquidity-generation alternative exists. ### Allocation of non-default losses from investments - BMEC distinguishes two types of losses not caused by a participant default: non-default losses from investments and other nondefault losses (business, operational, legal, force majeure). - Recovery phase waterfall for non-default losses from investments (order of absorption defined in BMEC’s Rulebook): - SITG. - Allocation of 80 percent of the investment losses to CMs, up to of EUR 32 million. - SSITG. - Allocation of 20 percent of the investment losses to CM, up to EUR 8 million. - Equity: BMEC shall assume the uncovered losses against its remaining own resources, excluding the regulatory capital and other own resources other than the liquid net assets funded by equity. - Note: the 80 percent and 20 percent allocation applies only to CMs that previously agreed to invest their margins (for which they are remunerated by the CCP). CMs that do not allow BMEC to invest their margins do not contribute to the 80 percent and 20 percent allocation. ### Recovery phase waterfall for other non-default losses - Order of priority in the absorption of losses defined in BMEC’s Rulebook: - SSITG. - Equity: BMEC shall assume the uncovered losses against its remaining own resources, excluding the regulatory capital and other own resources other than the liquid net assets funded by equity. ### Insurance and group arrangements - BMEC could access operational risk insurance policies of SIX which provide coverage for all subsidiaries; policies cover losses from fraud cases, civil liability claims and cyber risk. Exact amount and applicability decided case-by-case. - BMEC is part of SIX group; cooperation with FINMA is required for cross-border testing and recovery planning. ### IC (Iberclear) recovery framework—highlights - CNMV reviews IC’s recovery plan annually; BdE participates in the review as a relevant authority. - IC must also maintain a business continuity policy and a disaster recovery plan; plans may include a second processing site. - IC’s recovery plan: - Trigger: any losses that would reduce IC capital under 110 percent; trigger reviewed monthly and reported to the Risk Committee. - Scenarios include failure of significant counterparties, reputation damage, severe liquidity outflow, adverse asset price movements, severe credit losses, severe operational risk loss, failure of significant counterparties affecting financial stability, decreased interbank liquidity, increased country risk and generalized capital outflow, adverse asset price movements across markets, and a macroeconomic downturn. - Scenarios are tested in combination. - IC considers transfer of securities to alternative licensed CSDs under the CSDR regime in a recovery situation; finding alternative arrangements is complex and would benefit from peer-authority discussion. - IC’s tools to replenish financial resources: capital increases (subscribed by ultimate shareholders BME Holding or SIX Group) or sale of part of its investments (without affecting critical services). - IC holds separate resources to cover business risk amounting EUR 10.4 million as of end of March 2023. - CNMV considers IC’s liquidity shortfall risk reduced because IC does not hold positions or provide banking services and maintains capital in cash or highly liquid financial instruments. ### Strengths, challenges, and actionable implications - Strengths: - Reasonable level of preparedness for CCPRRR; CNMV applied FSB Key Attributes and set up a CMG for BMEC. - Rigorous supervision: CNMV reviewed BMEC’s recovery plan, identified deficiencies that BMEC addressed. - Severity and diversity of scenarios covered, including default and non-default events and combinations. - Range of recovery options and tools available (SSITG, cash calls, VM haircutting, voluntary margins, non-default loss allocation, tear-up, collateral substitution, insurance). - Challenges: - Cross-border group membership requires intensified international cooperation (CNMV and FINMA). - Finding alternative arrangements/portability is complex given lack of interoperability across CCPs and lengthy onboarding (average from 9 to 12 months); practical challenges for transferring critical functions in resolution. - Implication: preparatory work with potential alternative CCPs, counterparties, and supervisory peers is paramount to improve deployability of portability and separation options. *Source: Excerpt from IMF assessment of recovery and resilience arrangements for BMEC and IC as presented in the provided content unit.* ### 159. The authorities in charge of the resolution of the CCP and of CMs are different, and ### 159. The authorities in charge of the resolution of the CCP and of CMs are different, and that will require coordination. ### Coordination, CoR, and implementation status - The CoR is yet to be established. - The CCPRRR was adopted recently and the CNMV and its resolution unit are in track with its implementation. - From discussions with ESMA the FSAP team was made aware that the timeline designed by the CNMV is adequate and aligns with their peers. ### Recommendations—BMEC - Joint recovery exercises with FINMA. - Encourage the CNMV to coordinate with FINMA to test the recovery plan of BMEC in combination with contingency plans of other entities belonging to the SIX group. - The SIX Group organized a joint fire drill exercise where different entities within the group or critical services providers defaulted. The CNMV and FINMA should participate in these exercises in the future. - Ensure deployability of recovery tools and assess transfer of functions. - The CNMV should ensure that all tools currently identified in the recovery plan can be deployed in a timely fashion. - In its role as NRA when finalizing the resolution plan, the CNMV should assess whether in resolution it would be necessary to consider the transfer of functions to another CCP to ensure the continuity of critical services. - If necessary to ensure continuity of the FMI’s legal and technical arrangement, the CCP and resolution authority should: - (i) identify potential alternative provider, - (ii) consider in advance the potential technical and legal barriers to the transfer of activities and seek to address them, and - (iii) provide for advance agreement with other FMIs or relevant service providers. - Preparatory efforts from BMEC and the NRA may help to advance interoperability and connections across CCPs that can facilitate continuity in case BMEC faces a recovery or resolution situation. - More interoperability across SIX FMIs could also be explored. - CNMV is encouraged to intensify engagement with peer authorities, supervisors of CCPs that could potentially onboard BMEC’s critical functions, as part of a forward-looking exercise. - One possible approach: raise a discussion on how to ensure alternative arrangements among CCPs’ supervisors who might have similar concerns. - Communication with Clearing Members (CMs). - CNMV should communicate with CMs to raise awareness about their resolution work, the scope of the CoR, and the coordination in place with the CMs’ resolution authorities. - While relevant national and international authorities (e.g., FROB, BdE, FINMA, SRB, ECB, ACPR, etc.) are all members of the CCP’s CMG (and expected to become members of the CoR when it is established), there is room to strengthen key aspects of communication of financial crisis coordination arrangements to CMs and their clients. - Industry feedback indicated significant benefits from raising awareness and disseminating information about the level of preparedness and coordination across relevant resolution authorities, including of the CCP and the clearing members. - Examples of useful communication on a regular basis, also during peace time: - disseminating information of the meetings of BMEC’s CoR, - information about the protocols that will be in place for coordination between CMs’ resolution authorities (at EU and at national level) and the CoR. ### Strengths—IC - Regular reviews. - The recovery plan of IC is annually reviewed and the CNMV staff has a good understanding of its content and of the updates in the information provided from year to year. ### Challenges—IC - Cross-border group complexity. - IC is part of a cross-border group (SIX group), supervised by FINMA, requiring intensified international cooperation and close cooperation between the CNMV and FINMA in testing recovery plans for the group entities. - Portability and interoperability. - Finding alternative arrangements in case the CSD faces a recovery situation entails complexity. - IC’s recovery plan fulfills the CSDR requirements, however, portability of assets to an alternative CSD is an aspect where further work will need to be done to clarify the viability of such portability in an environment that lacks interoperability across different FMIs. - This issue is not exclusive to IC, but to all CSDs that need to comply with such requirement. - Preparedness for CSDR Refit implementation. - The CNMV needs to be prepared for the adoption of new governance structures and new responsibilities that will come under CSDR reviewed text. ### Recommendations—IC - Joint recovery exercises with FINMA. - Encourage the CNMV to coordinate with FINMA to test the recovery plan of IC in combination with contingency plans of other entities belonging to the SIX group. - The SIX Group organized a joint fire drill exercise where different entities within the group or critical services providers defaulted. The CNMV and FINMA could participate of these exercises in the future. - Ensure deployability of recovery tools and advance interoperability. - CNMV should take further steps to ensure that all tools currently listed in the recovery plan can be deployed in a timely fashion. - Preparatory efforts would help to advance on interoperability and connections across CSDs to facilitate transfer of business to alternative CSDs. - A higher degree interoperability across SIX FMIs could also be explored. - CNMV could intensify engagement with peer authorities supervising CSDs that offer IC’s services to prepare and better coordinate for a hypothetical situation where IC’s business should be transferred to an alternative CSDs. - This might be especially relevant in the case of IC, compared to BMEC, given that there is no CoR envisaged for the CSD. - One possible approach: raise a discussion on how to ensure alternative arrangements among CSDs’ supervisors who might have similar concerns. - Improve recovery plan narrative. - CNMV should encourage IC to improve the narrative of recovery plan. - The narrative of the plan is not as clear as desirable. - Aspects such as the impact of the different scenarios and the result of combining them should be more clearly presented. ### Annex I. IM Parameters and Add-Ons — overview by segment - Financial derivative instruments on equity: - BMEC uses the MEFFCOM2 model considering the price interval risk factor as well as the implied volatility factor, and the model takes the worst case. - Model parameters include a confidence level of 99 percent and an offset limit to portfolio margining up to 70 percent (only for highly correlated instruments, see sub-section on Portfolio margining). - Model includes liquidity add-on and concentration add-on. - Liquidity add-on calibrated at 99.9 percent; concentration add-on to cover positions with a higher volume than the AVD. - Rolling FX contracts (financial derivative instruments): - BMEC uses the HVaR model calibrated at a confidence level of 99 percent, combined with the expected shortfall calibrated at a 99.28 percent. - Parameters include an offset limit to portfolio margining up to 80 percent, an IM floor, an IM buffer to account for an adjustment for calendar bank holidays (in case the settlement occurs later than in two days), and a solvency multiplier according to the internal rating of the participant. - Model includes liquidity add-on and concentration add-on. - IRDs: - BMEC uses the HVaR model calibrated at a confidence level of 99.65 percent, combined with the expected shortfall calibrated at a 99.82 percent (the model uses the worse result from the two calculations). - Model applies a multiplicative parameter (from 1 to 1.8) based on the internal score the CCP gives to each CM’s credit worthiness. - The concentration add-on applies and is calculated based on a survey the CCP launches among the segment’s CMs, where CMs provide the cost of different IRD’s buckets. - Cash equity: - BMEC uses the MEFFCOM2 model with several position balances (current trades, failed settlements, shares held to be delivered, corporate instructions, cash). - Margin cannot be offset across different balances. - VM is considered as part of the IM model (and they offset) for cash securities. - Model considers the price interval risk factor and the inter-commodity spread credit risk. - Liquidity add-on and concentration add-on apply. - Fixed income (repos): - BMEC uses the MEFFCOM2 model with five position balances and margin cannot be offset across different balances. - Margin parameters are set by tranche. - Liquidity add-on and concentration add-on apply. - There is a wrong-way risk add-on: a risk premium applied to sovereign government bonds if the issuer’s risk is higher than a certain threshold. - Energy segment: - BMEC uses the MEFFCOM2 model with parameters such as a confidence level of 99.5 percent and a close-out period of five days for future contracts on gas, and a confidence level of 99 percent and a two-day close-out period for futures and forwards on electricity. - No portfolio margining between gas and electricity contracts; VM and IM can be offset. - Model considers spread risk; liquidity add-on and concentration add-on apply. - Products linked to crypto assets: - BMEC uses a MEFFCOM2 model combined with the expected shortfall. - Model incorporates conservative calibrations, in some cases beyond minimum EMIR requirements for similar products. - Model relies on continuous monitoring of positions for each trading day, and margin calls follow a specific calendar for this segment. ### Sources of Price Data and Price Estimations - When pricing data is unavailable or deemed unreliable, the CCP employs a methodology to estimate prices for calculating margin requirements. This methodology is documented and reviewed by the CNMV as part of their duty to produce a review and evaluation report. - Methodology tailored to different segments: - Financial derivatives, newly listed securities with no lookback period: - IM calculation relies on average parameters derived from instruments within the same economic sector that exhibit similar levels of floating capital. - Methodology incorporates a liquidity factor adjustment to account for extended close-out periods and concentrated positions. - Holding period adjustment determined by the frequency with which a position exceeds the average daily trading volume. - Fixed income, maturities lacking time series (example: Spanish 50Y sovereign bond): - CCP bases estimation on baskets of eligible assets with corresponding maturities. - Example: leverage yield changes observed in the 30-year benchmark bond, assuming changes would be similar to hypothetical benchmarks with maturities exceeding 30 years. - Use historical volatility of the 30-year benchmark as a basis, amplified by the increased sensitivity. - New asset classes: - Initially rely on external data sources for estimating risk factors used in IM calculations (case for new energy contracts introduced in the past, and forthcoming products linked to crypto-assets). - Once cleared, data transitions to real data sourced from trading venues; CCP monitors transition to prevent abrupt jumps in risk calculations. - CNMV considers transition process for new energy products and the framework for estimating prices worked well in the past. - Regarding products linked to crypto-assets, CNMV asked the CCP to introduce adjustments: - account for the liquidity factor and better calibrate parameters as BMEC initially used CME reference data. - BMEC adopted a more prudent projection for the new segment. - BMEC agreed to collect real spread data and to add a method to capture the liquidity factor more accurately. ### Close-out and Sample Periods - Annex I. Table 1. Spain: Increase of Margin Percentage for Large Positions (Equity, F. Derivatives and Fixed Income Segments; Energy Segment) — structure preserved as in source: - Equity, F. Derivatives and Fixed Income Segments: - Up to 1: Close-out Period (days) 2; Increase of Margin Percentage 0 - Between 1 and 1.5: Close-out Period (days) 3; Increase of Margin Percentage 22 - Between 1.5 and 2: Close-out Period (days) 4; Increase of Margin Percentage 41 - Between 2 and 2.5: Close-out Period (days) 5; Increase of Margin Percentage 58 - Between 2.5 and 3: Close-out Period (days) 6; Increase of Margin Percentage 73 - Between 3 and 3.5: Close-out Period (days) 7; Increase of Margin Percentage 87 - Between 3.5 and 4.5: Close-out Period (days) 8; Increase of Margin Percentage 100 - More than 4.5: Close-out Period (days) 9; Increase of Margin Percentage 112 - Energy Segment (Electricity and Gas delineation preserved): - Up to 0.75: Close-out Period (days) for Electricity Products 2; Close-out Period (days) for Gas Products 5; Increase of Margin Percentage 0 - Between 0.75 and 1: Close-out Period (days) for Electricity Products 3; Close-out Period (days) for Gas Products 7.5; Increase of Margin Percentage 22 - Between 1 and 1.5: Close-out Period (days) for Electricity Products 4; Close-out Period (days) for Gas Products 10; Increase of Margin Percentage 41 - Between 1.5 and 2: Close-out Period (days) for Electricity Products 5; Close-out Period (days) for Gas Products 12.5; Increase of Margin Percentage 58 - Between 2 and 2.5: Close-out Period (days) for Electricity Products 6; Close-out Period (days) for Gas Products 15; Increase of Margin Percentage 73 - Between 2.5 and 3: Close-out Period (days) for Electricity Products 7; Close-out Period (days) for Gas Products 17.5; Increase of Margin Percentage 87 - Between 3 and 3.5: Close-out Period (days) for Electricity Products 8; Close-out Period (days) for Gas Products 20; Increase of Margin Percentage 100 - More than 3.5: Close-out Period (days) for Electricity Products 9; Close-out Period (days) for Gas Products 22.5; Increase of Margin Percentage 112 ### APC Measures and procyclicality (Article 28 of the Margins RTS) - Article 28 options to limit procyclicality (text preserved verbatim where quoted): - A CCP shall ensure that its policy for selecting and revising the confidence interval, the liquidation period and the lookback period deliver forward looking, stable and prudent margin requirements that limit procyclicality to the extent that the soundness and financial security of the CCP is not negatively affected. This shall include avoiding when possible disruptive or big step changes in margin requirements and establishing transparent and predictable procedures for adjusting margin requirements in response to changing market conditions. In doing so, the CCP shall employ at least one of the following options: - applying a margin buffer at least equal to 25 percent of the calculated margins which it allows to be temporarily exhausted in periods when calculated margin requirements are rising significantly; - assigning at least 25 percent weight to stressed observations in the lookback period calculated in accordance with Article 26; - ensuring that its margin requirements are not lower than those that would be calculated using volatility estimated over a 10-year historical lookback period. - When a CCP revises the parameters of the margin model in order to better reflect current market conditions, it shall take into account any potential procyclical effects of such revision. - BMEC practice: - BMEC uses a combination of these three measures depending on the products it clears in the different segments. *Source: Extracted content from the provided IMF PDF chapter/section.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024007-print-pdf.pdf_