## 1. Summary of Observance of CPSS/IOSCO Recommendations

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### Recommendation 1 — Legal basis, enforceability, and asset protection
- Accessibility
  - Rules and regulations governing Monte Titoli (MT) are public and accessible; participants receive comprehensive documentation; documentation available on request and accessible on MT Web site.
  - Public authorities’ regulations available in Italian and English on Banca d’Italia (BI) and Consob Web sites.
- Legal foundation (main laws and regulations cited)
  - Legislative Decree 58/59 “consolidation Law on Financial Intermediation” (“TUF”)
  - Legislative Decree 213/98 on the Euro introduction
  - Legislative Decree 210/2001 implementing the “Settlement Finality Directive”
  - Legislative Decree 170/2004 enacting the “Financial Collateral Arrangements Directive”
  - Consob Resolution No. 11768 of 23 December 1998
  - Decree of the Ministry of Treasury of 17th April 2000 on the central deposit of government securities
  - Bank of Italy Regulations of 8 September 2000; 30 September 2002; 22 October 2002
  - Rules and requirements of MT approved by BI and agreed by Consob
- Enforceability and finality
  - Italian laws and BI/Consob regulations define terms, rights and obligations; Enforceability of netting arrangements ensured by Article 2 of the Finality Decree.
  - TUF Art. 71 ensures finality and irrevocability of payment and securities transfers through designated systems.
- Customer assets protection
  - TUF requires segregation between customer assets and intermediaries’ assets; intermediaries obliged to open omnibus account for customers and separate account for own holdings.
  - Art 39, resolution 11768 requires MT to separate own holdings and participants’ assets.
  - Custodians legally obliged to have internal accounting identifying customers’ holdings.
- Specific topics
  - Dematerialization: Consob resolution no. 11768 (23 December 1998); vast majority dematerialized; all government bonds and regulated-market securities mandatory dematerialized.
  - Securities lending: centralized facility regulated by MT rules; Master Securities Lending Agreement signed by participants; Legislative Decree 170/2004 governs collateralization.
  - DVP: Art. 9, par.4 Clearing and Settlement Regulations; MT rules condition securities transfer on cash availability at central bank participant account.
- Cross-border participation and conflict of law
  - MT has participants from EEA, Switzerland and United States; links to foreign CSDs free of payment.
  - Legal opinions and assessments required for links; ECB and ECSDA analyses referenced.
- Assessment
  - Observed
- Comments
  - Ambiguity noted by a major market participant whether ownership transfer for OTC occurs at trade execution or at settlement; authorities’ wording ties transfer to registration in intermediaries’ accounts.
  - Authorities note ambiguity would not impact insolvency procedures because Art.2, par.1 of the Finality Decree protects transfer orders entered into a designated system.
  - Ambiguity may affect corporate events and tax liabilities.
  - “Express User Group” discussed transfer issue on February 16 2005; EU Legal Certainty Group set up in January 2005 to advise harmonization.

### Recommendation 2 — Trade confirmation and matching
- Transactions on regulated markets: trade confirmation and matching required prior to settlement.
- Express II and RRG
  - All transactions settled by Express II automatically confirmed and matched by Riscontro e Rettifica Gionalieri (RRG); RRG electronically connected to trading system.
  - Straight through processing: 100 percent of trade confirmation between direct participants achieved on T+0 for regulated market transactions.
  - OTC transactions: 90 percent of trades confirmed on T+0.
  - RRG allows confirmation for indirect participants when their positions are settled in Express II.
- Assessment
  - Observed

### Recommendation 3 — Settlement cycles and rolling settlement
- Settlement cycles (rolling basis):
  - Transaction for monetary policy operations: T+0
  - MTS repo transactions: overnight T+0, spot next, T+2, corporate T+3
  - Short term government securities: T+2
  - Equities: T+3
  - OTC trades: negotiable but majority on T+0
- Settlement failures
  - Since Express II start on 8 December 2003 (except first week) failed settlements very small and did not exceed 0.2 percent of total settlement.
- Incentives and measures to reduce failures
  - MT penalties defined but never used; settlement statistics published on MT Web sites.
  - Measures: automated securities lending facility; automated collateralization mechanism; three-step settlement procedures (overnight net, daylight net, RTGS); availability of CCP.
- Cost–benefit and policy
  - Shortening cycles relevant mainly for OTC and possible for equities to less than T+3; Italian authority can encourage but not force changes; ESCB-CESR to initiate cost benefit analysis.
- Assessment
  - Observed

### Recommendation 4 — Central Counterparty (CCP) evaluation and risk control
- CCP activities
  - CC&G established August 1992; manages guarantee fund for equities and acts as CCP on interest rate futures; expanded activities to derivatives linked to equities and other instruments; manages a guarantee mutual fund for TLX market.
  - CC&G and Clearnet provide joint optional CCP services for MTS markets; virtual single CCP model; harmonized pricing, margin and capital methods.
- Netting and protections
  - Netting by open offer; CC&G interposes between clearing members at trade execution.
  - Netting protected by Article 2.1 of the Finality Decree; CC&G notified as designated system as of 2001.
- Financial/operational standards and liquidity risk
  - Comprehensive rules for membership; margins calculated and collected daily with intra-day recalculation.
  - Two default funds (equity market and MTS markets); cash margins and clearing fund contributions settled in central bank money.
  - Liquidity risk management includes preliminary netting, requiring debtors to pay by 9:30 a.m. before creditors paid, and timely requests for additional intra-day margin.
- Assessment
  - (Assessment text for Recommendation 4 not included in provided content.)

### Measures to withstand default / Financial resources (CC&G) [section 4]
- Default coverage
  - Default fund for derivatives and equities covers risks relating to participants’ multiple default of the three largest participants.
  - CC&G to review dedicated default fund amount based on MTS activity and participation.
  - Since start of operation CC&G has not experienced default of general clearing members; defaults of nonclearing members handled by concerned general member per B.6.2.2. of CC&G Rules.
- Financial resources relied on:
  - the margin system;
  - the default fund (determined on the basis of a stress test scenario);
  - committed credit lines;
  - own financial resources.
- Risk assessment and segregation
  - Adequacy assessed periodically by Risk Committee via structured stress tests by Risk Management Department.
  - Margins and funds segregated by destination, may not be used for other purposes or be subject to enforcement.
- Transparency
  - Loss allocation rules established by CC&G and available in Italian and English on CC&G Web site.
- Assessment
  - Observed
  - Comment: CC&G considered compliant with current Recommendation 4 wording; authorities may assess CC&G against new CPSS/IOSCO Recommendations for CCP.

### Recommendation 5 — Securities lending and borrowing
- Institutional and fiscal framework
  - Supported by Italian Civil Code (Art. 1813, Art. 1548) and Legislative Decree on Collateral; fiscal support Dpr n.917 of 1986 modified by d.lgs. n. 344 of 2003.
- Facilities and operations
  - Well developed repo market; bilateral lending by intermediaries.
  - MT centralized securities lending facility to support settlement during overnight and daylight netting; activated in case of securities shortage.
  - MT acts as agent; securities lenders assume credit risk.
  - No broad restrictions on securities/participants though some securities may be excluded.
- Supervision and risk management
  - Facility subject to settlement rules and supervised by BI and Consob; MT provides “White List” for counterparties; MTS repo market regulated by BI.
- Assessment and comments
  - Observed
  - Comments: facility not yet used significantly; market participants noted lack of standardized documentation and recommended MT accelerate legal documentation work; MT committed to propose enhancements.

### Recommendation 6 — Dematerialization and transfer by book entry
- Mandatory dematerialization per Legislative Degree No. 213 of 24 June 1998 for:
  - all securities traded in regulated markets;
  - all securities meeting Consob requirements;
  - all Government bonds.
- Current status
  - About 99.9 percent of securities held by MT dematerialized; remaining 0.1 percent physical certificate (jumbo/global certificates immobilized at MT and transferred electronically).
- Transfer of title
  - MT operates indirect account holding system; transfer of title assigned by registration in intermediaries’ accounts (Legislative Decree No. 213).
  - Art. 41 Consob Regulation No. 11768: MT notifies intermediaries electronically when transfer registered.
  - Art. 89 TUF: intermediaries must send issuers names of persons requesting certification within three days.
- Assessment
  - Observed

### Recommendation 7 — Eliminate principal risk via DVP
- DVP modalities in Express II
  - RTGS and Net Settlement (both cash and securities netted).
  - Cash settlement in central bank money via real time link to BI-REL.
  - Express II RTGS running between 7:00 and 18:00 each business day.
  - Two net settlement batches: overnight between 21.00 on S-1 and 7:00 on S; daylight between 9:30 and 13:00 on S.
- Batch operation and RTGS procedures
  - Net settlement activated only if cash and securities available and blocked; optimization algorithm maximizes settlable transactions; uncovered transactions set aside or forwarded to RTGS.
  - RTGS blocks securities pending cash settlement; positive cash settlement removes block and executes securities transfer.
- Usage statistics
  - Percentage of trades settled by MT on a DVP basis where cash involved: 100 percent.
  - Of total transactions settled by MT, 5 percent settled on free of payment (FOP) basis (participant initiative).
- Assessment
  - Observed

### Recommendation 8 — Timing of settlement finality
- Finality provisions
  - RTGS allows real time finality after DVP execution.
  - Finality timings:
    - overnight batch finality at 7:00 a.m.;
    - daylight batch finality at 1.00 p.m.;
    - RTGS finality for transactions received after 13:00 and same-day delivery needs.
  - Monetary policy operations settled by RTGS with finality throughout the day.
  - Cross-border link transactions settled in real time with immediate finality.
- Revocation
  - Once transfer instruction matched, revocation not possible even if unsettled.
  - Recommendation: reconsider allowing revocation when requested by both counterparties for flexibility; operational workaround exists via opposite-sign instruction.
- Assessment
  - Observed

### Recommendation 9 — Intraday credit risk controls
- Intraday settlement and credit
  - Express II RTGS settles trade-for-trade with immediate finality; settlement fails if participant lacks securities or cash unless eligible for securities lending and/or intraday credit from BI.
  - Electronic link to central bank cash transfer system; collateral required to receive credit from BI; collateralization automated and managed by MT.
  - Investment firms allowed intraday credit from BI per TARGET rules; non-bank financial institutions may obtain collateralized intraday liquidity subject to guarantees and limits.
- Net settlement design and CCP usage
  - Netting activated only when securities and cash available and blocked; transactions excluded forwarded to RTGS.
  - Transactions maintained in system up to 7 days per CCP rules; use of CCP mandatory for equity transactions on Borsa Italiana.
- Overdrafts and optimization
  - Overdrafts or debit balances strictly forbidden; technically not feasible.
  - Express II optimization algorithm identifies optimal subset to settle; extensive stress tests run in October 2003.
- Assessment and comment
  - Observed; Not applicable for Express II RTGS facility.
  - Comment: End-of-day failure slightly higher in value (about 1.2%), low in volume (about 0.35%); MT may strengthen stress testing and fine-tune algorithm to reduce value failures.

### Recommendation 10 — Settlement assets carry little or no credit risk
- Settlement in central bank money
  - Compulsory for euro transactions: Art. 9.1 Clearing and Settlement Regulations (cash leg in euros effected on accounts at Banca d’Italia).
  - For foreign currencies Art. 9.2 allows banks authorized in Italy or EEA as settlement cash agents; currently MT only settles in euro.
- Access to intraday credit and settlement banks
  - Credit institutions or investment firms may become cash settlement agents and open accounts at BI.
  - Intraday credit access unconditional for banks (subject to collateral); for other participants subject to requirements, guarantees, limits; BI may apply penalties.
  - EEA banks can access BI-REL remotely with Capacity Opinion and Country Opinion.
  - Participants not eligible for central bank accounts rely on settlement banks; no MT/BI/Consob specific rules beyond BI prudential supervision.
- Reuse of proceeds and timetable
  - Proceeds usable immediately upon credit.
  - Timetable:
    - at 7:00 a.m. of settlement day for transfers settled by overnight cycle;
    - at 13:00 p.m. for transfers not settled during overnight cycle;
    - in real time for RTGS settlements.
- Assessment
  - Observed
  - Comment: Coordination between BI oversight of settlement systems and banking prudential rules important; BI has interfunctional committee and internal agreement for information exchange in insolvency cases per “Finality decree”.

### Recommendation 11 — Operational risk identification and mitigation
- Controls and governance
  - Senior management responsible; risk management policies formalized; MT maintains a Risk Map.
  - Operational risk monitored via internal controls, insurance, secured access, automated IT controls, application review by Internal Auditing and Internal Users.
  - Procedures and training in place; skill profiles maintained.
- Contingency and disaster recovery
  - MT outsourced IT/daily operation to SIA S.p.A (ISO9000, BS7799 certified).
  - Business Continuity and Contingency Plan (BCCP) and Disaster Recovery Plan (DRP) defined; identifies contingency levels and “survival time”.
  - Continuity Management Group and Emergency Management Committee exist; DRP duplicates procedures/databases and provides real-time duplication on second mainframe; MT can resume operations within maximum period of four hours.
  - DRPs tested twice a year; SIA switches processing monthly between sites; intermediaries do not actively participate in DRP tests currently.
- Security, availability, audits
  - Data communication integrity, authentication, confidentiality, non-reputability measures and firewalls in place.
  - No key system failures historically; average processing resumed within maximum of 3 hours; no transactions/data lost.
  - External IT audit at least once a year; internal auditing reports to supervisory Authorities.
  - Outsourcing agreement includes technical annexes and SLAs; MT monitors SIA compliance in real time; monthly meetings and annual audit.
- Recommendations for full compliance
  - Carry out full-back testing including market participants;
  - Develop and implement a proactive risk analysis methodology;
  - Carry out external audit of disaster recovery and business continuity procedures;
  - Carry out external audit of SIA’s contingency plans and back up facilities.
  - BI and Consob may consider regulation to allow direct access to SIA for supervisory checks.
  - MT participates in Contingency Working Group coordinated by BI.
  - MT to conduct a DRP test in November 2005 including market participants; integrated test with all systemically relevant infrastructures planned by end of 2006.
  - MT’s Board approved external audit for BCCP and SIA contingency plans expected to be completed by November 2005.
  - Authorities drafted guidelines for supervised companies on outsourcing to allow supervisory access.
- Assessment
  - Broadly observed

### Recommendation 12 — Protection of customers’ securities
- Institutional arrangements and segregation
  - Dematerialization reduces custody risks.
  - MT holds insurance policies and a special guarantee reserve of Euro 8 million to indemnify participants for damage due to MT’s negligence or errors.
  - Legislative Decrees No. 58 (TUF) and No. 213, BI regulation of July 1st 1998 and Consob Regulation No. 11768 ensure segregation.
  - Intermediaries required to have separate omnibus accounts for customers; participants may open segregated settlement accounts.
  - In custodian insolvency MT acts per insolvency rules and receiver/trustee orders; may move customer positions to solvent intermediary.
- Reconciliation and supervision
  - Double book-entries ensure mirrored debits/credits; MT checks daily sums coincide with centralized issue balances.
  - Custodians reconcile daily; MT sends opening and closing balances daily; semi-annual external audits on securities account balances; tracers sent on sample basis.
  - CSD supervised by BI and Consob; custodians subject to rigorous regulation, supervision and external audits.
- Assessment
  - Observed

### Recommendation 13 — Governance arrangements
- Ownership and governance
  - Borsa Italiana Group owns 99 percent of MT.
  - MT is private for-profit subject to Italian Civil Code and Consob supervision.
  - Administrative/managerial/control functions subject to integrity and experience requirements (Decree No 471/98).
  - Board of Directors composed of nine members, one Independent Director.
- Public interest, users’ consultation and accountability
  - Art. 3 and 7 Clearing and Settlement Regulations and Art. 82.2 of TUF set public interest obligations.
  - MT maintains relationships with ABI, Assonime, Assosim; Express User Group established for Express II with representative stakeholders.
  - Consultation with users regular; participants invited to share analyses and tests.
- Assessment and comments
  - Observed
  - Comments: Concerns about independence — 7 of 9 board members are managers from Borsa Italiana possibly reducing neutrality and participant influence; recommendation to increase number of independent directors. Authorities indicated Borsa Italiana agreed to increase independent directors when existing Boards expire in Spring 2006.

### Recommendation 14 — Access criteria and exit
- Access and capital requirements
  - Governed by regulatory framework; participants receive rules/procedures upon signing model agreement.
  - Regulations and MT rules available in Italian and English on Web sites.
  - Participants may access CSD, settlement system, or both.
  - EEA participants subject to same conditions; foreign CSDs require legal opinion and agreement between BI, Consob and foreign authorities.
  - Capital requirements vary by clearing member type; general clearing members higher requirements scaled on number of non-clearing members.
- Exit procedures
  - Withdrawal notice periods:
    - three months for custody services;
    - 30 days for clearing and settlement services.
  - MT terminates membership if participant cancelled from registers or loses requisites or fails obligations.
- Assessment and comments
  - Observed
  - Comments: Foreign remote access limited due to fiscal presence requirements in Italy and restricted intraday central bank credit access; fiscal rules set by Ministry of Economy and Finance.

### Recommendation 15 — Cost-effectiveness
- Cost control and pricing
  - Costs identified per service; operating costs checked monthly; fixed costs dominant due to automation.
  - Annual pricing review against other European CSDs to cover costs, ensure efficiency, offer competitive services, and achieve reasonable ROE.
- Service level and reliability
  - User Groups, help desk, dedicated customer support.
  - Monthly IT provider checks and penalty mechanisms for noncompliance.
- Assessment
  - Observed

### Recommendation 16 — Communication procedures and standards
- Channels and usage
  - RNI (National Interbank Network), MT-X internet platform, SWIFT network.
  - Domestic participants prefer RNI; SWIFT used for foreign communications.
  - MT converts RNI messages to SWIFT and vice versa; RNI uses proprietary format and lacks internationally recognized identifier-based counterparty identification.
  - Express II and RRG matching/routing available through SWIFTNet technology.
- Assessment
  - Observed

### Recommendation 17 — Disclosure of risks and costs
- Disclosure practices
  - Laws, regulations, systems’ rules, and fees part of contractual agreements and available on Web sites (Italian and English).
  - MT’s risks and mitigation described in Disclosure Framework and BCCP; publishes answers to Global Custodians questionnaire.
  - CPSS/IOSCO Disclosure Framework completed and disclosed; last update December 2003.
- Assessment and comment
  - Observed
  - Comment: Market participants reported some pricing structure elements not entirely clear (failed trade settlement, reporting, reconciliation); authorities state pricing structure clearly defined and publicly available with a detailed table mapping price list items to invoices.

### Recommendation 18 — Regulation and oversight
- Regulatory framework and responsibilities
  - CSD and SSS subject to legislative, regulatory and supervisory framework; annual report required by Supervisory Instructions from BI and Consob.
  - MT’s business rules decided by Board and submitted to BI and Consob for approval.
  - TUF distinguishes CSD and SSS; Consob lead regulator for CSD, BI lead regulator for SSS; BI responsible for systemic risk containment; Consob for transparency and investor protection.
- Audits, cooperation and international engagement
  - Internal Auditing, External Auditors, Statutory Auditors perform audits.
  - BI and Consob required by law to share information and coordinate; regular meetings and working groups exist.
  - Cooperation with ESCB/CESR, CPSS/IOSCO.
- Assessment
  - Observed

### Recommendation 19 — Links to settle cross-border trades
- Established links
  - Clearstream Banking Frankfurt, Germany
  - Euroclear France, France
  - OeKB, Austria
  - Iberclear, Spain
  - Euroclear Bank, Belgium
  - Euroclear Netherlands, The Netherlands
  - Clearstream Banking Luxemburg, Luxemburg
  - SIS, Switzerland
  - DTC, United States
- Mode and risk
  - All links are free of payment (FOP); used mainly for transfers of collateral for monetary policy operations.
  - MT performed legal and operational risk analysis covering legal soundness, protection of customer holdings, finality and operational reliability.
  - No cash leg in FOP links; MT does not provide credit.
- Assessment
  - Observed

### Summary tables and selected actions to improve observance
- Observance summary (as reported)
  - Observed: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 13, 14, 15, 16, 17, 18, 19
  - Broadly Observed: 11
  - Partly observed: (none listed)
  - Non-observed: (none listed)
- Selected recommended actions (Table 2)
  - Recommendation 5: MT should accelerate development of standardized legal documentation for the securities lending facility to reduce legal uncertainty.
  - Recommendation 9: End-of-day failure in value about 1.2% (volume about 0.35%); MT may strengthen stress testing for uncovered cash positions and further fine-tune optimization algorithm to reduce settlement failures in value.
  - Recommendation 11: MT should carry out full-back testing including market participants; develop proactive risk analysis methodology; carry out external audits of disaster recovery, business continuity, and SIA contingency plans and back-up facilities; BI and Consob may consider regulation to allow direct access to SIA for supervisory checks.
  - Recommendation 13: Increase number of independent directors at MT Board.

### Authorities’ response (excerpt)
- BI and Consob contend Recommendation 11 fully observed and note:
  - MT to conduct on December, 3rd 2005 a DRP test with extensive involvement of participants and other market infrastructures; results will be disclosed to IMF staff when available.
  - MT risk analysis framework successful in proactively preventing materialization of risks.
  - External audit on MT BCCP and SIA contingency plans and back-up facilities being carried out and expected to be completed by end of year; authorities may inform IMF staff of main findings if requested.
  - Guidelines for supervised entities on outsourcing drafted to allow authorities to exercise supervisory powers regarding outsourced activities.

*Source: _cr0681 - 1. Summary of Observance of CPSS/IOSCO Recommendations; 4. having access to committed credit lines by leading Italian commercial banks*

### 1. Summary of Observance of CPSS/IOSCO Recommendations ...................................32

### 1. Summary of Observance of CPSS/IOSCO Recommendations

### Recommendation 1 — Legal basis, enforceability, and asset protection
- Description
  - Accessibility of the regulatory framework
    - Rules and regulations governing the operations and activities of Monte Titoli (MT) are public and accessible to participants. Participants receive comprehensive documentation covering the rules, requirements, procedures and instructions of MT. This documentation is available on request and accessible on MT Web site, respectively.
    - Public authorities’ regulations are also available to the general public both in Italian and English on both the Banca d’Italia (BI) and Consob Web sites.
  - Legal foundation — main laws and regulations cited
    - Legislative Decree 58/59 “consolidation Law on Financial Intermediation” also called “TUF”
    - Legislative Decree 213/98 on the Euro introduction
    - Legislative Decree 210/2001 implementing the “Settlement Finality Directive”
    - Legislative Decree 170/2004 enacting the “Financial Collateral Arrangements Directive”
    - Consob Resolution No. 11768 of 23 December 1998 “Rules enacting Legislative Decree No. 58 of 24th February 1998 and Legislative Decree No. 213 of 24th June 1998”; the regulation was issued enacting artt. 80/81 of the TUF
    - Decree of the Ministry of Treasury of 17th April 2000 on the central deposit of government securities
    - Bank of Italy Regulation of 8 September 2000 “Clearing and Settlement transactions in non-derivative financial instruments,” enacting Art. 69 of TUF
    - Bank of Italy Regulation of 30 September 2002, enacting the Legislative Decree 210/2001
    - Bank of Italy Regulation of 22 October 2002 on guarantee systems
    - Rules and requirements of MT that is approved by BI and agreed by Consob
- Enforceability of transactions
  - Italian laws and regulations of BI and Consob provide a sound legal basis for enforcement by defining terms, rights and obligations of counterparties and obligations of MT toward participants.
- Customer assets protection
  - TUF requires a clear segregation between customer assets and those of intermediaries. At the level of the CSD, an intermediary is obliged to open an omnibus account for customers’ securities and another account for its own holdings.
  - Art 39, resolution 11768 requires MT to separate its own securities holdings and the assets of its participants.
  - Custodians (banks, investment firms, other financial intermediaries) are legally obliged to have an internal accounting system that allows identification of customers’ holdings at any time.
- Legal basis — specific topics
  - Dematerialization of securities
    - Consob resolution no. 11768 of 23 December 1998 provides a sound and clear legal basis for dematerialized securities. The shift from physical to dematerialized securities was initiated in October 1998. Since that time, the vast majority of securities are dematerialized and transferred by book entry. All government bonds and securities traded on regulated markets are mandatory issued in a dematerialized form.
  - Netting arrangements
    - Enforceability of netting arrangements ensured by Article 2 of the Finality Decree. Netting procedure cannot be revoked in the event of insolvency provided transfer order is given before the opening of the procedure or performed on the day of the opening. Timing of the order transfer is defined by system rules and technically determined after matching and individual numbering.
  - Securities lending arrangements
    - Centralized securities lending regulated by MT rules; Master Securities Lending Agreement signed by participants provides legal basis. Legislative Decree 170/2004 provides rules governing collateralization procedures including securities lending.
  - Finality of settlement
    - TUF Art. 71 ensures finality of both payment and securities transfers performed through designated systems, ensuring irrevocability, finality and protection against third party claims.
  - Delivery versus payment (DVP)
    - Art. 9, par.4 of the Clearing and Settlement Regulations requires management company to adopt measures to ensure settlement of financial instruments is irrevocable and simultaneous with settlement of the cash leg.
    - Clearing and Settlement Regulation of BI states transfer of cash and securities is conditional upon each other and simultaneous; MT rules provide that transfer of securities is conditional upon cash being available at the participant account at the central bank.
- Challenges by a court
  - No court case has yet occurred.
- Enforceability in bankruptcy
  - Governed by Art 2 of the Finality Decree which provides protection to the validity of the transaction and against third party claim.
- Cross-border participation
  - MT has participants from the European Economic Area (EEA), Switzerland and United States. Links established between MT and foreign participants, in particular foreign CSDs, are free of payment links. Level of activities is relatively moderate.
- Conflict of law issues
  - For EEA participants, careful analysis of relevant legislative framework has been done at several levels. ECB has carried out assessment of links; provision of legal opinions was a condition for eligibility of the link. ECSDA has carried out analyses on legal implication of establishing links within the EU.
  - For foreign CSDs, MT requested legal analyses including provision of legal opinions and is analyzing those opinions.
- Assessment
  - Observed
- Comments
  - Major market participant noted ambiguity in Italian legislation whether ownership transfer, particularly for OTC transactions, occurs at trade execution or at settlement. Self-assessment: Italian public authorities stated “the transfer of title on rights arising from securities is assigned by the registration in the intermediaries’ accounts.” This wording may create ambiguity for timing of ownership transfer.
  - Authorities note ambiguity would not impact insolvency procedures because Art.2, par.1 of the Finality Decree makes transfer orders entered into a designated system enforceable notwithstanding the insolvency of a participant.
  - Ambiguity may have financial and taxation impacts by creating uncertainty regarding receiver of outcomes of corporate events and tax liabilities.
  - Authorities cite Euro Decree (n. 213/98) and Consolidated Law on Finance (n. 58/98) tying exercise of rights to registration in intermediaries’ accounts; Art. 2 of Legislative Decree n. 210/2001 prevents actions prejudicing finality of transfer orders.
  - Authorities stated the “transfer of ownership” issue was discussed by the “Express User Group” on February 16 2005; authorities stand ready to revise regulation if market deems necessary, but no clear consensus to intervene emerged.
  - In January 2005, the EU Commission set up the Legal Certainty Group to advise on harmonizing the “timing” of transfer of ownership at a European level.

### Recommendation 2 — Trade confirmation and matching
- Description
  - For transactions traded on regulated markets, trade confirmation and matching is required prior to settlement.
  - All transactions settled by Express II are automatically confirmed and matched by the Riscontro e Rettifica Gionalieri (RRG), which guarantees correspondence of transaction specification information. RRG is electronically connected to the trading system with automated procedures. Straight through processing implies that 100 percent of trade confirmation between direct participants is achieved on T+0 for transactions traded on regulated markets.
  - For OTC transactions, 90 percent of trades are confirmed on T+0.
  - Confirmation procedure for indirect participants
    - RRG provides possibility to confirm trade between direct participant and indirect participant as long as positions of the latter are settled in Express II. In this case RRG allows trade confirmation for indirect participants to take place on T+0.
- Assessment
  - Observed
- Comments
  - (No additional comments provided in source for Recommendation 2.)

### Recommendation 3 — Settlement cycles and rolling settlement
- Description
  - Settlement cycles (rolling basis in regulated market):
    - Transaction for monetary policy operations: T+0
    - MTS repo transactions: overnight T+0, spot next, T+2, corporate T+3
    - Short term government securities: T+2
    - Equities: T+3
    - OTC trades: negotiable between counterparties, but majority settled on T+0
  - Settlement failures
    - Since the start of operation of Express II on 8 December 2003, with the exception of the first week of operation, the number of failed settlements was very small and did not exceeded 0.2 percent of total settlement.
  - Incentives to settle on contractual date
    - MT rules and requirements, defined in agreement with BI and Consob, define penalties to discourage participants from not fulfilling settlement obligations on time; penalties have never been used due to low level of failed settlements.
    - Settlement statistics are published on MT Web sites.
  - Measures to reduce failed transactions
    - an automated securities lending facility
    - an automated collateralization mechanism for eligible counterparty
    - three steps settlement procedures with time lag that provides opportunities for counterparties to cover securities or cash shortage: overnight net settlement, daylight net settlement and RTGS mechanism
    - availability of CCP
  - Cost benefit analysis of enrolling and shorter settlement cycle
    - Settlement is based on a rolling basis.
    - Shortening settlement cycles in Italy is relevant mainly for OTC market, and possible shortening for equities less than T+3.
    - OTC market nature allows negotiation of settlement dates; Italian authority can encourage but not force shorter settlement dates.
    - Italian authority involved in discussion at European level on whether to shorten and harmonize settlement cycles for the EU. ESCB-CESR agrees to initiate, in cooperation with market participants, a cost benefit analysis on a shorter and harmonized settlement cycle for the European market.
- Assessment
  - Observed
- Comments
  - (No additional comments provided in source for Recommendation 3.)

### Recommendation 4 — Central Counterparty (CCP) evaluation and risk control
- Description
  - CCP activities in Italy
    - CC&G established in August 1992. Started managing a guarantee fund for the equities market and acting as a CCP on interest rates futures.
    - Activities expanded to derivatives linked to equities (futures and options), Nuovo Mercato, convertible bonds, warrants, units of closed-end funds and ETFs — with the exception of stocks undergoing an OPA (public purchase offer/take-over-bid offer).
    - CC&G manages a guarantee mutual fund for the TLX market.
    - CC&G, in cooperation with Clearnet (French CCP), provides jointly CCP services on optional basis for trades on the MTS markets (government bonds, cash and repo), realizing a model of a virtual single CCP for cross-border clearing.
    - CC&G and Clearnet are linked as general clearing members allowing dealers to trade with intermediaries belonging to one or the other CCP. CC&G and Clearnet harmonized pricing structures, methods for calculating margins and capital requirements for membership.
    - Six foreign intermediaries participated by remote access at inception; by the end of the first quarter of 2003 their number had increased to nine.
  - Netting arrangements
    - Netting arrangements are carried out by open offer. CC&G interposes itself between clearing members at time trades are executed.
    - Netting arrangement is protected and enforced by Article 2.1 of the Finality Decree and subsequent BI regulations in agreement with Consob. CC&G was notified to the European Commission as a designated system as of 2001.
  - Financial and operational standards for participation
    - CC&G has comprehensive rules to ensure compliance with financial, organizational and technical standards for clearing members.
    - Counterparty risk managed through margins requirement (initial margin and supplementary margin). Margins are calculated and collected on a daily basis; positions are recalculated on an intra-day basis to ensure adequacy.
    - CC&G established two default funds (one for the equity market and the other for the MTS markets).
    - Cash margins and contribution to the clearing funds are settled in central bank money.
  - Liquidity risk management by CC&G
    1. preliminary netting all payments be made/received to/from any participant;
    2. requiring that clearing members in debit position pay by 9:30 a.m.; only then are payments to clearing members in credit position made.
    3. notifying the request for additional margin in good time when additional intra-day margins are needed.
- Assessment
  - (Assessment text for Recommendation 4 is not included in the provided content.)

*Source: _cr0681 - 1. Summary of Observance of CPSS/IOSCO Recommendations*

### 4. having access to committed credit lines by leading Italian commercial banks

### 4. having access to committed credit lines by leading Italian commercial banks

### Measures to withstand default
- Default fund for derivatives and equities covers risks relating to participants’ multiple default of the three largest participants.
- CC&G will review the current amount of the dedicated default fund on the basis of the level of activity and participation for the MTS market.
- Since start of operation, CC&G has not experienced default of general clearing members; there have been defaults of nonclearing members handled by the concerned general member in accordance with B.6.2.2. of the CC&G Rules.

### Financial resources (CC&G)
- CC&G relies on:
  - the margin system;
  - the default fund (determined on the basis of a stress test scenario);
  - committed credit lines;
  - own financial resources.
- Adequacy of financial resources is periodically assessed by the Risk Committee following structured stress tests run by the Risk Management Department.
- Margins and funds are segregated by destination, in compliance with the TUF and may not be used for other purposes or be subject to enforcement procedures.

### Transparency of loss allocation rules (CC&G)
- Coverage of losses (or default) of participants follows rules established by CC&G, available in Italian and in English on the CC&G Web site.

### Assessment (CC&G)
- Observed.
- Comment: CC&G is considered compliant with the current wording of Recommendation 4. Authorities may consider assessing CC&G against the new CPSS/IOSCO Recommendations for CCP.

### Recommendation 5 — Securities lending and borrowing
- Institutional arrangements:
  - Securities lending supported by Italian Civil Code (Art. 1813, Art. 1548) and enhanced by the Legislative Decree on Collateral.
  - Fiscal support: Dpr n.917 of 1986 modified by d.lgs. n. 344 of 2003.
- Securities lending facilities:
  - Well developed repo market; bilateral lending by intermediaries.
  - MT established a centralized securities lending facility to support settlement during overnight netting and daylight netting batches; service activated in case of securities shortage.
  - MT acts as an agent; securities lenders assume credit risk.
  - No restrictions on range of securities/participants, though some securities may be excluded (i) bonds with anticipated maturity date; (ii) other securities identified by the Markets.
- Supervision and risk management:
  - Facility subject to rules governing settlement activities and supervised by BI and Consob.
  - MT provides a “White List” for borrower and lender counterparties.
  - MTS repo market subject to BI regulation and supervision.
- Assessment:
  - Observed.
  - Comments:
    - MT’s securities lending facility has not yet been used to a significant extent.
    - Market participants noted lack of standardized documentation; MT is developing legal documentation and is recommended to accelerate work to reduce legal uncertainty.
    - MT committed to propose legal and operational enhancements to promote use of the service.

### Recommendation 6 — Dematerialization and transfer by book entry
- Dematerialization:
  - Legislative Degree No. 213 of 24 June 1998 mandatory for:
    - all securities traded in regulated markets;
    - all securities meeting Consob requirements (high degree of circulation);
    - all Government bonds.
  - About 99.9 percent of securities held by MT are dematerialized; remaining 0.1 percent issued as physical certificate (jumbo/global certificates immobilized at MT and transferred electronically).
- Transfer of title:
  - MT operates an indirect account holding system.
  - Transfer of title assigned by registration in intermediaries’ accounts (Legislative Decree No. 213).
  - Art. 41 of Consob Regulation No. 11768: MT notifies intermediaries electronically when transfer registered; intermediaries then make necessary entries.
  - Art. 89 of TUF: intermediaries must send to issuers names of persons requesting certification for voting, dividends, pre-emption rights within three days.
- Assessment:
  - Observed.

### Recommendation 7 — Eliminate principal risk via DVP
- Institutional framework for DVP (Express II):
  - Two DVP modalities: Real Time Gross Settlement (RTGS) and Net Settlement (both cash and securities netted).
  - Cash settlement in central bank money via real time link to BI-REL.
  - Express II RTGS running between 7:00 and 18:00 each business day.
  - Two net settlement batches:
    - overnight batch between 21.00 on S-1 and 7:00 on S;
    - daylight batch between 9:30 and 13:00 on S.
- Net settlement batch:
  - Activated only on availability of cash and securities; assets reserved by moving them to a technical account and blocked.
  - If assets insufficient, transaction excluded from net settlement batch.
  - Optimization algorithm identifies maximum amount of transactions that can be settled considering availability (including liquidity reserve + proceeds of collateralization + reimbursement of government securities).
  - Transactions not covered are set aside to subsequent daylight net settlement or forwarded to RTGS.
- RTGS settlement procedures:
  - (a) Checks seller’s securities account; if available, places accounting block equal to negotiated quantity until cash settlement from BIREL completed.
  - (b) If seller’s securities account insufficient, transaction conveyed to queue-management system.
  - (c) If insufficient availability in BI account, transaction routed to BIREL stand-by lists; if cancelled from BIREL stand-by lists, RTGS deletes transaction and removes block.
  - After positive cash settlement, gross settlement removes block and executes securities settlement (debit seller, credit buyer).
- Availability:
  - Percentage of trades settled by MT on a DVP basis, where cash is involved, is 100 percent.
  - Of total transactions settled by MT, 5 percent are settled, at initiative of participants, on a free of payment (FOP) basis (mainly OTC activities, collateralization and cross-border activities).
- Assessment:
  - Observed.

### Recommendation 8 — Timing of settlement finality
- MT provides real time and intraday finality:
  - RTGS allows real time finality after DVP execution.
  - Finality timings:
    - overnight batch finality at 7:00 a.m.;
    - daylight batch finality at 1.00 p.m.;
    - RTGS finality for transactions received after 13:00 and same-day delivery needs.
  - Monetary policy operations settled by RTGS with finality throughout the day.
  - Cross-border link transactions settled in real time with immediate finality.
- Revocation of unsettled transactions:
  - Once a transfer instruction has been matched, it is not possible to revoke it (both bilateral and unilateral), even if unsettled.
- Recommendation (comment):
  - It is recommended that MT, in agreement with BI and Consob and after consulting market participants, reconsider allowing counterparties to revoke matched instructions when requested by both counterparties to provide flexibility; authorities note operational workaround exists by entering an additional instruction of opposite sign.
- Assessment:
  - Observed.

### Recommendation 9 — Intraday credit risk controls
- Measures to handle failure:
  - Express II RTGS settles trade-for-trade with immediate finality; settlement fails if participant lacks securities or cash unless eligible for securities lending and/or intraday credit from BI.
  - Electronic link to central bank cash transfer system; to receive credit from BI participants need to provide collateral; collateralization mechanism automated and managed by MT.
  - Investment firms allowed intraday credit from BI per TARGET rules; non-bank financial institutions may obtain collateralized intraday liquidity against guarantee or subject to operational limits.
- Net settlement batch design:
  - Netting activated only if securities and cash available and blocked; otherwise transactions excluded and forwarded to RTGS.
  - Transactions maintained in system for settlement for a period decided by CCP rules up to 7 days; OTC counterparties agree period.
  - Use of CCP mandatory for equity transactions on Borsa Italiana markets.
- Overdrafts or debit balances:
  - Strictly forbidden by MT; technically not feasible due to double accounting structure.
- Assessment of multiple failure:
  - Express II identifies optimal subset of transactions to settle based on available cash and securities and priority criteria in “Operational Rules” using an algorithm.
  - Extensive stress tests run in October 2003; multiple failure scenarios tested and optimization algorithm fine-tuned.
  - Mandatory CCP use for equities eliminates counterparty risk.
- Assessment:
  - Observed; Not applicable for Express II RTGS facility.
  - Comment: End-of-day failure remains slightly higher in value (about 1.2%), low in volume (about 0.35%). MT may consider strengthening stress testing and further fine-tuning optimization algorithm to reduce failures in value.

### Recommendation 10 — Settlement assets carry little or no credit risk
- Settlement assets:
  - Settlement in central bank money for euro transactions is compulsory for MT (Art. 9.1 of the Clearing and Settlement Regulations: cash leg in euros effected on accounts at Banca d’Italia).
  - For foreign currencies Art. 9.2 allows use of banks authorized in Italy or EEA as settlement cash agents; currently MT only settles in euro.
- Access and intraday credit:
  - Credit institutions or investment firms may become cash settlement agents and open cash accounts at BI.
  - Access to intraday credit unconditional for banks subject to collateral nature; for other participants subject to specific requirements, guarantees, operational limits; BI may apply penalties.
  - Banks from other EEA countries can access BI-REL remotely with Capacity Opinion and Country Opinion legal documentations.
- Settlement bank risks:
  - Participants not eligible for central bank cash accounts rely on settlement banks; no specific rules set by MT, BI or Consob for settlement banks beyond prudential supervision by BI.
- Reuse of settlement proceeds:
  - Proceeds (cash and securities) can be used immediately upon credit.
  - Timetable for recipients to use assets:
    - at 7:00 a.m. of settlement day for transfers settled by overnight cycle;
    - at 13:00 p.m. for transfers not settled during overnight cycle;
    - in real time for RTGS settlements.
- Assessment:
  - Observed.
  - Comment: Coordination between BI oversight of settlement systems and banking prudential rules important; BI has interfunctional committee, mutual statistical data availability, and internal agreement for information exchange in insolvency cases per “Finality decree”.

### Recommendation 11 — Operational risk identification and mitigation
- Procedures and controls:
  - Senior management responsible; risk management policies formalized; MT has a Risk Map.
  - Operational risk monitored via:
    - internal controls (manual/automated, insurances, organizational measures);
    - insurance policies;
    - secured access (authentication, passwords, firewall);
    - operational risk identification when launching new services with mitigation instruments;
    - automated controls in IT applications; significant IT applications reviewed before release by Internal Auditing and Internal Users.
  - Operational procedures and training available; skill profiles maintained.
- Contingency plans and backup:
  - MT outsourced IT and daily operation to SIA S.p.A (ISO9000, BS7799 certified).
  - Business Continuity and Contingency Plan (BCCP) covers contingencies and Disaster Recovery Plan (DRP).
  - BCCP identifies minor contingency, emergency, disaster; defines responsibilities and “survival time” for services.
  - Two permanent structures: Continuity Management Group and Emergency Management Committee led by Crisis Manager.
  - DRP: duplication of procedures, databases, and real-time duplication on second mainframe; MT can resume operations within maximum period of four hours.
  - DRPs tested twice a year; special contingency arrangements with BI; SIA switches processing monthly between sites; intermediaries do not actively participate in DRP tests currently.
- Protection of data communication:
  - Measures ensure integrity, authentication, confidentiality, non-reputability; effective firewalls in place.
- Availability and scalability:
  - No key system failures historically; average processing resumed within maximum of 3 hours; incidents documented; no transactions/data lost.
- Audits and outsourcing oversight:
  - External IT audit at least once a year; internal auditing prepares independent report for supervisory Authorities.
  - Outsourcing agreement includes technical annexes detailing service standards and SLAs; MT monitors SIA compliance in real time and conducts monthly meetings and annual audit.
- Assessment:
  - Broadly observed.
  - Recommendations for full compliance:
    - Carry out full-back testing including market participants;
    - Develop and implement a proactive risk analysis methodology;
    - Carry out external audit of procedures/arrangements for disaster recovery and business continuity;
    - Carry out external audit of SIA’s contingency plans and back up facilities.
  - BI and Consob may consider regulation to allow direct access to SIA for supervisory checks.
  - MT participates in Contingency Working Group coordinated by BI for harmonization of contingency plans.
  - MT will conduct a DRP test in November 2005 including market participants; integrated test with all systemically relevant infrastructures planned by end of 2006.
  - MT’s Board approved external audit for BCCP and SIA contingency plans expected to be completed by November 2005.
  - Authorities drafted guidelines for supervised companies on outsourcing relationships to allow supervisory access.

### Recommendation 12 — Protection of customers’ securities
- Institutional arrangements:
  - Dematerialization reduces custody-related risks.
  - MT holds insurance policies and a special guarantee reserve of Euro 8 million to indemnify participants for damage due to MT’s negligence or errors.
- Segregation of assets:
  - Legislative Decrees No. 58 (TUF) and No. 213, BI regulation of July 1st 1998 and Consob Regulation No. 11768 ensure protection.
  - MT must observe complete segregation between proprietary account and intermediaries’ and issuers’ accounts.
  - Intermediaries required to have separate omnibus accounts for customers; participants may open segregated settlement accounts.
  - In custodian insolvency, MT acts per insolvency rules and receiver/trustee orders; may move customer positions to solvent intermediary.
- Reconciliation procedures:
  - Double book-entries ensure one debit mirrored by one simultaneous credit.
  - MT checks daily that sum of intermediaries’ balances coincides with balance of each issue centralized in MT.
  - Consob Regulation No.11768: custodians reconcile securities accounts daily; MT sends opening and closing balances daily.
  - Semi-annual external audits on securities account balances; tracers sent on sample basis to issuers/intermediaries by external auditors.
- Supervision of custodians:
  - CSD subject to BI and Consob regulation and supervision; custodians subject to rigorous regulations, supervision, and external audits.
- Assessment:
  - Observed.

### Recommendation 13 — Governance arrangements
- Ownership and corporate governance:
  - Borsa Italiana Group owns 99 percent of MT.
  - MT is private for-profit company subject to Italian Civil Code and Consob supervision.
  - Persons performing administrative, managerial or control functions must fulfill integrity and experience requirements (Decree No 471/98).
  - Corporate bodies: Shareholder’s Meeting, Board of Directors, Board of Statutory Auditors; Board of Directors currently composed of nine members, one Independent Director.
- Publication and decision processes:
  - MT publishes financial results separately and aggregated in Borsa Italiana balance sheet.
  - Major decisions taken by Board following CEO proposals; Supervisory Authorities informed per supervisory instructions.
- Public interest and users’ interest:
  - Art. 3 and 7 of Clearing and Settlement Regulations and Art. 82.2 of TUF set public interest obligations (orderly, transparent, continuous functioning; protection of investors).
  - MT maintains relationships with ABI, Assonime, Assosim.
  - Express User Group established for Express II with representatives from MT, ABI, Assosim, BI, Consob, CC&G, leading banks, regulated markets.
  - Consultation with users on regular basis; participants invited to share analyses and tests.
- Management incentives and accountability:
  - Managers monitored by senior management; training initiatives for staff.
- Assessment:
  - Observed.
  - Comments:
    - MT became fully owned subsidiary of Borsa Italiana; 7 of 9 board members are managers from Borsa Italiana which may lead to conflicts of interest and reduced neutrality.
    - Market participants reported limited influence over MT since integration into Borsa Italiana.
    - Recommendation: Increase number of independent directors at MT Board to reduce concerns over de facto monopoly.
    - Authorities indicated Borsa Italiana agreed to increase independent directors when existing Boards expire in Spring 2006.

### Recommendation 14 — Access criteria and exit
- Access criteria:
  - Governed by regulatory framework; participants receive rules and procedures upon signing model agreement.
  - Regulations and MT’s rules available in Italian and English on Web sites.
  - Participants may access CSD, settlement system, or both.
  - EEA participants subject to same conditions as Italian entities; foreign CSDs require legal opinion and agreement between BI and Consob and foreign authorities.
  - Capital requirements vary by type of clearing member; general clearing members have higher requirements scaled on number of non-clearing members.
- Exit criteria:
  - Withdrawal procedures publicly disclosed; notice periods:
    - three months for custody services;
    - 30 days for clearing and settlement services.
  - MT terminates membership if participant cancelled from relevant registers or loses requisites or fails contractual obligations.
- Assessment:
  - Observed.
  - Comments:
    - Foreign access to MT remote basis limited due to need for fiscal presence in Italy and restricted access to intraday central bank credit.
    - Authorities note fiscal requirements set by Ministry of Economy and Finance and intraday credit access disciplined by Eurosystem documentation.

### Recommendation 15 — Cost-effectiveness
- Procedures to control cost:
  - Costs identified per service; operating costs checked monthly; fixed costs dominant because of automation.
- Pricing reviews:
  - MT compares price and service levels with other European CSDs and reviews pricing annually to:
    - cover costs;
    - ensure efficient use of services;
    - offer competitive and cost-effective services;
    - achieve reasonable ROE.
- Service level reviews:
  - User Groups convened; help desk and dedicated customer support departments provide support and problem resolution.
- Operational reliability:
  - Monthly checks with IT provider; penalty mechanisms for noncompliance.
- Assessment:
  - Observed.

### Recommendation 16 — Communication procedures and standards
- Communication channels:
  - RNI (National Interbank Network);
  - MT-X internet platform;
  - SWIFT network.
- Use patterns:
  - Domestic participants prefer RNI; SWIFT used for foreign communications.
  - MT converts RNI messages to SWIFT and vice versa; RNI based on proprietary format allows international message types but counterparty identification not based on internationally recognized identifiers.
  - Express II and RRG matching/routing available through SWIFTNet technology.
  - MT-X serves as web-based knowledge/document platform and backup channel.
- Assessment:
  - Observed.

### Recommendation 17 — Disclosure of risks and costs
- Disclosure:
  - Laws, regulations, systems’ rules, and fees part of contractual agreements and available on Web sites (Italian and English).
  - MT’s risks and mitigation steps described in Disclosure Framework and BCCP; publishes answers to Global Custodians questionnaire.
  - CPSS/IOSCO Disclosure Framework completed and disclosed; last update December 2003.
- Assessment:
  - Observed.
  - Comment:
    - Market participants reported pricing structure not entirely clear for specific transactions (failed trade settlement, reporting, reconciliation). Authorities state pricing structure is clearly defined and publicly available with transaction fee distinctions and detailed table of correspondence between price list items and invoices.

### Recommendation 18 — Regulation and oversight
- Framework:
  - CSD and SSS subject to legislative, regulatory and supervisory framework; annual report required by Supervisory Instructions from BI and Consob including governance, internal controls, measures for secure operation, risk management, audit results.
  - MT’s business rules decided by Board and submitted to BI and Consob for approval.
- Audits:
  - Internal Auditing, External Auditors, Statutory Auditors perform audits/examinations.
- Responsibilities:
  - TUF distinguishes CSD and SSS; Consob lead regulator for CSD, BI lead regulator for SSS.
  - BI responsible for systemic risk containment and soundness; Consob responsible for transparency, investor protection, proper conduct.
- Cooperation:
  - BI and Consob required by law to share information and coordinate; cannot invoke official secrecy in mutual relations.
  - Regular meetings: two meetings per year between Governor of BI and Chairman of Consob; senior managers meet regularly; working groups for joint regulations.
  - Cooperation with European and global authorities (ESCB/CESR, CPSS/IOSCO).
- Assessment:
  - Observed.

### Recommendation 19 — Links to settle cross-border trades
- Links established by MT to CSDs:
  - Clearstream Banking Frankfurt, Germany
  - Euroclear France, France
  - OeKB, Austria
  - Iberclear, Spain
  - Euroclear Bank, Belgium
  - Euroclear Netherlands, The Netherlands
  - Clearstream Banking Luxemburg, Luxemburg
  - SIS, Switzerland
  - DTC, United States
- Mode of settlement:
  - All links are free of payment (FOP); used mainly for transfers of collateral for monetary policy operations.
- Risk analysis:
  - MT carried out risk analysis covering legal soundness, protection of customer holdings, finality and operational reliability.
  - Securities accounting procedure verifies transaction-by-transaction correspondence between omnibus account at foreign CSD and balances of MT participants accounts.
- Credit extension:
  - No cash leg in FOP links; MT does not provide credit.
- Assessment:
  - Observed.

### Summary tables (as reported)
- Table 1. Summary of Observance of CPSS/IOSCO Recommendations:
  - Observed: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 13, 14, 15, 16, 17, 18, 19
  - Broadly Observed: 11
  - Partly observed: (none listed)
  - Non-observed: (none listed)

- Table 2. Actions to Improve Observance (selected recommendations and recommended actions):
  - Recommendation 5:
    - MT should accelerate development of standardized legal documentation for the securities lending facility to reduce legal uncertainty.
  - Recommendation 9:
    - End-of-day failure in value about 1.2% (volume about 0.35%); MT may strengthen stress testing for uncovered cash positions and further fine-tune optimization algorithm to reduce settlement failures in value.
  - Recommendation 11:
    - MT should:
      - Carry out full-back testing including market participants;
      - Develop and implement a proactive risk analysis methodology;
      - Carry out external audit of disaster recovery and business continuity procedures;
      - Carry out external audit of SIA’s contingency plans and back up facilities.
    - BI and Consob may consider regulation to allow direct access to SIA for supervisory checks.
  - Recommendation 13:
    - Increase number of independent directors at MT Board to mitigate concerns arising from MT’s de facto monopoly.

### Authorities’ response (excerpt)
- Italian authorities (Banca d’Italia and Consob) contend Recommendation 11 has been fully observed and note:
  - MT will conduct on December, 3rd 2005 a DRP test with extensive involvement of participants and other market infrastructures; results will be disclosed to IMF staff when available.
  - MT risk analysis framework has been successful in proactively preventing materialization of risks.
  - External audit on MT BCCP and SIA contingency plans and back-up facilities is being carried out and expected to be completed by end of year; authorities may inform IMF staff of main findings if requested.
  - Guidelines for supervised entities on outsourcing drafted to allow authorities to exercise supervisory powers regarding outsourced activities.

*Source: _cr0681 - 4. having access to committed credit lines by leading Italian commercial banks*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0681.pdf_