## _cr12144

## Source details

**Canonical URL:** [_cr12144](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12144.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12144.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12144.pdf.json)

---

### Executive Summary
- Reviews oversight and supervision framework for systemically important FMIs in Spain and discusses CCPs’ financial risk management, corporate governance, and crisis management.
- Systemically important payment systems are European or international based; domestically there are four securities settlement systems (SSS) and three central counterparties (CCPs).
  - IBERCLEAR is the main SSS that settles all securities traded in Spain, except regional government securities settled in three regional SSSs.
  - Three active CCPs: MEFF (listed financial derivatives); MEFFClear (Spanish debt repos); MFAO (olive oil derivatives). All except MFAO are part of Bolsas y Mercados Españoles (BME).
- European integration of post-trading systems requires substantial changes; a comprehensive reform was launched with implementation planned by end-2014.
- Authorities’ responsibilities are defined in law, but further transparency on Banco de España’s (BdE) responsibilities with respect to FMIs other than payment systems is recommended.
  - Primary responsibility to regulate and authorize FMIs: Government, through the Ministry of Economy and Competitiveness (MEC).
  - Oversight of payment systems: BdE within the European System of Central Banks (ESCB).
  - Supervision of other FMIs: Comisión Nacional del Mercado de Valores (CNMV); local SSSs supervised by respective regional governments.
  - BdE carries out complementary oversight activities over post-trade FMIs not backed by its statute; some ambiguity remains as to the central bank’s scope.
- Key recommended enhancements:
  - Clarify roles and publish a revised MoU between CNMV and BdE.
  - Regular liquidity stress-tests and access to central bank liquidity for CCPs after reorganization.
  - Regular (at least annual) default-management stress-testing involving participants and relevant public authorities.
  - MEFF to ring-fence clearing activities, hire independent Board members, and restructure risk committee to meet RCCP 13 and EMIR requirements.
  - Plan orderly exit of BdE from BME’s capital (BdE holds 5 percent of BME’s capital).
  - Develop coordinated contingency and resolution plans for potential CCP failure.

### Main Recommendations (timing definitions: “Immediate” = within one year; “Near-term” = 1–3 years; “Medium-term” = 3–5 years)
- Effectiveness of oversight/supervision
  - Regular assessments against the CPSS/IOSCO standards for FMIs other than payment systems (CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term
  - Securities clearing, settlement, and registration reform should stick to the agreed timetable (MEC, CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term
  - Adapt supervision methods of CSD and CCPs (CNMV).
    - Priority: Medium
    - Timeframe: Near-term
- Cooperation between domestic authorities
  - Clarify CNMV and BdE roles regarding oversight of FMIs other than payment systems in Spanish regulation (BdE, MEC).
    - Priority: Medium
    - Timeframe: Near-term
  - Complement and publish the MoU between CNMV and BdE on FMIs oversight and supervision.
    - Priority: Low
    - Timeframe: Near-term
- Risk management and governance of CCPs
  - Improve liquidity risk management via regular liquidity stress-tests and access to central bank liquidity (CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term
  - Change MEFF governance to comply with EMIR and RCCP 13 (CNMV).
    - Priority: Medium
    - Timeframe: Near-term
  - Plan orderly exit of BdE from BME’s capital.
    - Priority: Medium
    - Timeframe: Near-term
- Crisis management
  - Conduct regular (at least annual) default-management stress-testing exercises with participants and authorities (CNMV, BdE).
    - Priority: Medium
    - Timeframe: Immediate
  - Put in place coordinated contingency plans to deal with potential CCP failure (MEC, CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term

### Systemically important payment systems: key features and statistics
- TARGET2 (eurosystem RTGS)
  - RTGS owned/operated by the Eurosystem; replaced TARGET in May 2008.
  - 2011 average daily transactions value: more than €2,380 billion.
  - Spanish component 2011 average daily value: €367 billion.
- EURO1 (private net settlement)
  - Launched 1998 by EBA; 2011 daily value average: €249 billion.
- Continuous Linked Settlement (CLS)
  - PVP settlement for FX in 17 currencies; launched September 2002.
  - The euro accounts for about 20 percent of all transactions settled in CLS, representing €600 billion in daily value average.
  - U.S. dollar share is slightly over 40 percent.
- SNCE (retail)
  - Managed by Iberpay; settlement occurs in TARGET2.
  - 2011 average daily settled transactions value: €6.3bn.

### FMIs other than payment systems: infrastructure, activity, and reform context
- Domestic infrastructures
  - Four domestic SSSs and three domestic CCPs process euro transactions and use central bank money via TARGET2.
  - IBERCLEAR
    - Operates CADE and SCLV.
    - First 11 months of 2011 average daily settled transactions value: € 189bn (fourth in Europe).
  - Regional SSSs (Barcelona, Bilbao, Valencia)
    - Settled total value of €64 billion in 2010; activity decreased by 33 percent since 2006.
  - MEFF
    - Cleared 70.2 Million contracts in 2010 with a notional value of €789 billion.
  - MEFFClear
    - Established September 2003; processed repo trades in 2010 for a value of €278 billion; ended 2010 with approximately €27.7 billion of outstanding positions.
    - Guarantees gross transactions and does not perform multilateral netting (as of the report).
  - MFAO
    - Cleared 75,023 contracts in 2011 (until December 20), with a notional value of €124 million; not considered systemically important.
- Reform drivers and timeline
  - European post-trade integration (T2S, CSD and CCP initiatives) prompted comprehensive domestic reform begun after 2007 delays; implementation target to be ready for joining T2S in 2015 and planned implementation by end-2014 for domestic changes.
  - Key reform components:
    - Replace assured delivery principle for equities with incident-resolving mechanisms involving CCP(s); CCP use expected to become mandatory for equity transactions traded multilaterally on a regulated market or multilateral trading system.
    - Replace RR-based settlement/registry with standardized book-entry balances in IBERCLEAR.
    - Outcomes: separation of clearing/settlement/registration; netting by security; compatibility with T2S; shortened settlement cycle; equities settlement capable of adopting DVP model 1; settlement finality at time of settlement.

### Oversight and supervisory responsibilities and practices
- Legal assignments
  - MEC: primary responsibility to regulate and authorize FMIs; can delegate technical provisions to BdE and CNMV.
  - BdE: oversight of payment systems as part of ESCB; complementary oversight activities over post-trade FMIs; applies Eurosystem common policy.
  - CNMV: supervises FMIs other than payment systems; powers to obtain information, approve rules, approve budgets/tariffs, and sanction.
  - Regional governments: supervise local SSSs.
- BdE oversight of payment systems
  - Article 16 of BdE statute grants powers to regulate/oversee payment clearing and settlement systems and to suspend application of decisions adopted by a payment system manager.
  - Dedicated payment system oversight team of five staff; oversight unit separated from TARGET2-BdE operational unit but reports to same head of department.
  - Last in-depth assessments: TARGET2 in 2009; SNCE in 2011 (previous SNCE assessment in 2004/05).
  - Since 2005 BdE disclosed oversight policy and annual oversight reports (in Spanish).
- CNMV supervision of non-payment FMIs
  - CNMV approves FMIs’ main rules and circulars (e.g., margins, collateral), annual budgets, tariffs; can require rule changes.
  - Monitoring based on real-time access to transactions/positions and alert mechanisms; on-site inspections are infrequent.
  - CNMV committed to ensure compliance with CPSS/IOSCO Recommendations but does not conduct regular CPSS/IOSCO-standard assessments for FMIs other than payment systems; CCPs have not been assessed historically.
  - SMA does not distinguish between systemically and nonsystemically important FMIs for regulation/supervision.
- Coordination and transparency issues
  - Roles assigned to CNMV and BdE in SMA can be ambiguous/overlapping; law requires coordination via agreements.
  - Last MoU update dated June 2009; MoU is general and does not detail FMIs oversight/supervision.
  - Recommendation: clarify roles in regulation, consider amending BdE statute to extend oversight responsibilities to all FMIs, and publish a complemented MoU (in Spanish and English), excluding sensitive provisions.

### CCP financial risk management, governance, and access to liquidity
- General risk framework
  - Legal provisions, operational procedures, financial resources, and coordination arrangements exist to deal with participant default.
  - Both MEFF and MEFFClear settle in central bank money; MEFF offers individual segregation for clients; MEFFClear deals only with proprietary accounts.
  - CCPs aim to cover default of largest clearing member plus 10 percent through a resource waterfall; daily stress tests indicate collateral sufficient to cover defaults of the five largest positions in practice.
- Collateral and margin practices
  - Clearing members obliged to deposit 30 percent of initial margins in cash, but in practice they deposit more than 70 percent.
  - MEFF (but not MEFFClear) can draw on cash deposited by nondefaulting members up to a 10 percent limit.
  - Cash collateral invested in overnight repos on Spanish debt; noncash collateral not invested and available in CSDs (IBERCLEAR, Clearstream Frankfurt).
- Liquidity risk recommendations
  - Conduct regular liquidity stress-tests (none reported).
  - MEFF should apply for access to intraday central bank liquidity once reorganization is completed; under Eurosystem policy, national central banks may provide intraday credit to euro area CCPs under specified conditions.
  - Governing Council of the ECB may facilitate overnight liquidity access on an ad hoc basis in emergency situations provided conditions met.
- Governance and EMIR compliance
  - BME Group level: BME Board includes at least five independent members; subsidiaries have own Boards.
  - MEFF Board lacks independent members and combines trading and clearing; risk committee composition (MEFF CEO, two deputy CEOs, CCP managing director) does not ensure separation for risk management.
  - EMIR requires CCPs to be legal entities with independent board members (one third of members, but no less than two), and representation of clearing members and clients; risk committees to include clearing member representatives and independent board members.
  - Required near-term changes for MEFF: ring-fence clearing activities, hire independent Board members, change risk committee composition; BME working to organize all clearing functions under same legal entity (likely MEFF).
- BdE shareholding in BME
  - BdE acquired 9 percent of BME when transferring CADE in 2004; its share dropped to 5 percent (current).
  - Recommendation: BdE should plan an orderly exit from BME’s capital, choose timing, and explain reasons to avoid oversight, reputational, or conflict-of-interest concerns—especially if BME accesses central bank liquidity for CCP activities.

### Crisis management, default procedures, and contingency planning
- Legal/operational arrangements
  - SMA provides CCPs and CSDs powers to manage client positions and transfer securities in event of participant bankruptcy or insolvency.
  - Financial Stability Committee (CESFI) established 2006 as forum for information exchange on potential systemic issues; CESFI does not have decision-making powers.
- Default management stress-testing
  - Recommendation: Regular (at least annual) default-management stress-testing exercises with participants and public authorities.
  - Lehman default handled smoothly in Spanish FMIs (defaulting institution was an indirect participant; direct participants terminated activity in a few days without loss; no litigation).
  - Caveat: No default of a direct participant in the past decade; tests should include default of major participants and combinations with deteriorating market conditions.
- CCP failure contingency planning
  - No specific contingency arrangements for a potential failure of a Spanish CCP currently exist.
  - Authorities should develop coordinated contingency and resolution plans, identifying in advance applicable resolution arrangements: sustain critical services or orderly wind-down.
  - Consideration could be given to a special bankruptcy regime for CCPs to preserve going-concern value and minimize disruption.
  - Spanish authorities intend to act according to international discussions and the Eurosystem’s stance.

### European legislative and operational initiatives affecting FMIs
- EMIR (OTC derivatives and CCPs)
  - Agreed February 2012; expected applicable as of January 1, 2013.
  - Introduces clearing obligation for eligible OTC derivatives, reporting obligations, common CCP rules, interoperability rules, data trade repositories, and a CCP passport with strengthened ESMA role.
  - CCP-specific features: requirement to offer indirect participants segregated margin accounts; governance and risk standards tightened.
- CSD Regulation
  - Preliminary proposals published January 2011; first version expected in first quarter of 2012.
- Securities Law Directive
  - Draft Directive on legal certainty of securities holding and transactions under preparation; aims to address holding/disposition frameworks, investor rights through intermediary chains, issuer choice of holding structures, and safekeeping supervision.
- TARGET2-Securities (T2S)
  - Launched July 2006; operational objective: from September 2015 T2S should provide harmonized DvP settlement in central bank money for almost all heavily traded securities in Europe.
  - T2S will offer settlement services to CSDs which will retain other functions; use of T2S not compulsory.

### Appendix 3 — MEFF and MEFFClear: rulebooks, waterfalls, and collateral at end-November 2011
- MEFF default waterfall (in order)
  1. Initial Margins of the Member for each group of contracts (daily margining with confidence level of 99.9 percent and close-out period of two/three days).
  2. Defaulting Member’s contribution to the default fund for each group of contracts (total default fund must cover the largest position, plus 10 percent).
  3. Offsetting balances for each group and execution of the defaulting member’s extraordinary and individual fund.
  4. MEFF fund (composed of MEFF capital) for each contract group.
  5. Remainder of the default fund in the group with losses (default fund from other groups not affected).
  6. Remaining MEFF capital.
- MEFF collateral details at End-November 2011 (In millions of euros):
  - Required Collateral / Posted Collateral
    - Equities: Initial Margin 1,783 / 1,833
    - Fixed Income Securities: Initial Margin 214 / 228
    - Cash: Initial Margin 1,391 / 0
    - Individual Fund: 224 / 301
      - Individual Fund breakdown: Equities 99 / 19; Fixed Income Securities 121 / 224
    - Default Fund: 30 / 30
      - Default Fund breakdown: Equities 1 / 3; Fixed Income Securities 4 / 30
    - Total: 2,037 (Required Collateral) / 2,163 (Posted Collateral)
- MEFFClear default waterfall (in order)
  1. Defaulting member’s initial margin.
  2. Defaulting member’s individual clearing fund.
  3. MEFFClear capital.
- MEFFClear collateral details at End-November 2011 (In millions of euros):
  - Required Collateral / Posted Collateral
    - Equities: Initial Margin 842 / 1,048
    - Fixed Income Securities: Initial Margin 103 / 124
    - Cash: Initial Margin 821
    - Individual Fund: 388 / 635
      - Individual Fund breakdown: Equities 26 / 58; Fixed Income Securities 551
    - Total: 1,229 (Required Collateral) / 1,683 (Posted Collateral)
- Planned changes in anticipation of new EU legislation
  - Introduction of a mutual default fund and a dedicated MEFFClear fund composed of MEFFClear capital.
  - MEFF to take over all clearing activities; carve out share of MEFF capital to form MEFF Fund for the repo segment.
  - Mutual default fund and MEFF Fund to be divided by market segment (repo, equity derivatives, energy derivatives).
  - Revised MEFF default waterfall (planned)
    1. Defaulting member’s initial margin.
    2. Defaulting member’s contribution to the new mutual default fund.
    3. Defaulting member’s extraordinary and individual clearing fund.
    4. The MEFF Fund for the segment suffering the default.
    5. The rest of the default fund for the segment suffering the default.
    6. MEFF capital.

*International Monetary Fund — Technical Note: FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN — OVERSIGHT AND SUPERVISION OF FINANCIAL MARKET INFRASTRUCTURES (FMIS), MAY 2012*

### 2012. The views expressed in this document are those of the staff team and do not necessarily reflect

### FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN — OVERSIGHT AND SUPERVISION OF FINANCIAL MARKET INFRASTRUCTURES (FMIS) TECHNICAL NOTE MAY 2012

### Executive Summary
- The note reviews the oversight and supervision framework for systemically important FMIs in Spain and discusses CCPs’ financial risk management, corporate governance, and crisis management.
- Systemically important payment systems are European or international based; domestically there are four securities settlement systems (SSS) and three central counterparties (CCPs).
  - IBERCLEAR is the main SSS that settles all securities traded in Spain, except regional government securities settled in three regional SSSs.
  - Three active CCPs: MEFF (listed financial derivatives); MEFFClear (Spanish debt repos); MFAO (olive oil derivatives). All except MFAO are part of Bolsas y Mercados Españoles (BME).
- European integration of post-trading systems requires substantial changes to the Spanish clearing, settlement, and registry system; a comprehensive reform was launched and implementation is planned by end-2014.
- Authorities’ responsibilities are defined in law, but further transparency on Banco de España’s (BdE) responsibilities with respect to FMIs other than payment systems is recommended.
  - Primary responsibility to regulate and authorize FMIs: Government, through the Ministry of Economy and Competitiveness (MEC).
  - Oversight of payment systems: BdE within the European System of Central Banks (ESCB).
  - Supervision of other FMIs: Comisión Nacional del Mercado de Valores (CNMV); local SSSs supervised by respective regional governments.
  - BdE carries out complementary oversight activities over post-trade FMIs not backed by its statute; some ambiguity remains as to the central bank’s scope.
- Recommendations to clarify roles and publish a revised MoU between CNMV and BdE for transparency.
- BdE has implemented Eurosystem common policy on systemically important payment and retail systems, discloses oversight policy and annual reports on payment systems since 2005.
- CNMV supervises FMIs other than payment systems on an ongoing basis but does not conduct regular assessments against CPSS/IOSCO Recommendations; CNMV commitments include ensuring compliance with CPSS/IOSCO.
- Spanish CCPs have robust financial risk management frameworks but could be complemented by:
  - Regular liquidity stress-tests.
  - Access to central bank liquidity after reorganization of clearing activities is completed.
  - Regular (at least annual) default management stress-testing exercises involving participants and relevant public authorities.
- CCP governance needs changes to comply with EMIR and CPSS/IOSCO Recommendation for CCPs (RCCP) 13 on governance:
  - MEFF Board lacks independent members and covers both trading and clearing activities.
  - MEFF risk committee composition (MEFF CEO, two deputy CEOs, CCP managing director) does not provide clear separation of reporting lines for risk management.
  - MEFF should ring-fence clearing activities, hire independent Board members, and change risk committee composition.
- BdE holds 5 percent of BME’s capital; orderly exit from BME’s capital should be planned and communicated to avoid oversight, reputational, or conflict-of-interest issues—particularly if BME accesses central bank liquidity for CCP activities.
- Authorities should develop coordinated contingency plans for potential CCP failure, identifying in advance resolution arrangements to sustain critical services or allow orderly winding down; Spanish authorities intend to act according to international discussions and the Eurosystem’s stance.

### Main Recommendations (Table 1 summary)
- Note on timing definitions:
  - “Immediate” is within one year; “near-term” is 1–3 years; “medium-term” is 3–5 years.

- Effectiveness of oversight/supervision
  - Regular assessments against the CPSS/IOSCO standards should also be conducted for FMIs other than payment systems (CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term
  - The securities clearing, settlement, and registration reform should stick to the agreed timetable (MEC, CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term
  - Supervision methods of CSD and CCPs will need to be adapted (CNMV).
    - Priority: Medium
    - Timeframe: Near-term

- Cooperation between domestic authorities
  - The roles of the CNMV and the BdE with regard to the oversight of FMIs other than the payment systems should be clarified in Spanish regulation (BdE, MEC).
    - Priority: Medium
    - Timeframe: Near-term
  - The MoU between CNMV and BdE should be complemented with respect to the FMIs oversight and supervision, and published (CNMV, BdE).
    - Priority: Low
    - Timeframe: Near-term

- Risk management and governance of CCPs
  - Liquidity risk management could be further improved by regular liquidity stress-tests and access to central bank liquidity (CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term
  - MEFF governance arrangements will need to be changed to comply with the new European regulation (EMIR), which will allow RCCP 13 on governance to be fully observed (CNMV).
    - Priority: Medium
    - Timeframe: Near-term
  - The orderly exit of BdE from BME’s capital should be planned (BdE).
    - Priority: Medium
    - Timeframe: Near-term

- Crisis management
  - Spanish FMIs should conduct regular (at least annual) default management stress-testing exercises with the involvement of participants and relevant public authorities (CNMV, BdE).
    - Priority: Medium
    - Timeframe: Immediate
  - Coordinated contingency plans should be put in place to deal with a potential financial failure of a CCP (MEC, CNMV, BdE).
    - Priority: High
    - Timeframe: Near-term

### Introduction and Scope
- FMIs in this note cover payment systems, securities settlement systems, and central counterparties.
- The analysis is based on CPSS-IOSCO Recommendations for Securities Settlement Systems (RSSSs) and Recommendations for CCPs (RCCPs).
- The note focuses on effectiveness of oversight and supervision of the main SSS and CCPs in Spain and builds on authorities’ questionnaire responses, background documentation, and meetings with Treasury, BdE, CNMV, industry participants, and legal advisers.

### Overview of Spanish FMIs and Reform Context
- Since the 2006 FSAP, payment systems have become significantly more integrated at the European level; focus now is on European integration of post-trading systems.
- Spanish clearing, settlement, and registry system is robust but its particularities make adaptation to European integration difficult without significant redesign.
- Reform discussions began in 2007, delayed by the financial crisis; planned implementation by end-2014 — the reform should adhere to the agreed timetable.
- Some improvements recommended in the 2006 FSAP for IBERCLEAR have been only partly addressed; some are not feasible until reform completion.

### Oversight and Supervisory Responsibilities and Practices
- Legal and institutional roles:
  - Government (MEC): primary responsibility to regulate and authorize FMIs.
  - BdE: oversight of payment systems within Eurosystem framework; complementary oversight activities over post-trade FMIs (not backed by its statute).
  - CNMV: supervisory body for FMIs other than payment systems; powers to obtain information and induce change.
  - Regional governments: supervise local SSSs.
- Operational observations:
  - Cooperation generally works well in practice but ambiguity exists over BdE’s scope regarding non-payment FMIs.
  - CNMV does not conduct regular CPSS/IOSCO-standard assessments for FMIs other than payment systems; supervision will need adaptation to forthcoming European regulatory and operational frameworks and future domestic FMI organization.

### CCP Risk Management, Governance, and Crisis Preparedness
- Financial risk management
  - Legal provisions, operational procedures, financial resources, and coordination arrangements exist to deal with participant default.
  - Areas for improvement:
    - Regular liquidity stress-tests.
    - Access to central bank liquidity after clearing reorganization is completed.
    - Regular (at least annual) default-management stress-testing exercises with participants and public authorities.
- Governance
  - MEFF’s current governance structure:
    - Board lacks independent members.
    - Board combines trading and clearing responsibilities.
    - Risk committee composition does not ensure separation between risk management and other CCP operations.
  - Required changes:
    - Ring-fence clearing activities.
    - Hire independent Board members.
    - Restructure risk committee to meet RCCP 13 governance requirements and comply with EMIR.
- Central bank equity stake
  - BdE holds 5 percent of BME’s capital; potential oversight, reputational, and conflict-of-interest concerns warrant planning an orderly exit and clear communication of reasons.
- Crisis management and resolution
  - Authorities should develop coordinated contingency and resolution plans for CCP failure, aligned with international and Eurosystem developments, identifying arrangements to sustain critical services or enable orderly winding down.

*International Monetary Fund — Technical Note: FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN — OVERSIGHT AND SUPERVISION OF FINANCIAL MARKET INFRASTRUCTURES (FMIS), MAY 2012*

### 3.      Systemically important payments systems used by Spanish financial institutions

### 3.      Systemically important payments systems used by Spanish financial institutions

### Overview of systemically important payment systems
- The euro area is served by two main euro large-value payment systems and one worldwide FX settlement system, all classified as systemically important payment systems:
  - TARGET2
  - EURO1
  - Continuous Linked Settlement (CLS)
- The euro area benefits from a well-integrated wholesale payment infrastructure due to changes implemented before and after the launch of the euro.

### TARGET2-Banco de España
- TARGET2-Banco de España is the Spanish component of the TARGET2 system and is the successor of the former Spanish Real Time Gross Settlement System (RTGS), the Banco de España Settlement System (SLBE).
- TARGET2 characteristics and role:
  - RTGS system owned and operated by the Eurosystem.
  - Core payment system in the euro zone where payments between banks are settled throughout the day.
  - Payments are continuously settled in central bank money and on a gross basis, providing finality at settlement and eliminating settlement risk.
  - Fully replaced the previous generation, TARGET, in May 2008.
  - Based on a single shared platform developed and operated by three central banks of the Eurozone (the Banque de France, the Deutsche Bundesbank, and the Banca d'Italia).
  - Centralized system offering harmonized services, while business relationships between national central banks and users remain decentralized.
  - One of the three largest payment systems in the world, along with FEDWIRE and CLS.
- Key statistics:
  - Average daily transactions value: more than €2,380 billion (2011 daily average).
  - Spanish component average daily value: €367 billion.

### EURO1
- EURO1 is the only private sector alternative to TARGET2 for euro large-value payments.
- Launched in 1998 by the Euro Banking Association (EBA) to provide a cost-effective net settlement infrastructure with immediate finality for large-value payments in euro.
- EURO1 processes large-value cross-border and domestic transactions in euro between banks operating in the European Union.
- Key statistics:
  - Daily value average: €249 billion (2011 daily average).
  - EURO1 specializes in processing smaller large-value payments; average payment amount is far lower than in TARGET2, typically commercial payments.

### Continuous Linked Settlement (CLS)
- CLS offers payment-versus-payment (PVP) settlement of foreign exchange transactions in 17 currencies, including the euro.
- Launched in September 2002 to mitigate FX settlement risk.
- CLS settles both sides of FX deals simultaneously for FX spot, forward, swap, and option exercises.
- Participants fund and defund net settlement positions through the RTGS systems of eligible currencies in central bank money; TARGET2 processes all euro payments to and from CLS.
- Key statistics:
  - The euro accounts for about 20 percent of all transactions settled in CLS, representing €600 billion in daily value average.
  - The U.S. dollar share is slightly over 40 percent.

### National Electronic Clearing System (SNCE) and non-systemic FMIs
- SNCE is an interbank Spanish payment system for small-value payments, managed by Iberpay (a private company owned by participating credit institutions).
- SNCE processes retail payments including credit transfers, checks, direct debits, bills, and various other transactions; settlement of SNCE occurs in TARGET2.
- Key statistics:
  - SNCE settled transactions for an average daily value of €6.3bn in 2011.
- MFAO (olive oil futures exchange and CCP) and MEFF/MEFF RF described under FMIs other than payment systems (see below).

### FMIs other than payment systems: clearing and settlement infrastructures
- European clearing and settlement infrastructures are less integrated than payment systems; in Spain there are:
  - Four domestic securities settlement systems (SSSs)
  - Three domestic CCPs
- These systems process euro transactions and use central bank money for settling through TARGET2.
- Except for the commodity derivatives CCP, the clearing and settlement systems are integrated into the holding company BME (a publicly traded company listed on the Spanish Stock Exchanges):
  - IBERCLEAR (La Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. Unipersonal)
    - Operates two settlement platforms: Book-entry System (CADE) for fixed interest securities and Securities Clearing and Settlement System (SCLV) for stock exchange traded securities.
    - Key statistic: In the first 11 months of 2011, IBERCLEAR settled transactions for an average daily value of € 189bn (placing it fourth in Europe).
  - Regional SSSs (Barcelona, Bilbao and Valencia Stock Exchanges)
    - Settle transactions for regionally listed securities (mainly public debt of the Autonomous Communities).
    - Activity decreased by 33 percent since 2006; they settled a total value of €64 billion in 2010.
  - MEFF (market and clearing house for futures and options)
    - Cleared 70.2 Million contracts in 2010 with a notional value of €789 billion.
  - MEFF Renta Fija (MEFF RF) and MEFFClear
    - MEFF RF has traded futures and options on bonds and settled contracts through its own clearing house since 1990.
    - MEFFClear established in September 2003; provides clearing services for (repo) public debt transactions contracted in SENAF and for bilaterally negotiated public debt market transactions.
    - MEFFClear currently guarantees gross transactions and does not perform multilateral netting.
    - Since mid-2010, MEFFClear activity increased due to heightened sensitivity to counterparty risk and its opening to OTC transactions.
    - Key statistics: In 2010 MEFFClear processed repo trades for a value of €278 billion, ending the year with approximately €27.7 billion of outstanding positions.
  - MFAO (exchange and CCP for olive oil futures)
    - Begun transactions in 2004; unique worldwide in trading olive oil as underlying.
    - Private company with main shareholders the Regional Government of Andalusia and seven saving banks in Andalusia.
    - Not considered systemically important.
    - Key statistic: MFAO cleared 75,023 contracts in 2011 (until December 20), with a notional value of €124 million.

### Supervisory and oversight framework
- Primary regulatory and authorization responsibility for FMIs is entrusted by law to the government; primary regulatory competence is assumed by the MEC through the treasury.
  - The MEC can delegate competence to the BdE and the CNMV to develop technical provisions.
  - MEC determines general principles of regulation; BdE and CNMV develop technical provisions.
  - The MEC is competent for authorization of FMIs, usually based on BdE and CNMV opinions.
- Oversight responsibilities:
  - BdE has responsibility for oversight of payment systems in Spain in the broader context of the ESCB; national central banks promote sound functioning of payment systems per the European Treaty and the Statute of the ESCB.
  - The Autonomy Law of the BdE (Law 13/1994) requires the BdE to promote the sound functioning and stability of the financial system and payment settlement systems; recognizes BdE with functions arising from the Statute of the ESCB.
  - CNMV supervises all other FMIs except local SSSs supervised by regional governments.
  - Securities Markets Act 24/1988 (SMA), last amended in October 2011, regulates securities market activities, including clearance and settlement; Article 84 includes regulated markets, multilateral trading facilities and systems of registry, clearing, and settlement.
  - Although not explicitly provided by law, BdE has a keen interest in securities and derivatives clearing and settlement systems due to their importance for monetary policy and financial stability; the SMA articles 44 bis and ter assign BdE several tasks in securities market infrastructures.
  - The Eurosystem conducts user assessments of SSSs it uses and their links every two years; BdE regularly assesses Iberclear and its links with European CSDs against Eurosystem user requirements.

### Main reforms and developments since the 2006 FSAP
- 2006 FSAP assessments:
  - CPSS assessment of SLBE (predecessor of TARGET2-Banco de España): all CPSS Core Principles were observed, with a few recommendations for improvement.
  - CPSS/IOSCO assessment of IBERCLEAR: RSSS 9 (settlement risk) and RSSS 15 (cost-effectiveness) were broadly observed; RSSS 11 (operational risk) and RSSS 16 (use of international communication procedures and standards) were partly observed. Overall risk judged low but some improvements suggested (see Box 1 in source).
- TARGET2 second generation:
  - Major improvement for European harmonization and economy of scale.
  - Shared technical platform allows consolidated, real-time liquidity management from a single point for institutions with locations in multiple European countries.
  - TARGET2 must meet demanding robustness and business continuity requirements; it is based on a two countries/four sites concept enabling rapid restoration of full processing capacity in an emergency.
  - Contingency procedures aim to process critical payments timely under all circumstances.
  - TARGET2 has improved cost efficiency for users and central banks.
  - In 2010, the Eurosystem started two strategic initiatives: increase use of ISO 20022 standards and develop the interface between TARGET2 and TARGET2-Securities (T2S).
- SNCE (retail payment system) developments:
  - Adapted to process new pan-European instruments and amended rules to comply with the new legal framework for payment services.
  - Created links with other retail payment systems for pan-European reachability.
  - Implemented technical improvements to increase efficiency and scalability.
- Post-trading integration initiatives:
  - Securities infrastructure integration remains limited due to complexity and cross-country differences in market practices and legal, regulatory and fiscal regimes.
  - Eurosystem launched T2S project in 2006 to create a common technical platform for settlement in central bank money, aiming to make cross-border transactions as cost effective and secure as domestic ones.
  - As of September 2015, T2S should provide harmonized delivery-versus-payment (DvP) settlement in central bank money for almost all heavily traded securities in Europe.
  - The financial crisis accelerated harmonization efforts; three new legislative initiatives launched addressing OTC derivatives and CCPs, central securities depositories (CSDs), and securities rights, with work most advanced on OTC derivatives and CCPs.

### 2006 FSAP Recommendations for IBERCLEAR (extracted)
- RSSS 9 (settlement risk): IBERCLEAR should improve risk controls by prohibiting debit balances in a participant’s securities account in the SCLV platform (to balance credits in other participants’ accounts).
- RSSS 11 (operational risk): IBERCLEAR should test its backup facility with its members more frequently. Its backup facility is 20 km from the main site and appears to rely on many of the same resources, representing a risk. The actual independence of critical services, such as telecommunications facilities, should also be evaluated.
- RSSS 15 (cost-effectiveness): IBERCLEAR should implement an effective process to obtain the views of its participants on the efficiency and costs of its services and operations, or it should regularly survey its participants on these matters.
- RSSS 16 (international communication standards): IBERCLEAR should implement international communication standards for all participant communications.
- RSSS 18 (regulation and oversight): CNMV should review the participation of its personnel on the IBERCLEAR Board due to potential governance, regulatory and reputational complications; CNMV and BdE should continue to coordinate closely and clearly define their oversight roles.

*Source: _cr12144 - 3.      Systemically important payments systems used by Spanish financial institutions*

### 18.      The European integration of domestic post-trading systems requires the Spanish

### _cr12144 - 18.      The European integration of domestic post-trading systems requires the Spanish

### European integration and securities post-trade reform
- The current Spanish clearing, settlement, and registry system is described as "particularly robust and secure" but "difficult to adapt to the European harmonization and integration process."
- Authorities have launched a comprehensive reform plan; securities and derivatives systems are in a transition period.
- A key component: replacement of the current principle of assured delivery of equities in IBERCLEAR by incident-resolving mechanisms involving the interposition of a CCP.
  - "The use of a CCP is indeed expected to become mandatory for equity transactions traded multilaterally on a regulated market or in a multilateral trading system (several CCPs, be they domestic or global, may offer the related clearing services)."
- Another key component: replacement of the registrar reference (RR)-based settlement and registry system by a system based on standardized management of balances of book-entry securities held in the accounts kept by IBERCLEAR for its participants and in the detailed accounts kept by participants for their clients.
- Expected operational and functional outcomes of the reform:
  - Better separation of clearing, settlement and registration responsibilities.
  - Ability to net transactions for the same security.
  - Compatibility with T2S practices.
  - Shortening of the settlement cycle (as the European CSD regulation will require).
  - Equities settlement able to adopt a DVP model 1 (real time gross settlement).
  - Settlement finality aligned with current practice in Europe: "at the time of settlement rather than at the time of trade."
- Milestone: approval of the revised SMA version in October 2011, which "establishes the fundamentals of the future framework."
- Implementation timeline target: "the aim being to be ready in time for joining T2S in 2015."
- Operational and secondary legislation workstreams remain outstanding.

### Reorganization of BME clearing activities
- BME is reorganizing clearing activities to adapt to the future European framework and to face further competition.
- MEFF and MEFF RF are in the process of integration.
  - Expectation: "MEFF will be the only CCP in BME Group, with three segments: stock-exchange derivatives, power derivatives, and Spanish Government debt repos."
  - MEFF may decide to offer clearing services for other product groups, "such as listed equities."
- Legal/regulatory enabler: Royal Decree 1282/2010 on regulated markets on futures, options and other derivatives instruments.
  - Entered into force in October 2010.
  - Purpose: adapt Spanish regulations to international standards, enabling Spanish derivatives markets to introduce new products, services and business lines as well as a different registry system.

### Effectiveness of the oversight/supervision of systemically important FMIs — Payment systems
- BdE oversight framework:
  - BdE applies the decisions of the Governing Council of the ECB.
  - Within the Eurosystem, BdE ensures operators of TARGET2-BdE and SNCE implement the common policy stance adopted by the Eurosystem on systemically important payment systems and retail systems.
  - TARGET2 oversight activities are carried out cooperatively by Eurosystem central banks under ECB coordination.
  - EURO1 oversight: ECB acts as lead overseer; other Eurosystem NCBs participate on a "no compulsion, no prohibition" basis.
  - CLS primary oversight responsibility: Federal Reserve of New York, with an international oversight college in which the ECB participates.
- Legal and operational toolkit of BdE:
  - Article 16 of BdE statute grants powers to regulate payment clearing and settlement systems, to oversee them, to suspend application of decisions adopted by a payment system manager; noncompliant institutions subject to Law on the Discipline and Intervention of Credit Institutions.
  - Oversight tools: prior approval of payment system rules, system monitoring, application of international standards, collaboration with system operators and participants, cooperation with banking supervisors.
  - Oversight staffing: a dedicated payment system oversight team of five staff with economics backgrounds; specific skills drawn from legal and information systems departments.
  - Oversight unit is separated from TARGET2-BdE operational unit but reports to the same head of department.
- Compliance and assessments:
  - Objective: ensure Spanish payment systems comply with ESCB standards based on the CPSS Core Principles.
  - As a SIPS, TARGET2 must comply with all applicable core principles, while SNCE, classified as a prominently important retail payment system, has to comply with only six of them.
  - Operators are expected to conduct self-assessments; BdE conducts its own assessments.
  - Last in depth assessments: TARGET2 in 2009; SNCE in 2011 (previous SNCE assessment in 2004/05).
  - Continuous oversight activities: changes to systems, incident reports, statistical information; BdE may request payment systems to make changes.
- Achievements:
  - Since 2005, rationalization of payment infrastructure: now composed of a large value payment system and a single retail payment system.
  - Settlement risk reduced via mandatory use of the RTGS system for payments over certain thresholds (example: "EUR 100,000 for checks or credit transfers in the national format").
  - Increased efficiency and BdE’s catalytic role in European harmonization of retail payments.
- Transparency:
  - Since 2005 BdE disclosed its oversight policy on its website in Spanish and English and has published an annual oversight report (in Spanish).
  - Eurosystem documents cited: Eurosystem Oversight Policy Framework; Oversight standards for euro retail payment systems; Terms of reference for the oversight assessment of euro systemically and prominently important payment systems against the Core Principles.

### Effectiveness of the oversight/supervision of systemically important FMIs — FMIs other than payment systems
- CNMV powers and tools:
  - Law provides CNMV with specific powers regarding FMIs, including ability to obtain information and induce change.
  - Main rules of FMIs and their changes require prior approval from market regulators; this includes CCP circulars on calculation of margins and lists of collateral.
  - FMIs’ annual budgets and tariffs must be presented to the CNMV for approval.
  - CNMV can establish exceptions or ask for tariff changes if they "can affect the financial solvency of the management body, produce disruptions in the securities markets, or can produce discriminations among the different market members."
  - SMA and Royal Decree 1282/2010 provide extensive access to information: right to access any document in any form and to receive a copy.
  - SMA provides market regulators with administrative sanctions (from fines to suspension); Royal Decree empowers CNMV to require government bodies to amend internal regulations if needed.
- CNMV supervisory practices:
  - Close and continuous supervision: approval of FMIs’ rules, daily monitoring, and frequent contact with FMIs and participants.
  - Rule Books and General Conditions approved for each FMI; circulars related to collateral types require explicit prior approval.
  - CNMV analyzes proposals from FMIs to change internal regulations and approves, modifies, or requires Board approval for modifications.
  - Since Royal Decree 1282/2010, more than 15 reports produced by CNMV supervisory department for MEFF, including rule book, new instruments admitted, and collateral admitted as guaranty.
  - Clearing operators must deliver a specific report on risks, detailing risk management criteria and procedures, and update it as needed.
  - Monitoring based on real time access to all individual transactions and positions, including alert mechanisms; information fed into internal CNMV information system to produce aggregated data.
  - Frequent meetings and phone calls with market participants and FMIs; on-site inspections are infrequent (examples: IBERCLEAR in 2005/2006, MEFF in 2007, MFAO in 2010).
- Compliance with CPSS/IOSCO Recommendations:
  - CNMV is committed "to ensure that the main Spanish FMIs comply with the CPSS/IOSCO Recommendations" but does not conduct regular assessments to this end.
  - SMA makes no distinction among systemically and nonsystemically important FMIs for regulation, supervision and oversight purposes.
  - When requiring compliance with CPSS/IOSCO Recommendations, CNMV considers level of activity (effective trading volume and level of margins collected) and specific FMI factors; small-sized FMIs may not be obliged to comply (example: MFAO).
  - The list of FMIs required to comply is not publicly available.
  - Operators are expected to conduct self-assessments; CNMV does not validate these self-assessments but "may conduct its own assessments."
  - Historical assessments: IBERCLEAR assessed once at end of 2005 at IMF request; CCPs have not been assessed.
  - Recommendation: "regular assessments against the CPSS/IOSCO standards be conducted for all FMIs to draw a clear and comprehensive picture of their observance of the international standards."
  - Note on standards transition: "The current CPSS/IOSCO standards (RCCPs and RSSSs) by end 2012 and the new ones (Principles for FMIs) as from 2013."
- Pace of inducing change and reform timeline:
  - Some 2006 FSAP recommendations regarding IBERCLEAR remained unaddressed six years later; some are infeasible until securities clearing, settlement, and registration reform is completed.
  - Reform discussions began in 2007; CNMV and BdE disclosed preliminary proposals in December 2007.
  - Reform efforts suspended during the financial crisis; planned implementation of agreed changes by "end-2014."
  - A detailed timetable including all relevant workstreams has been agreed by stakeholders to meet this deadline; "The securities clearing, settlement, and registration reform should stick to the agreed timetable."
- Box 2 — Follow-up of the 2006 FSAP Main Recommendations for IBERCLEAR (summary of issues)
  - RSSS 9 (settlement risk): Debit balances still possible at the level of individual client’s securities account in the SCLV platform; issue is technical and linked to the guarantee of settlement and depends on settlement system design; can only be addressed through the ongoing reform.
  - RSSS 11 (operational risk): 2010 FSB peer-review noted the proximity of IBERCLEAR’s backup site to the main site may need re-examination; advantages and costs of having the backup site in a different seismic zone or geographical area should be assessed, taking into account Madrid region is "considered as a extremely low seismic risk area."
  - RSSS 15 (Cost-effectiveness): CSD has made progress in obtaining periodic feedback via two technical committees, but "high level user representation is still an issue since the users are not part of the Board and user committees are only of technical nature."
  - RSSS 16 (International communication standards): IBERCLEAR has begun adopting international communication standards and "is planning to achieve the process in two to three years, at the time T2S goes live."
  - RSSS 18 (regulation and oversight): CNMV’s personnel is no longer part of IBERCLEAR’s Board; "The scope of oversight of the IBERCLEAR system and its participants exercised by the CNMV and the BdE still needs to be made more transparent to users and the public."

### CNMV supervisory capacity and recommended adjustments
- Current organization and staffing:
  - Secondary Market Department organized in three workstreams: equities, debt, and derivatives.
  - No dedicated supervision of FMIs; staff in each workstream covers all market functions from trading to settlement, including market operators and participants.
  - Overall, 23 people are in charge of supervising secondary markets; equivalent to five/six full-time people involved in monitoring and supervision of FMIs (but "only one person is working full time on this issue in each workstream").
- Anticipated needs under new European supervisory framework:
  - Implementation of new framework for CSDs and CCPs will require high level resources, especially to comply with new cooperation requirements (e.g., creation of supervisory colleges for each CCP with participation of foreign relevant authorities).
  - Domestic changes (replacement of RR-based settlement by standardized book-entry accounts; creation of new clearing services) will call for changes in supervision process and high level supervisory expertise.
- Suggested organizational/approach changes:
  - Grouping all clearing activities’ supervision in a dedicated team, cross-market, could allow further specialization and better focus; alternative arrangements with equivalent effectiveness could be envisaged.
  - Given scarce resources, CNMV may consider adopting a more risk-based approach: give up daily monitoring of FMIs’ operations, focus on approving main rule changes and assessing compliance with CPSS/IOSCO standards; complement with regular on-site inspections.
  - Key driver: "The implementation of the supervisory provisions of the forthcoming European legislation will be key in driving the adaptation of the CNMV’s supervision methods."

*Source: _cr12144 - 18.      The European integration of domestic post-trading systems requires the Spanish*

### 30.      Since 2007, the CNMV has increased the transparency of its actions. The CNMV

### _cr12144 - 30.      Since 2007, the CNMV has increased the transparency of its actions. The CNMV

### Transparency, CNMV Publications, and Plans
- Since 2007, the CNMV increased transparency of its actions through publications.
- The CNMV Annual Report (Spanish and English) includes two chapters on markets and post trading infrastructures describing:
  - supervision activities carried out in the year;
  - main concerns and challenges for supervision;
  - main policies to be implemented.
- Since 2007 the CNMV publishes the Plan of Activities, which:
  - sets out broad guidelines governing its activities and specific objectives for the following year, including deadlines;
  - excludes specific supervisory actions considered confidential;
  - contains a section dedicated to markets efficiency and transparency with objectives on:
    - (a) supervision of securities markets and their participants;
    - (b) enhancing transparency and disclosure;
    - (c) improvements in risk prevention and risk management.
- The 2011 Plan identified reform of Spain’s clearing, settlement, and registry system as a priority for the CNMV but did not mention FMIs’ supervision as such.

### BdE Oversight Role and Transparency
- The BdE carries out complementary oversight activities over post-trade FMIs.
- As required by law, BdE:
  - provides opinions to the MEC and the CNMV on the creation of an FMI and change of its rulebook;
  - participates in assessments and on-site inspections, if any.
- BdE focus: mainly on cash settlement process and liquidity arrangements.
- As a member of the ESCB, BdE assesses IBERCLEAR against the standards for using securities settlement systems in Eurosystem credit transactions every two years.
- Inside the securities settlement system unit, BdE dedicates three staff to oversight activities of IBERCLEAR and CCPs, drawing specific skills from legal and information system departments.
- The central bank does not publish its oversight policy over post-trade FMIs and does not include information on its implementation in its annual oversight report.

### Cooperation Between Domestic Authorities
- Cooperation between authorities is essential to ensure consistent oversight/supervision, minimize FMIs’ reporting burdens, and avoid supervisory gaps.
- The law requires coordination between CNMV and BdE.
- For payment systems, only BdE is in charge of oversight; CNMV has no supervisory responsibility for payment systems.
- Cross-representation:
  - Vice-president of CNMV is a member of the BdE Board;
  - Deputy governor of BdE sits on the CNMV Board.
- Roles assigned to CNMV and BdE regarding oversight/supervision of non-payment FMIs are located in separate provisions of the SMA and can be ambiguous or overlapping; the law provides that both institutions shall coordinate by signing agreements to set out responsibilities.
- Last update of the MoU for exchange of relevant information related to supervision of credit institutions and financial markets between both authorities is dated June 2009; the MoU is quite general and does not address FMIs’ oversight and supervision in detail.
- The law authorizes communication of confidential information between both authorities for fulfilling their respective functions.
- In practice:
  - CNMV acts as single point of entry and primary regulator/supervisor for FMIs other than payment systems.
  - CNMV and BdE have cooperated closely on reform: in 2007 they published a joint report on securities clearing, settlement and registry systems and have been jointly active in the reform process since then.
- Recommendations to improve clarity and transparency:
  - Spanish regulation should be revisited to clarify CNMV and BdE roles with regard to oversight of FMIs other than payment systems.
  - Amending the BdE’s statute to extend oversight responsibilities to all FMIs would give BdE a formal basis and allow disclosure of its oversight policy over all FMIs.
  - Both authorities may want to complement and publish a revised MoU with respect to FMIs oversight and supervision, excluding possible sensitive provisions, in Spanish and English.

### Financial Risk Management and Corporate Governance of Spanish CCPs
- General features:
  - Spanish CCPs benefit from robust financial risk management frameworks.
  - Both MEFF and MEFFClear settle in central bank money and are not linked to other CCPs.
  - MEFF offers individual segregation for clients (positions and collateral); MEFFClear only deals with proprietary accounts of clearing members.
  - Both CCPs aim at covering the default of the clearing member with the largest position plus 10 percent of this position through a resource waterfall.
  - In practice, daily stress tests indicate collateral is sufficient to cover default of the participants with the five largest positions.
- Margin and collateral specifics:
  - Clearing members are obliged to deposit 30 percent of their initial margins in cash, but in practice they deposit more than 70 percent, providing a high level of liquid resources.
  - MEFF (but not MEFFClear) has the right to draw on the cash deposited by nondefaulting members up to a 10 percent limit.
  - All cash collateral is invested in overnight repos on the Spanish debt (MEFF permitted to maintain cash available at the central bank in extraordinary market conditions).
  - Noncash collateral is not invested but is readily available in CSDs (IBERCLEAR and Clearstream Banking Frankfurt).
- Appendix 3 provides additional detail on MEFF and MEFFClear risk management frameworks.
- Liquidity risk recommendations:
  - Regular liquidity stress-tests should be conducted (none have been undertaken to confirm sufficiency of invested cash collateral).
  - Access to central bank liquidity would provide an alternative funding source if CCP funds are not readily available.
  - Under Eurosystem policy, national central banks may provide intraday credit to euro area CCPs on a routine basis under the same conditions as credit institutions when authorized by the Governing Council of the ECB.
  - MEFF has not applied for access to intraday credit but has informed BdE of intention to do so when MEFF’s reorganization is completed.
  - In emergency situations the Governing Council of the ECB may decide to facilitate overnight liquidity access to CCPs on ad hoc basis, under the same conditions as credit institutions, provided they hold an account in TARGET2, have been authorized to access intraday liquidity, and are subject to supervision and/or oversight by competent authorities.
  - Recommendation: MEFF should apply for access to central bank liquidity as soon as the on-going reorganization of clearing activities is completed.
- Governance and EMIR compliance:
  - Current governance is transparent at BME Group level: BME Board includes at least five independent members; each subsidiary has its own Board.
  - MEFF is a 100 percent owned subsidiary of BME and governed by a Board appointed by the General Shareholders’ Meeting; MEFF Board does not include independent members and covers both trading and clearing activities.
  - EMIR requires CCPs to be legal entities with independent members on their Board (one third of members, but no less than two), and representatives from clearing members and clients.
  - MEFF’s risk committee composition (MEFF CEO, two deputy CEOs, and CCP managing director) does not meet RCCPs’ requirement for clear separation between reporting lines for risk management and other CCP operations.
  - EMIR requires a risk committee composed of representatives of clearing members and independent members of the Board (in line with RCCP 13).
  - Near-term implication: MEFF will need to ring-fence clearing activities, hire independent Board members, and change risk committee composition; BME is working toward organizing all clearing functions under the same legal entity, likely MEFF.
- BdE shareholding and recommended exit:
  - When BdE transferred the SSS it operated for fixed-income securities (CADE) to Iberclear in 2004, it received nine percent of the newly formed holding, BME.
  - Since then BdE’s share has dropped to five percent, making BdE one of the main shareholders of the stock exchange group.
  - Potential issues: oversight and reputational problems if BME adopts inappropriate measures or experiences operational difficulties; conflict of interest if BME gains access to central bank liquidity for CCP activities.
  - Recommendation: BdE should plan an orderly exit from BME’s capital, choose the right moment, and clearly explain reasons to the market.

### Crisis Management, Default Procedures, and Contingency Planning
- Legal and operational arrangements:
  - Legal provisions, operational procedures, and coordination arrangements are in place to deal with default of an FMI’s participant.
  - CCPs: SMA establishes that in event of legal declaration of bankruptcy or commencement of insolvency proceedings of a participant, the CCP, upon previous communication to the CNMV, will manage transfer of contracts and open positions registered on behalf of clients, and the financial instruments and cash balances posted as collateral.
  - CSD: SMA provides that under same circumstances CNMV, without prejudice to BdE powers, may immediately and at no cost to investors transfer their securities to another authorized firm; if no firm can take responsibility, CSD will provisionally undertake until clients request transfer.
- Coordination forum:
  - The Financial Stability Committee (CESFI), established in 2006, offers a forum for information exchange on potential systemic financial stability issues; members include three financial sector regulators, State Secretary for Economic Affairs (Chair), and Secretary General of the Treasury and Financial Policy (Secretariat).
  - CESFI does not have decision-making powers; it enables coordinated actions via information exchange.
- Default management stress-testing:
  - Recommendation: Spanish FMIs should conduct regular (at least annual) default management stress-testing exercises involving participants and relevant public authorities.
  - Lehman default experience: handled smoothly in Spanish FMIs; the defaulting institution was an indirect participant and direct participants terminated activity in a few days without loss; no litigation followed.
  - Caveat: Spanish FMIs have not faced a default of a direct participant in the past decade.
  - Test scenarios should include default of major participants and combinations of participant defaults with deteriorating market conditions, reflecting potential behavioral responses and liquidity effects.
- CCP failure contingency planning:
  - Authorities should consider developing coordinated contingency plans for potential CCP failure, aligned with international discussions.
  - CCPs are particularly vulnerable to wrong-way risk (exposure to a counterparty adversely correlated with that counterparty’s credit quality).
  - Currently no specific contingency arrangements exist for a potential failure of a Spanish CCP.
  - Defining contingency policy in advance would allow faster intervention, clearer market communication, and reduced spillover risk.
  - Authorities should identify in advance applicable resolution arrangements: sustaining critical services or orderly winding down.
  - Consideration could be given to a special bankruptcy regime for CCPs to preserve going-concern value and minimize financial system disruption.
  - Note: Development of CCP contingency plans is not a requirement under current CPSS/IOSCO standards; international discussions continue and Spanish authorities intend to act according to international outcomes and the Eurosystem’s stance.

*Source: _cr12144 - 30.      Since 2007, the CNMV has increased the transparency of its actions. The CNMV*

### 43.      The EC has launched three new legislative initiatives to further harmonize

### _cr12144 - 43.      The EC has launched three new legislative initiatives to further harmonize

### OTC derivatives and Central Counterparties Regulation (EMIR)
- European Parliament and Council agreed in February 2012 on a Regulation (European Market Infrastructure Regulation, EMIR) to govern the OTC derivatives markets, the activities of CCPs, linkages between CCPs, and the features of instruments to be cleared, uniformly across EU countries.
- Objectives and scope:
  - Take into account lessons from the financial crisis and the September 2009 G20 objective of improving OTC derivatives markets.
  - Move from “light-handed regulation” to a more ambitious and comprehensive regulatory policy; make some ESCB/CESR recommendations binding (at least for CCPs).
- EMIR will introduce:
  - a clearing obligation for eligible OTC derivatives with measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives;
  - common rules for central counterparties;
  - a reporting obligation for OTC derivatives;
  - rules on the establishment of interoperability between CCPs;
  - the concept of data trade repositories.
- CCP-specific features (Regulation expected applicable as of January 1, 2013):
  - Introduce a passport for CCP services, relying on national authorization and supervision of CCPs, with a strengthened role for European Securities and Markets Authority (ESMA).
  - Define common requirements and procedures for establishing a right for CCPs to become interoperable provided that risks are addressed and competent authorities approve the link.
  - Set up common, stringent risk and governance standards for CCPs.
  - Require CCPs to offer indirect participants the possibility of having their margins placed in segregated accounts (omnibus or nominal).
- Notes:
  - Currently, CCPs provide services on a European basis but remain regulated at national level, as there is no community legislation covering CCPs.
  - ESMA is in particular in charge of developing most of the detailed rules.

### Central Securities Depositories Regulation (CSDs)
- The European Commission intends to issue a Regulation on central securities depositories (CSDs) to complement the legal framework for European clearing and settlement infrastructure.
- Timeline and status:
  - Preliminary proposals were published for public consultation in January 2011.
  - A first version of the regulation is expected in the first quarter of 2012.

### Securities Law Directive
- The Commission services are preparing a draft Directive on legal certainty of securities holding and transactions (Securities Law Directive).
- The Directive is expected to address four issues:
  - (a) the legal framework of holding and disposition of securities held in securities accounts;
  - (b) the legal framework governing the exercise of investor's rights flowing from securities through a "chain" of intermediaries, in particular in cross-border situations;
  - (c) the establishment of the free, EU-wide choice of issuers regarding the initial entry of their securities in the relevant holding structures, in particular CSDs;
  - (d) the submission of any activity of safekeeping and administration of securities under an appropriate supervisory regime.
- Status note:
  - This harmonization is expected to be a crucial step toward integration.
  - In February 2012, no draft had yet been disclosed.

### TARGET2-Securities (T2S)
- Eurosystem operational initiative launched July 2006 to create a common technical platform for settlement in central bank money of securities transactions.
- Objective:
  - Make cross-border transactions as cost effective and secure as domestic ones, complementing TARGET2 cash settlement integration.
- Operational timeline and scope:
  - As from September 2015, T2S should provide harmonized delivery-versus-payment (DvP) settlement in central bank money for almost all heavily traded securities circulating in Europe.
- Features and interactions with CSDs:
  - T2S will offer a service to CSDs but will not replace them.
  - CSDs that join T2S will “outsource” their settlement processes to T2S but retain all other functions and client relations.
  - Market participants will need a legal relationship with a CSD in order to use T2S; only CSDs will sign contracts with T2S.
  - Asset servicing, corporate action processing, and tax and regulatory reporting will remain core functions of national CSDs.
  - Use of T2S will not be compulsory.
  - Any intermediary, including ICSDs, will remain able to offer securities settlement on their books (in commercial bank money instead of central bank money).

### Appendix 3: Risk Management Framework in MEFF and MEFFClear — MEFF
- Default handling:
  - In the event of default, the Member’s proprietary account position will be closed and the clients’ positions will be transferred to other members.
- MEFF Rule Book waterfall of resources (in order):
  1. Initial Margins of the Member for each group of contracts. There is a daily margining of all positions with a confidence level of 99.9 percent and close-out period of two/three days
  2. Defaulting Member’s contribution to the default fund for each group of contracts. The total default fund of each group of contracts must cover the largest position, plus 10 percent of this position.
  3. Offsetting balances for each group of contracts and execution of the defaulting member’s extraordinary and individual fund. Members have to contribute extraordinary and individual funds based on intra-day risk limit and margin call limits or stress test results. At the end of every session, MEFF calculates the exposure of every member under stress test parameters. If the exposure is larger than all the collateral posted by the member and other members ‘contributions to the default fund, the member is required to increase its individual fund accordingly.
  4. MEFF fund (composed of MEFF capital) for each contract group.
  5. Remainder of the default fund in the group with losses. The default fund from the groups of contracts with no default will not be affected.
  6. Remaining MEFF capital.
- Collateral details at End-November 2011 (Figure 1, In millions of euros):
  - Required Collateral / Posted Collateral (columns)
  - Equities: Initial Margin 1,783 / 1,833
  - Fixed Income Securities: Initial Margin 214 / 228
  - Cash: Initial Margin 1,391 / 0
  - Bank Guarantee: (no separate values listed)
  - Individual Fund: 224 / 301
  - Individual Fund breakdown: Equities 99 / 19; Fixed Income Securities 121 / 224
  - Default Fund: 30 / 30
  - Default Fund breakdown: Equities 1 / 3; Fixed Income Securities 4 / 30
  - Total: 2,037 (Required Collateral) / 2,163 (Posted Collateral) / 313 / 250 / 124 / 2,037

### Appendix 3: Risk Management Framework in MEFF and MEFFClear — MEFFClear
- Default handling:
  - In the event of default, the Member’s proprietary account position will be closed. There are no client positions.
- MEFFClear Rule Book waterfall of resources (in order):
  1. defaulting member’s initial margin;
  2. defaulting member’s individual clearing fund; and
  3. MEFFClear capital.
- Collateral details at End-November 2011 (Figure 2, In millions of euros):
  - Required Collateral / Posted Collateral (columns)
  - Equities: Initial Margin 842 / 1,048
  - Fixed Income Securities: Initial Margin 103 / 124
  - Cash: Initial Margin 821
  - Individual Fund: 388 / 635
  - Individual Fund breakdown: Equities 26 / 58; Fixed Income Securities 551
  - Total: 1,229 (Required Collateral) / 1,683 (Posted Collateral) / 129 / 182 / 1,372
- Planned changes in anticipation of new EU legislation:
  - Introduction of a mutual default fund and a dedicated MEFFClear fund (composed of MEFFClear capital) buffer.
  - MEFF will take over all clearing activities in the Spanish markets; a share of MEFF’s capital will be carved out to form the MEFF Fund for the repo segment.
  - The mutual default fund and the MEFF Fund will be divided by market segment (repo, equity derivatives and energy derivatives).
- Revised MEFF default waterfall (planned):
  1. defaulting member’s initial margin;
  2. defaulting member’s contribution to the new mutual default fund;
  3. defaulting member’s extraordinary and individual clearing fund;
  4. the MEFF Fund for the segment suffering the default;
  5. the rest of the default fund for the segment suffering the default; and
  6. MEFF capital.

*Source: _cr12144 - 43.      The EC has launched three new legislative initiatives to further harmonize*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12144.pdf_