## _cr13183 ## Source details **Canonical URL:** [_cr13183](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13183.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13183.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13183.pdf.json) --- ### Executive Summary - LCH.Clearnet SA displays a high level of observance of the CPSS/IOSCO recommendations. - Legal and operational framework: - Sound, coherent, and transparent legal basis. - Adequate risk-management framework addressing financial and operational risks. - Participant default rules and procedures are comprehensive and publicly available. - Participant assets and CCP collateral are held in supervised banks and regulated securities depositories. - Liquidity risk minimized by settling cash in central bank money and access to central bank facilities. - Governance: governance arrangements and composition of Boards and management are well defined and adequately staffed. - Crisis performance: managed major participant defaults and increased price and sovereign debt volatility effectively. - Recommended resilience improvements: - Monitor and measure exposures continuously throughout the business day and intensify stress testing and back-testing. - Introduce operational segregation between proprietary assets and clients’ assets for all fixed-income products and for CDS when client clearing becomes available. - Strengthen control and formalize external audit of IT companies supplying and operating infrastructure. - Formalize selection criteria for Board members and enhance conflict-of-interest mitigation. - Ensure ongoing reorganization of ownership and realignment of business lines does not compromise LCH.Clearnet SA’s independence as a distinct legal entity to meet regulatory obligations. - Regulatory and oversight framework: - Supervised by Autorité du Contrôle Prudentiel (ACP) as a credit institution; regulated by Autorité des Marchés Financiers (AMF) as a Clearing House; overseen by Banque de France (BDF) as a clearing and settlement system for financial instruments. - Recommendations: empower BDF to issue regulations and undertake enforcement measures; increase on-site inspections including participation of staff from all relevant authorities; maintain and strengthen cross-border cooperation via MOUs and the regularly meeting college. ### Institutional and Market Structure - Ownership and corporate structure: - Since December 2003, LCH.Clearnet SA is fully owned by holding company LCH.Clearnet Group Ltd., registered in the U.K. - Shareholder composition: users hold 83 percent of total shares; New York Stock Exchange (NYSE) Euronext holds 9 percent; London Metal Exchange holds 8 percent. - Legal form and footprint: - Company limited by shares incorporated in France, licensed as a credit institution under French law. - Branches in Amsterdam and Brussels; representative office in Portugal; cross-border activities in Germany, Italy, Luxembourg, and Spain. - Products and markets cleared: - Listed cash products: cash equities, convertible equities, bonds listed on NYSE Euronext markets. - Listed derivatives: equity and commodity derivatives listed on NYSE Euronext markets. - Fixed-income products: government debt securities (Italian, French, Spanish) traded on MTS Italy, Euro MTS, Icap, Brokertec. - OTC product: credit derivative Swap (CDS). - CCP services to: NYSE Euronext markets, Bourse du Luxembourg, Equiduct, NYSE BondMatch, MTS Italy, Euro MTS, Icap, Brokertec, and OTC CDS. - Links and developments: - Link with CC&G (Cassa di Compensazione e Garanzia) for Italian government bonds. - Transformation Plan to create “One Firm” consolidating operations of French and U.K. subsidiaries; fixed-income clearing to be first on single platform in London. - March 2012: LSE Group offered to acquire at least 50 percent, up to 60 percent, of LCH.Clearnet Group Ltd share capital (transaction expected by fourth quarter of 2012, subject to regulatory approvals). ### Regulatory Structure and Cooperation - Legal/regulatory status and oversight: - Incorporated in France; credit institution statute required; supervised by ACP; regulated by AMF; overseen by BDF. - Cross-border supervision and MOUs: - Subject to Dutch, Belgian, and Portuguese competent authorities for local services; MOUs signed among involved authorities; a college and Coordination Committee on Clearing (CCC) in place. - Licensed as a Recognized Overseas Clearinghouse (ROCH) by the U.K. FSA for CDS; group-level MOU covering France, Belgium, the Netherlands, Portugal, and the U.K. - Link with CC&G governed by MOU between French and Italian authorities. ### Key Statistics (Table 1: France: Key Statistics of LCH.Clearnet SA, 2008–2011) - 1. Number of transactions cleared (Million) - 2008: 899,74795,76 - 2009: 852,80 - 2010: 889,82 - 1.1 Listed cash products - 2008: 388,90344,61 - 2009: 373,76 - 2010: 445,72 - 1.2 Listed Derivatives - 2008: 509,64449,93 - 2009: 477,43 - 2010: 442,05 - of which Equity derivatives - 2008: 504,20442,65 - 2009: 463,17 - 2010: 421,83 - of which Commodity derivatives - 2008: 5,457,28 - 2009: 14,26 - 2010: 20,22 - 1.3 Fixed-income - 2008: 1,201,21 - 2009: 1,61 - 2010: 2,05 - 1.4 CDS - 2010: 0,001 - 2011: 0,001 - 2. Value of transactions (EUR billion) 1/ - 2008: 50 748,2345 039,87 - 2009: 59 682,26 - 2010: 67 008,00 - 2.1 Listed cash products - 2008: 7 392,244 569,79 - 2009: 5 492,36 - 2010: 5 960,10 - 2.2 Listed Derivatives - 2008: 10 066,976 206,06 - 2009: 7 861,14 - 2010: 7 592,21 - of which Financial - 2008: 9 998,796 142,08 - 2009: 7 701,39 - 2010: 7 322,84 - of which Commodity - 2008: 68,1863,98 - 2009: 159,75 - 2010: 269,37 - 2.3 Fixed-income - 2008: 33 289,0234 264,02 - 2009: 46 273,08 - 2010: 53 394,74 - 2.4 CDS - 2010: 55,68 - 2011: 61,83 - 3. Average daily value of transactions (EUR billions) - 2008: 198,24175,94 - 2009: 234,97 - 2010: 264,86 - 4. Number of clearing members (end of year) - 2008: 105103 - 2009: 103 - 2010: 114 - of which Foreign clearing members - 2008: 4154 - 2009: 57 - 2010: 68 - 5. Default fund (EUR millions) (Value as of month of December) - 2008: 944,761 - 2009: 1 404,65 - 2010: 1 491,09 - 2011: 1 605,00 - 5.1 Listed products (equities, bonds, derivatives) - 2008: 575,00874,71 - 2009: 1 106,35 - 2010: 603,00 - 5.2 Fixed-income - 2008: 369,76529,94 - 2009: 384,74 - 2010: 750,00 - 5.3 CDS - 2010: 200,00 - 2011: 217,00 - Note: 1/ Notional amount for derivative products. ### Main Findings by CPSS/IOSCO Recommendation Categories - Legal Framework (Rec. 1): legal framework supports enforcement, netting, novation, settlement finality and collateral protection; assessment: Observed. - Participation requirements (Rec. 2): objective, publicly disclosed criteria; only regulated credit institutions and investment firms eligible; assessment: Observed. - Financial risk management (Rec. 3–6): - Measures exposures at least once a day; intraday capabilities exist with variation by market segment. - Recommendation: measure exposure continuously intraday; for fixed-income use intraday prices; formalize triggers for additional intraday margin calls; develop same-day margin model for CDS. - Assessment: Observed (with recommended improvements). - Custody and investment risks (Rec. 7): cash and securities held in central bank accounts and CSDs/ICSDs; conservative investment policy; LCH.Clearnet SA has an account in TARGET-2. - Operational risk (Rec. 8): Basel II Operational Risk Framework implemented; contingency and BCP tested; recommendations include annual simulation with market participants, formal external audit of outsourced providers and insourcing companies. - Money settlements (Rec. 9): central bank money used for vast majority of euro payments (about 85 percent for cash equity segment; 100 percent for other asset segments); exceptions include Euroclear Bank (~10 percent of NYSE Euronext volume) and CLS for CDS life-cycle events. - Links between CCPs (Rec. 11): link with CC&G exists with specific risk methodology; CCPs collect margins from each other but do not contribute to each other’s clearing funds; recommendation: collect adequate additional margin from CC&G and ensure safe investment of collateral. - Efficiency (Rec. 12): regular pricing, capacity and benchmarking reviews; ongoing profit-and-loss analysis; cost control program implemented. - Governance (Rec. 13): governance arrangements clear; Board includes four independent members; no formal selection criteria for “user representative”; assessment: Broadly Observed; recommendations to formalize selection criteria and strengthen independence. - Transparency (Rec. 14): rules and procedures disclosed; comprehensive self-assessment against RCCPs not completed; assessment: Partly Observed; recommended to complete and disclose CPSS/IOSCO key-question responses. - Regulation and oversight (Rec. 15): comprehensive and effective oversight with well-defined responsibilities; recommendations to empower BDF and for ACP and AMF to publish policy notes clarifying objectives and responsibilities; assessment: Observed. ### Measurement, Margining, Haircuts, and Collateral - Measurement frequency and data by segment: - Exchange traded cash products — Measurement: Ad hoc depending on the volatility — Prices: Real time — Positions: Real time - Exchange traded derivatives — Measurement: 9 per day — Prices: Near real time — Positions: Real time - Fixed-income — Measurement: 1 per day + 1 additional depending on the volatility — Prices: End-of-day prices for trades of the previous day; trade prices for new trades — Positions: Near real-time - CDS — Measurement: 1 per day — Prices: End-of-day prices for previous trades of the previous day; trade prices for new trades — Positions: New positions are received once per day - Margin requirements: - Target coverage: confidence interval of 99.7 percent over price movement observed in previous year(s); CDS use adapted SPAN methodology; liquidation periods: three days for cash equities, bonds, listed derivatives, fixed-income; five days on the CDS segment. - Intraday margin calls automated at 1.45 pm on derivatives and fixed-income; ad-hoc hourly triggers possible; no automated intraday margin for cash equity segment (recommendation to apply). - Collateral composition (average): - Cash: around 63 percent - Securities: 26 percent - Central bank guarantees: 10 percent - Cash deposits almost entirely in EURO; equities represent less than 10 percent of securities holdings. - Haircuts, collateral valuation and FX treatment: - Haircuts back tested monthly since November 2011; equity haircut fixed at 35 percent. - Cash collateral FX risk: amount equal to a 99.7 percent confidence level calculated over a five year price history for two-day currency movements added to market risk haircut. - Recommendations: improve automation, trailing and accuracy in parameter calculation; formalize policy to address wrong-way risk; commission independent model reviews for all products (not only CDS). ### Financial Resources, Default Funds, Stress Testing - Default fund structure: - Three separate default funds: exchange traded markets; fixed-income markets; CDS markets. Each can only be used for its relevant market. - Sizing and confidence: - Each clearing fund calibrated to cover 100 percent of estimated maximum potential future exposure of the biggest participant on that segment with at least 99.7 percent confidence. - Stress testing: - Two sets of scenarios: historical and theoretical; GEV used for default fund sizing (under implementation for Cash & Derivative Default Fund); stress tests performed daily in practice; scenarios reviewed at least once a year. - Replenishment: members can be requested for immediate and full replenishment; aggregate replenishment calls limited to amount of last default fund call. - Types and tiers of resources (availability and composition): - Individual margins, mutual clearing funds, LCH.Clearnet SA’s own funds. - CDS “skin in the game”: LCH.Clearnet SA contributes EUR 20 million of its own capital prior to mutual CDS clearing fund contributions. - Financial resources as of February 2012 (in MEUR): - Cash Equity & derivatives: Default fund 971, Margins 4 022 - Bonds & Repos: Default fund 750, Margins 15 512 - CDS: Default fund 225, Margins 264 - Total: Default fund 1 946, Margins 19 798 - LCH.Clearnet SA’s own funds: EUR 141 million - Clearing fund contributions accepted only in cash in EURO, British pound or U.S. dollar. - Assessment comments: commission independent model reviews beyond CDS; intensify stress tests and formalize policies on inadequate resource responses. ### Liquidity Arrangements and Credit Lines - Liquidity management: - Required amount of liquidity calculated daily by the risk department; as a credit institution LCH.Clearnet SA has access to central bank liquidity in Target 2 against collateralized securities. - Access to money markets and noncommitted commercial bank credit lines (noted as highly uncertain in distress). - Noncommitted credit lines (amounts as stated): - EUR 380000000 total noncommitted credit lines with commercial banks. - BNPP EUR 110 000 000 - SG EUR 100 000 000 - ING EUR 100 000 000 - Natixis EUR 50 000 000 - BPCE EUR 20 000 000 ### Default Procedures, Legal Powers, and Segregation - Default definitions (CRB): - Contractual event of default: failure to comply with clearing rules or likely inability to meet obligations. - Insolvency event of default: subject to insolvency proceedings or likely to become so based on public information. - Triggers and actions: - Triggers include failures to pay/deliver, margin calls, clearing fund contributions, and unresolved net fails. - Default management: transfer client positions to another clearing member; close out defaulting member’s positions; auction process; CDS-specific powers include distribution of losses and potential close out of the segment. - Customer/proprietary asset treatment and segregation: - Members required to open separate accounts for own positions and client positions for listed equities and derivatives; Article L.440-7 and L.440-9 of MFC provide legal basis for CCP rights over posted client deposits and transfers to other members. - At time of report: no possibility to distinguish proprietary vs client assets in CDS (planned to be developed); fixed-income offers account segregation for some debt instruments. - Recommendations: - Introduce segregation mechanism for CDS when client clearing available. - Introduce operational segregation mechanism for all fixed-income products. ### Custody, Investment Policy, and Concentration Limits - Custody: - Collateral securities deposited only with CSDs and ICSDs supervised by national authorities; participant securities held in dedicated participant-name accounts pledged to LCH.Clearnet SA. - Cash collateral in euro must be credited on LCH.Clearnet SA’s Target-2 account at BDF; small non-euro cash held with commercial banks. - Investment policy: - Invests cash funds with approved counterparties via fixed deposits, swaps, repo; over 95 percent invested in high quality investments: governments (AA- and above), central banks, supranational and government guaranteed institutions. - Interest rate exposure hedging required for investments with maturity exceeding 6 months. - Policy prohibits investing own capital or margin in LCH.Clearnet SA’s own securities. - Concentration: - Concentration limits and overall credit exposure monitored daily; limited by Large Exposure Rules of the Capital Requirements Directive. ### Operational Risk, Business Continuity, and IT Resilience - Operational risk framework and staffing: - Basel II Operational Risk Framework implemented; 119 risks identified and evaluated; ownership and monitoring assigned; outsourced risks monitored via SLAs. - Staff: 194 permanent, 50 temporary; Operations Department ~20; BCS Department six persons; Internal audit staffed 4.5 FTEs. - Business continuity and testing: - PARAD tool implemented; Operator Recovery Plan released June 2010; Business Continuity Testing Universe initiated 2010; contingency plans regularly tested. - Recommendation: annual external audit of BCP; formalize external audits of outsourced activities; test BCP regularly with participants; study feasibility to reduce RTO from four hours to preferably less than one hour. - IT resilience and capacity: - Data replicated synchronously between three IT sites via COLT network; RTO less than 4 hours from secondary site with no data loss; fire-drill tests show 2 ½ hour RTO achievable including IT and Operations. - Two data centres managed by ATOS; plan to move back-up data center by end 2012 to 35km away. - Operational capacity on cash equity segment: 3 million trades per day (current), peak ~2 million/day during Lehman; maximum capacity up to 6 million/day with expectation up to 10 million/day. - Outsourcing: - All IT services outsourced; ATOS major provider representing roughly 85 percent of IT production costs; COLT for communications; operational arrangements with DTCC/Markit for CDS prices and TIW exchange. - Assessment comments: formalize external audits of outsourced activities and insourcing companies; involve clearing participants in continuity tests. ### Money Settlements, Use of Central Bank Money, and Finality - Settlement model and usage: - Preference for central bank money for cash margins and settlement; commercial banks used where central bank money not possible. - Usage (2011): central bank money about 85 percent for cash equity segment and 100 percent for other asset segments. - Euro payments settled in TARGET-2 in LCH.Clearnet SA account with BDF; clearing members must hold TARGET-2 account or be represented. - Exceptions and settlement agents: - Euroclear Bank used for about 10 percent of NYSE Euronext cash transaction volume; Clearstream Luxembourg used for Bourse de Luxembourg (negligible). - CDS life-cycle payments settled via CLS; LCH.Clearnet SA accesses CLS through Société Générale as payment agent. - Foreign currency margins in GBP and USD represent less than 0.1 percent; corresponding bank agents used. - Finality and operating hours: - Euro payments in TARGET-2 ensure finality under Directive 98/26 EC; CLS finality window when effected between 9.30 a.m. and 12 a.m.; payment systems provide real-time finality during operating hours from 7.00 am to 6.00 pm CET. - Monitoring settlement agents: - ICSDs and private payment agents used; monitoring practices differ; criteria for private bank agents include average credit rating at least A- or sovereign/parent guarantees; LCH.Clearnet SA maintains cash exposure limit on BNPP as group. - Recommendation: assess finality of non-euro payments in commercial bank money if volumes increase. ### Risks in Links between CCPs (LCH.Clearnet SA — CC&G link) - Link description and governance: - Link with CC&G activated August 2004 for clearing Italian government bonds; CCPs are reciprocal participants; payments in central bank money; securities via Monte Titoli. - Executive Board reviews links annually; ad-hoc and monthly coordination between risk teams; joint default management test in December 2011. - Risk mitigation: - Margins collected daily from CC&G using same methodology; CCPs do not contribute to each other’s default funds; bilateral collateralization in place. - Empirical uncovered risk: January 2011 monthly average of daily uncovered risk EUR 375.7, with peak EUR 2,614.3 million on January 3, 2011; uncovered risk reduced since July 2011. - Legal and cooperation framework: - Link governed by EU Directives and national laws; service agreements in place under French and Italian law; cooperation via MOU between French and Italian authorities enabling information exchange and on-site inspection reliance. - Recommendations: - Collect adequate additional margin from CC&G; ensure collateral provided to CC&G is safely invested and re-hypothecation/reinvestment risks minimized. ### Governance, Transparency, and Regulation & Oversight (summary of recommendations) - Governance (Recommendation 13): - Assessment: Broadly Observed. - Recommended actions: align independence criteria with U.K. Code; disclose Board selection criteria; formalize user representative selection; clarify remuneration policy; review structure to identify and address conflicts of interest; ensure Group integration does not erode LCH.Clearnet SA independence. - Transparency (Recommendation 14): - Assessment: Partly Observed. - Recommended action: complete and disclose answers to CPSS/IOSCO key questions and review them at least annually or following major changes. - Regulation and oversight (Recommendation 15): - Assessment: Observed. - Recommended actions: empower BDF to issue regulations and enforce oversight; ACP and AMF to publish policy notes clarifying objectives and responsibilities; BDF/AMF/ACP to produce a joint policy note to increase transparency and accountability. *Source: _cr13183 - 6.00 pm CET_* ### 1. Key Statistics of LCH.Clearnet SA, 2008–2011 ..................................................................8 ### 1. Key Statistics of LCH.Clearnet SA, 2008–2011 ### Executive Summary - LCH.Clearnet SA displays a high level of observance of the CPSS/IOSCO recommendations. - Legal and operational framework: - Sound, coherent, and transparent legal basis. - Adequate risk-management framework addressing financial and operational risks. - Participant default rules and procedures are comprehensive and publicly available. - Participant assets and CCP collateral are held in supervised banks and regulated securities depositories. - Liquidity risk is minimized by settling cash in central bank money and access to central bank facilities, including liquidity. - Governance: - Governance arrangements and composition of Boards and management are well defined and adequately staffed. - Crisis performance: - Managed the challenges of the financial crisis well, including prompt handling of major participant defaults and effective management of increased price volatility, including sovereign debt volatility. - Recommended resilience improvements: - Monitor and measure exposures continuously throughout the business day and intensify stress testing and back-testing. - Introduce an operational segregation mechanism between proprietary assets and clients’ assets for all fixed-income products to enhance customer asset protection in default events. - Strengthen control and formalize external audit of IT companies supplying and operating infrastructure. - Formalize selection criteria for Board members and enhance conflict-of-interest mitigation. - Ensure ongoing reorganization of ownership and realignment of business lines does not compromise LCH.Clearnet SA’s independence to meet regulatory obligations as a distinct legal entity. - Regulatory and oversight framework: - Comprehensive and effective: supervised by Autorité du Contrôle Prudentiel (ACP) as a credit institution; regulated by Autorité des Marchés Financiers (AMF) as a Clearing House; overseen by Banque de France (BDF) as a clearing and settlement system for financial instruments. - BDF should be empowered to issue regulations and undertake measures to enforce oversight effectively. - Improve enforcement via increased on-site inspections, including participation of staff from all relevant authorities. - Cooperation and coordination among domestic authorities have solid legal basis, including exchange of confidential information. - Cross-border cooperation is well developed, with comprehensive Memoranda of Understanding (MOUs) and a regularly meeting college. ### Institutional and Market Structure - Ownership and corporate structure: - Since December 2003, LCH.Clearnet SA is fully owned by holding company LCH.Clearnet Group Ltd., registered in the U.K. - Holding company created as part of a December 2003 merger to oversee two subsidiaries: LCH.Clearnet Limited and LCH.Clearnet SA (officially “Banque Centrale de Compensation SA”). - Shareholder composition: users hold 83 percent of total shares; New York Stock Exchange (NYSE) Euronext holds 9 percent; London Metal Exchange holds 8 percent. - Legal form and footprint: - LCH.Clearnet SA is a company limited by shares incorporated in France, licensed as a credit institution, governed by French law. - Branches in Amsterdam and Brussels; representative office in Portugal. - Cross-border activities in Germany, Italy, Luxembourg, and Spain. - Products cleared: - Listed cash products: cash equities, convertible equities, and bonds listed on the NYSE Euronext markets. - Listed derivatives: equity and commodity derivatives listed on the NYSE Euronext markets. - Fixed-income products: government debt securities (Italian, French, and Spanish states) traded on MTS Italy, Euro MTS, Icap, and Brokertec (often called “bonds and repo”). - OTC product: credit derivative Swap (CDS). - Markets served (CCP services): - Cash products and derivatives listed on the NYSE Euronext markets. - Cash products listed on Bourse du Luxembourg. - Cash products traded on Equiduct, NYSE BondMatch. - Fixed-income products traded on MTS Italy, Euro MTS, Icap, Brokertec. - CDS traded over the counter. - Links and developments: - Operates a link with CC&G (Cassa di Compensazione e Garanzia), an Italian CCP in LSE group. - Recent developments: - Board-initiated “Transformation Plan” to create “One Firm” by consolidating operations of French and U.K. subsidiaries; fixed-income clearing to be first business line cleared on the single platform in London. - March 2012: LSE Group offered a bid to acquire at least 50 percent, and up to 60 percent, of LCH.Clearnet Group Ltd share capital; transaction expected to be completed by the fourth quarter of 2012, subject to regulatory approvals, including competition clearance. ### Regulatory Structure and Cooperation - Legal/regulatory status: - Incorporated in France and operates under French law. - Must have credit institution statute, licensed and supervised by ACP (banking supervisory authority). - Regulated by AMF as a clearing entity; AMF approves operating rules. - Overseen by Banque de France (BDF) as a clearing and settlement system for financial instruments. - Cross-border supervision and MOUs: - Subject to regulation and oversight of Dutch, Belgian, and Portuguese competent authorities for services in Amsterdam, Brussels, Lisbon. - MOUs signed between National Bank of Belgium (NBB) and Financial Services Market Authority, De Nederlandsche Bank, Nederlandsche Autoriteit Financiële Markten, Banco de Portugal, and Comissão do Mercado de Valores Mobiliários; a college has been set up. - Licensed as a Recognized Overseas Clearinghouse (ROCH) by the Financial Service Authority (FSA) in the U.K.; a group-level MOU signed by France, Belgium, the Netherlands, Portugal, and the U.K. (FSA, BOE). - For link with Italian CC&G, an MOU is signed by French authorities and Italian authorities (Banca d’Italia (BDI) and Consob). - Table 2 (summary) lists MOUs for systems/activities (LCH.Clearnet SA, LCH.Clearnet Group, link with CC&G, LCH.Clearnet SA-Bourse du Luxembourg, LCH.Clearnet SA-German infrastructures). ### Key Statistics (Table 1: France: Key Statistics of LCH.Clearnet SA, 2008–2011) - 1. Number of transactions cleared (Million) - 2008: 899,74795,76 - 2009: 852,80 - 2010: 889,82 - 1.1 Listed cash products - 2008: 388,90344,61 - 2009: 373,76 - 2010: 445,72 - 1.2 Listed Derivatives - 2008: 509,64449,93 - 2009: 477,43 - 2010: 442,05 - of which Equity derivatives - 2008: 504,20442,65 - 2009: 463,17 - 2010: 421,83 - of which Commodity derivatives - 2008: 5,457,28 - 2009: 14,26 - 2010: 20,22 - 1.3 Fixed-income - 2008: 1,201,21 - 2009: 1,61 - 2010: 2,05 - 1.4 CDS - 2010: 0,001 - 2011: 0,001 - 2. Value of transactions (EUR billion) 1/ - 2008: 50 748,2345 039,87 - 2009: 59 682,26 - 2010: 67 008,00 - 2.1 Listed cash products - 2008: 7 392,244 569,79 - 2009: 5 492,36 - 2010: 5 960,10 - 2.2 Listed Derivatives - 2008: 10 066,976 206,06 - 2009: 7 861,14 - 2010: 7 592,21 - of which Financial - 2008: 9 998,796 142,08 - 2009: 7 701,39 - 2010: 7 322,84 - of which Commodity - 2008: 68,1863,98 - 2009: 159,75 - 2010: 269,37 - 2.3 Fixed-income - 2008: 33 289,0234 264,02 - 2009: 46 273,08 - 2010: 53 394,74 - 2.4 CDS - 2010: 55,68 - 2011: 61,83 - 3. Average daily value of transactions (EUR billions) - 2008: 198,24175,94 - 2009: 234,97 - 2010: 264,86 - 4. Number of clearing members (end of year) - 2008: 105103 - 2009: 103 - 2010: 114 - of which Foreign clearing members - 2008: 4154 - 2009: 57 - 2010: 68 - 5. Default fund (EUR millions) (Value as of month of December) - 2008: 944,761 - 2009: 1 404,65 - 2010: 1 491,09 - 2011: 1 605,00 - 5.1 Listed products (equities, bonds, derivatives) - 2008: 575,00874,71 - 2009: 1 106,35 - 2010: 603,00 - 5.2 Fixed-income - 2008: 369,76529,94 - 2009: 384,74 - 2010: 750,00 - 5.3 CDS - 2010: 200,00 - 2011: 217,00 - Note: 1/ Notional amount for derivative products. ### Main Findings (by CPSS/IOSCO Recommendation categories) - Legal Framework (Rec. 1) - Activities governed by a consistent and solid set of laws, regulations, and rules. - Legal framework supports enforcement of transactions, netting procedures, and protection of customer assets. - Adequate rules for participant default events, including effective use of collateral. - Settlement finality and collateral directives provide solid protection in France and other EEA countries. - Participation requirements (Rec. 2) - Access and exit criteria are well defined and publicly disclosed. - Participation requirements are objective and clearly stated; do not limit access on grounds other than risks. - Only regulated credit institutions and investment firms eligible as clearing members. - Participants must meet financial resources and operational reliability; compliance monitored regularly. - Financial risk management (Rec. 3–6) - Comprehensive risk-management framework. - Monitors participants’ exposures at least once a day and conducts intraday margin calls. - Tools to limit exposures include high required capital, margin requirements, and clearing fund contributions. - Can require additional financial resources when unusual price levels detected. - Developed dedicated risk-management procedures for sovereign debt. - Recommendation: measure exposure continuously intraday (exposure calculated continuously intraday once positions, participants, or product prices have changed). - Custody and investment risks (Rec. 7) - Cash and securities kept safe in central bank account and national/international central securities depositories. - LCH.Clearnet SA has an account in TARGET-2. - Investment policy conservative: invests in highly rated government instruments. - Daily monitoring procedures ensure overall credit exposure to any issuer remains within acceptable concentration limits. - Operational risk (Rec. 8) - Business continuity arrangements well developed; cover operations and communication networks. - Implemented Operational Risk Framework of Basel II Capital Accord requirements. - Operational Risk Management is ongoing, formalized; monitoring of operational risks and loss events via dedicated tool. - Contingency plans and back-up facilities regularly tested and maintained. - Recommendation: carry out annual simulation exercise with market participants. - Recommendation: relevant authorities should formalize assessment of operational risk, including onsite inspections, of the insourcing company that develops and manages the largest part of LCH.Clearnet SA activities. - Money settlements (Rec. 9) - Uses both central bank money and private settlement bank for cash processing (margin and settlement). - Central bank money used for the vast majority of euro payments: - about 85 percent for cash equity segment - 100 percent for other asset segments - Euroclear Bank used for about 10 percent of the volume of NYSE Euronext markets. - Clearstream Luxembourg used for settlement of transactions on Bourse de Luxembourg (amount very low). - Commercial bank money used for settlement of margins in British pounds and U.S. dollars (very negligible). *Source: LCH.Clearnet SA.* ### 23. LCH.Clearnet SA clearly identifies and manages its obligation for physical ### 23. LCH.Clearnet SA clearly identifies and manages its obligation for physical ### Physical delivery - Deliveries of securities are carried out in book-entry form (dematerialized and immobilized). - Delivery obligations are fulfilled via book transfer. - LCH.Clearnet SA has developed comprehensive rules and instructions for the delivery of commodity contracts. ### Risks in links between central counterparties (Rec. 11) - LCH.Clearnet SA has a link to the Italian CCP—CC&G—for the clearing of Italian government bonds. - LCH.Clearnet SA has specific rules and risk methodology aimed at minimizing its risk exposures to CC&G. - Both CCPs collect margins from each other based on a methodology that is applied to their members, but they do not contribute to the other’s clearing fund, in order to minimize contagion risk that may result from members’ default. - The link is subject to the regulation and oversight of the relevant French and Italian competent authorities. - Both central counterparties (CCPs) are designated payment systems according to Article 10 of the Settlement Finality Directive 98/26/EC, which provides legal protection to finality and collaterals. ### Efficiency (Rec. 12) - LCH.Clearnet SA reviews its pricing and service levels, as well as capacity levels on a regular basis. - It performs periodic benchmarking studies with comparable CCPs in other European countries to assess its costs and fees. - An ongoing profit-and-loss analysis is conducted. ### Governance (Rec. 13) - LCH.Clearnet SA is a wholly owned subsidiary of LCH.Clearnet Group Ltd. - LCH.Clearnet SA governance arrangements and composition of the Boards are clear and publicly available on its website. - The Board, which includes four independent Board members, is accountable to the shareholders. - There is no formal selection criteria or procedure used to choose the “user representative” on the Board, so as to ensure the Board has appropriate skills and incentives. - Procedures to identify and mitigate conflicts of interests should be further enhanced. - A transformation plan is currently being implemented, aimed at streamlining the operations of both subsidiaries based on product lines, and some of the functionalities will be concentrated at the group level. - It is crucial that the new organization does not compromise that LCH.Clearnet SA retains the necessary level of independence to meet its regulatory obligations as a distinct legal entity. ### Transparency (Rec. 14) - LCH.Clearnet SA discloses to its clearing members and other market participants its rules, procedures, and policies on its website. - These rules cover governance issues, the rights and obligations of participants, procedures and tools for handling risks, and fees for using its services. - Important notices and information are posted on the website. - LCH.Clearnet SA has not completed and disclosed a comprehensive self-assessment following the RCCPs assessment methodology. ### Regulation and oversight (Rec. 15) - The objectives and responsibilities of the regulators of LCH.Clearnet SA are well defined and transparent. - The supervision and oversight of LCH.Clearnet SA are comprehensive and effective. - LCH.Clearnet SA is regulated and supervised by several domestic and foreign authorities. - Cooperation and coordination between these authorities are governed by French law and, where necessary, formalized in several MOUs. *Source: IMF staff report excerpt (section 23–28).* ### 29. A general discussion with the system operator and the regulators indicates ### _cr13183 - 29. A general discussion with the system operator and the regulators indicates ### Overall assessment - LCH.Clearnet SA will, in principle, be able to meet the newly revised CPSS/IOSCO principles. - The new principles would not have any significant impact on LCH.Clearnet SA, and it will be able to adjust to the new requirements as far as needed. - Table of assessment categories (extracted): - Observed: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 15 - Broadly observed: 13 - Partly observed: 14 - Non-observed: - - Not applicable: - ### Recommendation 1 — Legal framework - LCH.Clearnet SA is subject to a clear, coherent, and robust regulatory framework; rules, procedures, and contractual arrangements are public and readily accessible. - Legal and regulatory instruments governing activities: - the Monetary and Financial Code (MFC), including European Directive; - the French Code Civil governing the notion of “netting” (completed by the MFC regarding the multilateral netting) and “novation;” - the Companies Act of 1985 for the governance structure, including the role of the Board and Directors; - the Commercial Code for private contractual arrangements; - Clearing Rule book (CRB) for its operations; and - contractual arrangements with clearing members. - EU Directive 98/26/EC on Settlement Finality transposed; LCH.Clearnet SA notified as a settlement and clearing system to the European Commission in February 2001. - Novation - Legal basis for novation provided in the CRB (Article 1.3.2.1) and aligned with Article 1271 and seq. of the French Civil Code. - For CDS, CRB for CDS dated May 9, 2012 provides contractual provisions for central counterparty novation; novation occurs if eligible for clearing pursuant to controls in section 3.1.1 CRB of CDS. - Timing of assumption of liability - When a transaction is matched following trade execution, LCH.Clearnet SA guarantees that the transaction is registered in the clearing system unless otherwise provided in a notice. - Not liable if a transaction is improperly registered because of a third party’s fault or force majeure (section 1.3.3 of the CRB). - Scope of guarantee varies by instrument (Article 1.3.2.6 of the CRB): securities, option contracts, futures contracts (including commodities), repos, and CDS segment obligations are specified. - Netting arrangements - Legal basis: Article 1289 of the French Civil Code for bilateral netting; Article L. 330-1 of the MFC (transposition of Directive 98/26/CE as amended by Directive 2009/44/EC) supports multilateral netting and states netting is legally enforceable and binding on third parties upon registration. - Protection of CCP’s interest in collateral - Collateral defined in CRB as any security, cash, or central bank guarantee pledged, granted or transferred outright to LCH.Clearnet SA; covers margins and contributions to clearing funds. - Settlement Finality Directive and Collateral Directive transposed into French law: law n° 98-546 on July, 2, 1998; Order n° 2005-171 on February, 24, 2005; Order n° 2011-398 on April 14, 2011. - Directives ensure financial collateral arrangements can take effect notwithstanding winding-up proceedings and set applicable law as that of the country where the relevant securities account is maintained. - Default procedures - Defined in CRB Chapter on Risk Management: defines contractual event of default and insolvency event of default; Chapter 5 specifies measures and available resources; Section 4.4.2 details liability of defaulting clearing member and measures in default. - French statutory laws Article L. 440-7 and L. 440-8 of the MFC provide legal basis for default rules. - Finality of transfers - Article L. 330-1-III of the MFC (transposing Directive 98/26/EC) ensures finality of transfers of funds and financial instruments in a settlement system. - Euro-denominated securities settlements via Euroclear France, Euroclear Netherlands, Euroclear Bank, Euroclear Belgium, Interbolsa (Portugal) and Express II Monte Titoli (Italy). - Non-euro settlements use different settlement banks; negligible value of non-euro settlements led to no deep risk analysis here (see Recommendation 9). - Transfers of funds in euro take place in TARGET-2, except CDS product cash settlements (coupons, premiums, credit events) which take place in CLS. - Cross-border participation and legal evaluation - Significant level of cross-border activities mainly within the EEA; contractual arrangements governed by French law. - Belgium, Netherlands and Portugal are subject to EU Directives on finality and collateral and have ratified the Rome Convention; French law governing admission agreements is recognized subject to public policy and Rome Convention rules. - LCH.Clearnet SA has obtained legal opinions to ensure netting arrangements are compatible with foreign jurisdictions; no indication of conflict of law inhibiting sound clearing within EEA. - Non-EEA clearing member domicile in Switzerland: AMF prior approval in close consultation with ACP required; AMF and ACP obtained a comfort letter from FINMA and LCH.Clearnet SA required independent legal opinion from applicant. - Assessment: Observed ### Recommendation 2 — Participation requirements - Eligibility and monitoring - Eligible clearing members: credit institutions and investment firms with registered office in the EEA and subject to supervision; non-EEA firms may be clearing members subject to AMF approval (in consultation with ACP). - LCH.Clearnet SA’s specific financial and operational requirements vary by category: clearing member vs general clearing member; capital requirements depend on products to be cleared (highest for CDS, fixed-income; lowest for equities). - Participants must demonstrate adequate technical equipment, sufficiently qualified staff, and adequate risk management procedures. - Applicants conduct testing with LCH.Clearnet SA prior to activating membership; operational and organizational requirements updated annually by members. - “Members’ Financial Monitoring Service” produces half-yearly reports assessing core and supplementary capital and compliance; ad-hoc assessments follow rating deterioration signals. - Suspension and termination - Circumstances for suspension/termination: - Events that lead a clearing member to no longer satisfy participation requirements; - Clearing member endangers proper functioning or is unable/likely to become unable to meet obligations; - Clearing member requests termination. - Clearing member informed in writing; termination subject to at least ten days’ notice (admission agreement); suspension/revocation notified to all clearing members and competent authorities. - Access and appeals - Participation requirements are objective, publicly disclosed (rule books available via website), and do not limit access on grounds other than risks. - LCH.Clearnet SA reserves discretion to refuse applicants; if refused, LCH.Clearnet SA must provide motivation within one month; no specific internal appeal procedure—recourse to Court is possible. - Comment: Due to LCH.Clearnet’s unique position as a single CCP serving specific markets, an applicant should have the possibility to appeal to a third party (cf. competent authority) rather than addressing a court, which is a lengthy process. - Assessment: Observed ### Recommendation 3 — Measurement and management of credit exposures - Frequency and intraday capability - LCH.Clearnet SA measures exposures at least once a day and has capacity to measure intraday; intraday timing varies across markets. - Exchange traded cash products: no automated intraday exposure measurements currently; ad hoc intraday measurements possible in volatile conditions. - Exchange traded derivatives: nine snapshots per day; margin-call-triggering run at 1:45 pm; other runs can be used in extreme volatility. - Fixed-income: intraday margin calculation performed once per day at 1:45 pm; additional ad-hoc intraday measurement may occur. - CDS: no intraday margin call at time of assessment; CDS clearing receives trades in a batch once a day from DTCC trade information warehouse for indexes—exposure cannot build intraday due to acceptance process. - Price and position data used - Exchange traded cash products: real time prices and positions for ad-hoc intraday measurements. - Exchange traded derivatives: near real time prices and real time positions. - Fixed-income: end-of-day prices for previous day trades, trade prices for new trades; near real-time updated positions including settlements and same-day repos. - CDS: end-of-day prices for previous trades and trade prices for new trades; new positions received once per day. - Summary table of measurement frequency and data (as reported) - Exchange traded cash products — Measurement: Ad hoc depending on the volatility — Prices: Real time — Positions: Real time - Exchange traded derivatives — Measurement: 9 per day — Prices: Near real time — Positions: Real time - Fixed-income — Measurement: 1 per day + 1 additional depending on the volatility — Prices: End-of-day prices for trades of the previous day; trade prices for new trades — Positions: Near real-time - CDS — Measurement: 1 per day — Prices: End-of-day prices for previous trades of the previous day; trade prices for new trades — Positions: New positions are received once per day - Tools to limit exposures - Prudential supervision and participation requirements; daily monitoring using Market Implied Rating (Bond, Equity and CDS)/Credit Edge data (EDF Expected Default Frequency and Implied Rating). - Alerts generated when Market Implied Rating diverges from official rating beyond a threshold; desk-based investigations and discretionary actions (e.g., request increase in margin, membership review). - Position and exposure limits; ability to increase margin requirements; ability to order reduction of open positions and automatic liquidation if limits are not met. - Assessment: Observed - Comments / recommended improvements - LCH.Clearnet SA should measure exposures continuously throughout the business day (continuous intraday recalculation when positions, participants, or prices change). - For fixed-income instruments, LCH.Clearnet SA should use intraday prices for exposure calculation. - Triggers for additional intraday margin calls for exchange traded equities should be formalized with specific procedures and policies. - LCH.Clearnet SA should develop a model that allows calculation of margin call for CDS on the same day prices rather than previous day prices. ### Recommendation 4 — Margin requirements - Intended coverage and model validation - LCH.Clearnet SA relies primarily on margin requirements (initial and variation margin each clearing day) to cover losses from a member’s default in normal market conditions. - Target coverage corresponds to a confidence interval of 99.7 percent over the price movement observed in the previous year or two years for the CDS segment (the “look back period”). - Initial margin covers losses in all but extreme market conditions (inside 99.7 percent confidence); extreme conditions are covered by Default Funds. - For CDS, initial margins computed using an adapted SPAN methodology (replacing underlying value price by CDS spread); methodology must account for spread risk, expected recovery rate risk, recovery rate risk (in case of actual default), default risk, interest rate risk, time risk, and basis risk (index versus components spreads). - Initial margin in SPAN comprises scanning risk, inter-month spread charge, and inter-commodity spread credit. - Variation margin established at account level to reflect current market valuation of each member’s portfolio. - Price sources and look-back periods - Listed cash equities: official market closing price from most liquid marketplace cleared by CCP. - Exchange-traded derivatives: official market closing from NYSE Euronext-Liffe and BlueNext (for carbon futures). - Fixed-income products: prices sourced from Interactive Data (except Italian debt from MTS Italy); prices pass automated verification and manual control when sanity criteria fail. - CDS prices sourced from Markit each day; contributed member quotes used if sufficient. - Historical data used for parameter derivation: - Cash equities and derivatives: historical data starting from early ‘90s. - Bonds and repos: time interval for potential price movements measured is five years. - Liquidation periods (liquidation / close out periods set by LCH.Clearnet SA) - three days on cash equities and bonds; - three days on listed derivatives; - three days on the fixed-income segment; and - five days on the CDS segment. - Rationale and example - A three-day interval implies liquidation feasible within up to D+3 (D = date of default) depending on timing; Lehman example: Lehman defaulted Monday, September 15, 2008; derivatives position liquidated and transferred on Thursday, September 18; bonds & repos position largely liquidated on Thursday, September 18; remaining mainly long maturity forward repos hedged on Friday, September 19, 2008. - Model governance and validation - Models checked by Risk Committee (including users) and proposed to CEO for validation. - From 2011, Internal Audit undertakes independent review of risk models (collateral haircuts, cash equities, swaps mark-to-market, portfolio sensitivity and treasury products). - Yearly plan for parameters’ adequacy revision; minimal frequencies (monthly, quarterly or yearly) associated to each parameter; ad-hoc revisions possible. - Independent review of CDS risk model commissioned to Ernst & Young. - Back-testing mechanism introduced recently; further improvements needed in automation, trailing and accuracy in parameters’ calculation. - Historical adequacy tested during Lehman Brothers and MF Global defaults; after Lehman liquidation CCP remained with positive initial margin. - Intraday margin authority and practice - CRB grants right to call intraday margin on entire clearing member’s position or specific open positions. - Automated intraday margin calls applied for derivatives and fixed-income; none for cash equity. - Intraday margin calls performed automatically at 1.45 pm on derivatives and fixed-income segments; additional intraday margin calls can be triggered each hour. - Eligible collateral and composition - Types accepted as margin: - Cash in Euros, British pound, or U.S. dollars; - Central bank guarantees (available with De Nederlandsche Bank and the National Bank of Belgium); - Public debt securities issued by French, Spanish, Dutch, Italian, German, Portuguese, British and the United States; and - Stocks incorporated in the main European indexes; underlying stocks of options listed on NYSE Euronext markets; corporate bonds if the stocks of the relevant company are accepted as collateral. - The list of eligible securities is much narrower than that used by the Eurosystem. - Wrong-way risk is not specifically taken into account when accepting collateral; participants can deposit sovereign debt of the same country as positions, but during distress CCP seeks diversified collateral via bilateral contact. - Collateral composition (average): - Cash: around 63 percent of collateral deposited with LCH.Clearnet SA - Securities: 26 percent - Central bank guarantees: 10 percent - Cash deposits are almost entirely in EURO; equities represent less than 10 percent of securities holdings. - Haircuts - Haircuts on government debt securities are changed on an ongoing basis to reflect market evolution. - Policy: in setting the haircut for market risk, the policy is to cover a 3 day price move. - Assessment: (contextual evaluation included in text) ### 99.7 percent confidence level, based on a five year price history. These ### _cr13183 - 99.7 percent confidence level, based on a five year price history. These ### Haircuts, collateral valuation, and FX treatment - Haircuts are back tested by LCH.Clearnet SA monthly since November 2011. - Haircuts applied are published on LCH.Clearnet SA website in risk notices. - As of March 29, 2012, the applied haircuts are specified (see source). - Equity collateral: - All individual equities eligible as collateral are reviewed regularly against the 35 percent threshold. - Any individual equity which has shown a price move of more than 25 percent over the expected liquidation period will be excluded from the eligible collateral list. - A fixed haircut of 35 percent of market price is applied on equity. - Rationale: 35 percent is described as well above the level of price movement observed on any equity index containing stocks eligible for collateral over the expected liquidation period. - Intraday margin calculation: - Collateral is revaluated against the recent market price and applying the effective haircut. - Automated intraday margin call should also be applied on cash equity (assessment comment). - Cash collateral (2011): - Cash represented 63 percent of collateral deposited in 2011. - To account for foreign exchange risk, an amount equal to a 99.7 percent confidence level is calculated over a five year price history for two-day currency movements, and added to the market risk haircut. - Assessment comments: - Improvements needed in automation, trailing and accuracy in parameters’ calculation, and intensifying the use of stress testing and back-testing mechanism. - LCH.Clearnet SA should formalize its policy to address wrong way risk. - LCH.Clearnet SA should commission an independent review of its risk models for all its products and not only for CDS. ### Financial resources, default funds, and stress testing - Principle: A CCP should maintain sufficient financial resources to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme but plausible market conditions. - Default fund structure: - Three separate default funds: - default fund for exchange traded markets (NYSE Euronext, Bluenext, etc); - default fund for fixed-income markets (MTS Italy, Brokertec, etc); - default fund for CDS markets. - Each default fund is dedicated and can only be used to cover losses in the relevant market. - Sizing and confidence: - Each specific clearing fund is calibrated so that together with margin calls it covers 100 percent of the estimated maximum potential future exposure of the biggest participant on that specific segment, this estimate being held with at least 99.7 percent confidence under extreme but plausible conditions. - Stress testing methodology: - Two sets of stress scenarios: - Historical scenarios: replicate the largest past variations (i.e., replicate the past crisis) on member portfolios. - Theoretical scenarios: describe potential future plausible crises not yet occurred or use largest variations occurred upon other markets (than cleared) but upon similar products. - Generalized Extreme Value theory (GEV) will be used for the calculation of default fund sizing and contributions for several markets (under implementation for the Cash & Derivative Default Fund). - Stress tests are performed daily in practice; stress scenarios are planned to be reviewed once a year at least. - Additional margins are called in case there is an uncovered stress risk (risk covered neither by the margins nor by the current level of default fund). - Replenishment mechanism: - In case of a subsequent default, LCH.Clearnet SA can request members for an immediate and full replenishment of the same default fund. - LCH.Clearnet SA may only call in aggregate for one replenishment of the default fund up to the same amount as the last default fund amount called. - Same mechanism in place for the cash and derivatives clearing fund, the listed derivatives clearing fund and the CDS clearing fund. - Assessment comments: - LCH.Clearnet SA should commission independent model reviews beyond CDS. - Stress tests should be intensified and formal policies on inadequate resource responses should be available and adhered to. ### Types and tiers of financial resources (availability and composition) - Multi-tiered system of financial resources: - Individual margins. - Mutual clearing funds. - LCH.Clearnet SA’s own funds. - CDS “skin in the game”: - On the CDS segment, LCH.Clearnet SA would contribute with EUR 20 million of its own capital prior any contribution of the mutual CDS clearing fund. - As February 2012, LCH.Clearnet SA financial resources (in MEUR): - Cash Equity & derivatives: Default fund 971, Margins 4 022 - Bonds & Repos: Default fund 750, Margins 15 512 - CDS: Default fund 225, Margins 264 - Total: Default fund 1 946, Margins 19 798 - LCH.Clearnet SA’s own funds: EUR 141 million. - Clearing fund contributions accepted only in cash in EURO, British pound or U.S. dollar. - Assessment comment: High degree of assurance claimed for immediate availability of resources intended to cover the default of the member to which LCH.Clearnet SA has the highest exposure; on the CDS segment resources intended to cover the default of the 2 members to which LCH.Clearnet SA has the highest exposure. ### Liquidity arrangements and credit lines - Liquidity risk management: - Framework determines the amount that treasury should have at its disposal in appropriate liquid form; required amount of liquidity is calculated daily by the risk department. - As a credit institution, LCH.Clearnet SA has access to central bank liquidity in Target 2 against collateralized securities. - LCH.Clearnet SA has access to the money market and to noncommitted credit lines with commercial banks (noted as highly uncertain during financial distress). - Noncommitted credit lines with commercial banks (amounts as stated): - EUR 380000000 total noncommitted credit lines with commercial banks. - BNPP EUR 110 000 000 - SG EUR 100 000 000 - ING EUR 100 000 000 - Natixis EUR 50 000 000 - BPCE EUR 20 000 000 ### Default procedures, legal powers, and segregation - Definition of default (CRB): - Contractual event of default: clearing member failing to comply with obligations under the clearing rules or likely to become unable to meet obligations. - Insolvency event of default: (i) clearing member being subject to an insolvency proceeding; or (ii) on public information, likely to become subject to an insolvency proceeding. - Triggers for declaring contractual event of default include: - failure to pay or deliver balances, financial instruments, cash payment or assets owed within stipulated deadlines; - failure to pay initial margin, variation margin, intra-day margins or additional margin or to make required contribution to clearing fund within stipulated time limits; - nonsuccessful setting of net fails via a buy-in or sell-out procedure. - Default management actions: - First step: transfer positions, especially client positions, to another clearing member within a set period. - Next: close out and settle the defaulting member’s open positions. - Auction process may be used to liquidate the defaulter’s position as a whole or in slots to nondefaulting members. - On the CDS segment, LCH.Clearnet SA can proceed to distribution of losses and ultimately proceed to the close out of the segment if necessary. - Legal assurance and customer/proprietary asset treatment: - Article L.440-7 of the MFC: deposits made by clients to clearing members for guaranteeing positions are deemed full ownership of CCP as soon as posted; rights applicable even if bankruptcy opened in foreign jurisdiction. - Members required to open position accounts to record separately their own positions and those of their clients for listed equities and derivatives; enables LCH.Clearnet SA to liquidate/transfer positions distinguishing “house positions” and client positions. - MFC (Art. L.440-9) states the Clearing House is fully entitled to transfer deposits covering the positions of nondefaulted principals (final investors) of the defaulting member to another clearing member. - For CDS: no possibility to distinguish between proprietary assets and clients’ assets at time of report; planned to be developed when client servicing is developed (service not open to clients at time of report). - For fixed-income: LCH.Clearnet SA offers account segregation for some debt instruments. - Governance of default procedures: - Default procedures are implemented via detailed internal operational business procedures. - Default Management Committee assesses potential defaulting member positions, collateral, and quantifies liquidity needs prior to liquidation decisions. - Article 4.5.2.2: upon occurrence of event of default, LCH.Clearnet SA may discretionary take any measures deemed necessary to contain exposure and mitigate effects. - Key aspects of default procedures are specified in CRB and Instructions, publicly disclosed on its website and disclosed to clearing members. - Assessment comments: - LCH.Clearnet SA should introduce a mechanism to allow segregation between the clearing member’s proprietary assets and its clients’ assets for CDS contracts when client clearing will be available. - LCH.Clearnet SA should introduce an operational segregation mechanism for all fixed-income products. ### Custody, investment policy, and concentration limits - Custody: - Securities provided as collateral are deposited only with central securities depositories (CSDs) and international CSDs (ICSDs) supervised by national authorities. - Participants’ securities are held in dedicated accounts in the name of the participant, pledged in favor of LCH.Clearnet SA; securities can only be withdrawn with LCH.Clearnet SA consent. - Cash collateral in euro must be credited on LCH.Clearnet SA’s Target-2 account held at BDF. - Cash collateral in U.S. dollar and British pound (constitutes less than 1 percent) is collected and held with commercial banks: - U.S. dollar: Deutsche Bank Trust Company America (U.S.); and Crédit Agricole S.A. - GPB: HSBC Bank PLC (GB); and Crédit Agricole S.A. - Investment standards and practice: - LCH.Clearnet SA invests cash funds related to margins and default fund contributions with approved counterparties through fixed deposits, swaps, and repo transactions. - Cash also deposited in Central Bank account. - Invested over 95 percent of its portfolio in high quality investments: governments (AA- and above), central bank, supranational and government guaranteed institutions. - Counterparty limits for cash deposits, interest rate swaps and repo limits are based on nature and rating of counterparties. - Interest rate risk monitored daily; for investments with maturity exceeding 6 months, interest rate exposure must be hedged through an interest rate swap. - For repo investment, haircuts are applied depending on maturity (detailed in Treasury Investment Policy). - Policy prohibits investing own capital or margin in LCH.Clearnet SA’s own securities. - Reliance on external assessments: - LCH.Clearnet SA does not carry out an assessment of Euroclear Settlement of Euronext-zone Securities (ESES); relies on assessments by BDF, De Nederlandsche Bank and National Bank of Belgium (assessment published March 2011). - Concentration risk management: - Concentration risk limits detailed in Treasury investment policy. - Overall credit exposure to any individual obligor monitored daily by Risk Management, Treasury Investment and Finance Management. - Risk also limited by Large Exposure Rules of the Capital Requirements Directive since LCH.Clearnet SA is licensed as a bank. ### Operational risk, business continuity, and IT resilience - Operational risk framework: - Implemented Operational Risk Framework of Basel II Capital Accord; Basic Indicator Approach adopted for capital requirements determination. - Monitoring of operational risks and loss events performed through ERA software & database at group level. - 119 risks identified and evaluated on frequency and potential loss (scale 1 to 5); each risk assigned an owner and an operational risk correspondent in each department. - Outsourced operational risks monitored via Service Level agreements with contractors. - Business continuity and staffing: - Staff: 194 persons with permanent contract and 50 with temporary contract. - Operations Department: about 20 persons responsible for daily clearing follow-up and controls. - Business Continuity & Security (BCS) Department: six persons in charge of operational risk and business continuity. - Operational Risk Framework & Permanent Control Committee meets quarterly to provide senior management and the Board with operational risk information and assurance. - Internal audit (IA) function staffed with 4.5 full-time equivalents reporting to CEO; IA reviews operational risk policy and controls; available audit report dates back to 2006; internal audits in BCM in 2006, 2008, and 2011. - Improvements and tools: - Business Impact Analysis conducted yearly; Risk Assessment ratified by the Board in June 2011. - PARAD tool implemented May 2010 and upgraded in 2011 for business continuity documentation, crisis steering and reporting. - BCS released “Operator Recovery Plan” (ORP) in June 2010. - Business Continuity Testing Universe initiated in 2010; continuity plans documented and regularly tested; crisis management process in place; mass communication tool implemented in 2011. - IT resilience and recovery times: - Data replicated synchronously between three IT sites connected through secured Colt network with duplicated lines. - If primary site unavailable during the day, less than 4 hours needed before production can resume from secondary site with no loss of data; fire-drill tests show a 2 ½ hour RTO is achievable including IT and Operations. - Two data centres (primary and back-up) managed by ATOS; plan to move back-up data center by end 2012 to 35km away from primary. - For Paris Centorial site (HQ1) disruption, backup site (HQ2) allows staff move in less than two hours; half of staff can have remote access via laptops; plans can be activated remotely via PARAD. - Amsterdam, Brussels and Lisbon locations: business continuity strategy to resume activities at the Paris site; operational procedures for transfer updated annually and communicated to participants. - Currently clearing participants are not involved in tests undertaken by LCH.Clearnet SA (assessment comment). - System availability, capacity, and outages: - Since June 2011, incidents graded on a scale 1 to 4; incidents not closed until corrective/proactive action taken. - Monthly reports to authorities detail system availability, incidents by severity, root cause and business consequences. - No indication that key systems are not reliable, secure and able to handle stress volumes. - Operational capacity on cash equity segment: 3 million trades per day (current), peak recorded around 2 million trades per day during Lehman crisis; maximum capacity up to 6 million trades per day and expects ultimately up to 10 million trade/day. - IT outsourcing: - LCH.Clearnet SA outsources all IT Services; ATOS is major provider representing roughly 85 percent of IT production costs. - Telecoms service provider COLT used for communication between data centres. - For CDS clearing service, operational, technical and contingency procedures concluded in March 2010 between LCH.Clearnet SA and DTCC/Markit for prices by Markit and exchange of information between DTCC TIW and LCH.Clearnet SA. - Assessment comments and recommendations: - External audit of the business continuity plan should be carried out annually. - LCH.Clearnet SA should formalize the external audit of the operational risk of the outsourced activities. - Relevant authorities should formalize assessment of operational risk of insourcing companies, including on-site inspection. - Business continuity plan should regularly be tested with participants. - Feasibility study, including cost assessment, should be undertaken to reduce the Recovery Time Objective (RTO) from four hours to preferably less than one hour. ### Money settlements, use of central bank money, and finality - Settlement model preference: - Policy states preference to effect transfer of cash margins and cash settlement using central bank money; where not possible, commercial banks meeting rigorous credit risk and operational capability requirements may be used. - Usage statistics (2011): - Central bank money used for the vast majority of euro payments: about 85 percent for cash equity segment and 100 percent for other asset segments in 2011. - Payments in euro settled in Target-2 in LCH.Clearnet SA account with BDF. Clearing members must hold a Target-2 account or be represented by a payment agent. - Exceptions where central bank money not used: - Euro transactions: - Euroclear Bank used for settlement of cash transactions, about 10 percent of volume of NYSE Euronext markets. - Clearstream Luxembourg used for settlement of cash transactions for Bourse de Luxembourg (volumes negligible). - On the CDS segment, CLS is used for payments related to life cycle events of CDS; LCH.Clearnet SA accesses CLS Bank through Société Générale acting as payment agent. - Foreign currency transactions: - Commercial bank money in British pound and U.S. dollar used for very small percentage of margin payments (less than 0.1 percent). - Clearing member deposits for U.S. dollar held at Deutsche Bank Trust Company Americas (U.S.) and Crédit Agricole S.A.; for GPB: HSBC Bank PLC (GB) and Crédit Agricole S.A. - Kas Bank used for “cash payment” related to small volume of derivatives denominated in U.S. dollar on NYSE Euronext Amsterdam market. - Legal finality and confirmation: - Euro payments in Target 2 ensure finality in accordance with the Finality Directive 98/26 EC. - LCH.Clearnet SA’s clearing members receive settlement confirmation messages from BDF confirming that funds transfers have been effected as required. - Payment systems provide real-time finality during operating hours (i.e., from 7.00 am to [end of source excerpt]). *Source: _cr13183 - 99.7 percent confidence level, based on a five year price history. These* ### 6.00 pm CET ### 6.00 pm CET ### Settlement finality and settlement agents - Euroclear Bank is assessed by NBB as ensuring intraday finality of payments and settlements (cf. NBB assessment of Euroclear Bank in 2009). - CLS: transfer of funds is final when effected in the morning between 9.30 a.m. and 12 a.m.; CLS is regularly assessed by the competent authorities. - LCH.Clearnet SA uses ICSDs and private bank agents; monitoring practices differ by case: - When an ICSD is used, LCH.Clearnet SA does not directly monitor the ICSD but ensures it is regulated; LCH.Clearnet SA does not assess concentration of exposures and liquidity pressure posed by its exposure to Euroclear Bank; exposures to Clearstream Luxembourg are insignificant. - When a private bank agent is used, monitoring criteria are in the Payment and Settlement Risk Policy, including an average credit rating of at least A-, or a guarantee from a sovereign government or parent company with an average credit rating of at least a demonstrable operational suitability. - LCH.Clearnet SA assesses potential losses and liquidity pressures from a settlement agent’s failure; a cash exposure limit is maintained on BNPP as a group. - LCH.Clearnet SA uses Deutsche Bank Trust Company Americas, Crédit Agricole S.A., HSBC Bank PLC and Kas Bank N.V. for very low values in British pound or U.S. dollar. - Clearing members must submit choice of payment agents to the CCP before agreements come into effect; clearing members remain liable to the CCP for their payment obligations even if their payment agents default; ultimate cash transfers take place in central bank money with immediate finality. - Assessment: Observed. - Comment: Once the volume of non-euro payments in commercial bank money increases, LCH.Clearnet SA should carry out an assessment of the finality of these payments. ### Physical deliveries - LCH.Clearnet SA does not deliver securities in physical form; all deliveries are book-entry (immobilized or dematerialized) and fulfilled via book transfer. - CRB specifies general delivery obligations and conditions (e.g., number of days before buy-in procedures: 10 days on French debt, 30 days on Italian debt). - DVP mechanism is always used for all markets LCH.Clearnet SA is active in, including Euroclear settlement system ESES used in Belgium, France and the Netherlands. - CCP obligations: LCH.Clearnet SA commits to deliver assets to buying counterparties even in case of default of a selling clearing member. - Commodities contracts (traded on NYSE-Euronext Paris): LCH.Clearnet SA generally pays cash compensation to nondefaulting clearing members rather than intervening as deliverer; commodities activity is limited relative to securities activity. - For commodity delivery, counterparties are placed directly in contact; LCH.Clearnet SA appears not subject to liquidity, storage and delivery risks. - Settlement agents may be used for physical deliveries; clearing members must obtain LCH.Clearnet SA agreement before entering arrangements; LCH.Clearnet SA remains exposed only to clearing member failure to deliver. - Assessment: Observed. ### Monitoring concentration and exposures to settlement banks - LCH.Clearnet SA monitors exposures toward used banks to avoid concentration. - Assessment: Observed. ### Risks in links between CCPs (LCH.Clearnet SA — CC&G link) - Link description: - Link with CC&G S.p.A. (Italian CCP part of LSE Group) designed in 2002, activated August 2004; covers clearing of Italian government bonds traded on MTS Italy, Euro MTS, and Brokertec. - CCPs became participants to each other; for cross-border trades they interpose and are reciprocally liable for settlement of bilateral net positions. - Payments effected in central bank money in euro; delivery of securities through Monte Titoli. - Link approved by competent French and Italian authorities before going live. - Risk assessment and governance: - LCH.Clearnet SA carried out initial risk assessment based on principles: regulatory supervision; stringent membership requirements; monitoring and measurement of exposures including collateralisation; prudent investment policy; organization designed to withstand default of largest participant; additional layers of post-default backing. - Executive Board reviews links annually; ad-hoc and monthly coordination between risk management teams; joint default management test in December 2011. - Legal and contractual framework: - Link subject to relevant EU law and national law; Directive 98/26/CE and Directive 2004/39/EC apply; Directive 98/26/EC and directive 2009/44/EC transposed in Italian law. - Service agreements: “A Service agreement for Allied Clearinghouse to the LCH.Clearnet SA Clearing System” (drafted and jointly signed 6 February 2007 under French law); “A Service Agreement for Special Clearing members to the CC&G” (drafted and jointly signed May 2006 under Italian law). - Operational, credit and liquidity risks and mitigants: - Main risks identified: risk measure arbitrage (margin methodology harmonized); contagion risk (each CCP does not contribute to the other’s Default Fund); exposures (LCH.Clearnet SA has direct exposure to CC&G, not to CC&G members). - LCH.Clearnet SA requests margins from CC&G daily using same methodology as for clearing members; bilateral exposures covered by margins deposited by each CCP with the other; collateral deposited is segregated from linked CCP’s assets. - Linked clearinghouses exempt one another from contributing to respective default funds; to compensate, additional margins are called by each CCP. - Empirical uncovered risk: January 2011 monthly average of daily uncovered risk following CC&G stress risk exposure was EUR 375.7, with a peak of EUR 2,614.3 million on January 3, 2011. Since July 2011 such uncovered risk has reduced. - LCH.Clearnet SA considers CC&G default risk remote and significantly lower than a regular clearing member. - In a default, LCH.Clearnet SA would use defaulter’s margin; if part of initial margin was passed to CC&G, LCH.Clearnet SA may have to pre-fund that margin part. - CC&G may invest margins in high credit rating instruments and may re-hypothecate margins it receives from LCH.Clearnet SA under article 70 of the Italian Financial Services Act; if CC&G realizes loss on investments and becomes insolvent, LCH.Clearnet SA could have an unsecured claim against CC&G’s insolvent estate and delay in identifying margins may create financial uncertainty for LCH.Clearnet SA. - Cooperation framework: - Co-operation and coordination between French and Italian authorities defined in an MOU; primary objective to ensure adequate monitoring of risks related to the link; each local authority remains primarily responsible for its CCP. - MOU defines information provision conditions, confidentiality, information exchange procedures, and allows authorities to request information from either CCP (cross-border requests may be transferred indirectly or directly to the CCP with domestic authority informed). - Authorities agreed to exchange information and promptly inform each other about irregularities; reliance for on-site inspections and sharing of results. - Post-Lehman improvements to the link and liquidity management were judged satisfactory by Italian and French authorities. - Assessment: Observed. - Comments / Recommended actions: - LCH.Clearnet should collect adequate level of additional margin from CC&G as contribution to the default fund is not made. - LCH.Clearnet SA should ensure that the collateral provided to CC&G is safely invested by minimizing credit and liquidity risks. ### Efficiency - Cost control and benchmarking: - LCH.Clearnet SA performs regular performance management checks with monthly executive review of P&L; procurement management, contractor monitoring, renegotiations, and IT run optimization are in place. - Management accounts reviewed monthly by Executive Committee; reviewed by Board and Audit Committee. - Benchmarks versus LCH.Clearnet Ltd are used but comparison may be biased as LCH.Clearnet Ltd has been structurally generating losses compared to LCH.Clearnet SA. - Tariff reviews are ad-hoc; costs monitored on an ongoing basis; pricing comparison with competitors is difficult due to confidentiality and different business models. - LCH.Clearnet SA launched a cost control program leading to cost cutting initiatives. - Price example: equity transaction price reduced from EUR 0.53 per transaction in January 2006 to EUR 0.064 per transaction in January 2010. - User influence and service review: - Since governance changes, user representation makes up to 80 percent of the voting rights of the holding company, enabling user influence on pricing policy. - Regular consultative meetings with Users Consultation Group; participants represented on LCH.Clearnet SA Board. - Procedures to control operational costs, monitor participant satisfaction through performance indicators, member meetings, operational risk management committee, internal audit coverage and reporting to regulators are in place. - Assessment: Observed. ### Governance - Ownership and board composition: - LCH.Clearnet SA is fully owned by LCH.Clearnet Group Ltd; share capital held by “users” and “exchanges” with 83 and 17 percent, respectively. - LCH.Clearnet Group Ltd Board: 21 directors including four independent non-executives (INEDs), one acting as Chairman. - LCH.Clearnet SA Board: 7 directors, one Chairman, one direct shareholder representative, four INEDs, two executives. - Cross-board continuity provided by four Group INEDs, the holding CEO who sits on all three Boards, and subsidiary CEOs; the holding CEO is also CEO of LCH.Clearnet Ltd creating potential conflicts of interest. - Governance information is available on LCH.Clearnet SA website. - Risk management reporting lines: - Segregation of duties in organizational structure; Risk Management Unit reports directly to the Board. - Since January 2012, a Euro zone treasurer reports directly to the CEO of LCH.Clearnet SA and the Group Treasurer. - CEO is ultimately responsible for risk management decisions; LCH.Clearnet SA Risk Committee reviews policies and adequacy of clearing and default fund. - Board skills, accountability and remuneration: - French banking regulation (Article L. 511-13 of the MFC) sets fitness and properness requirements for Management Board; ACP supervises fitness and properness. - Board members are accountable to shareholders’ assembly; management remuneration incentives used for accountability; non-executive Board members receive participation fees only. - Remuneration framework under ACP supervision in CRD III; role of Board in remuneration not stipulated; absence of a Remuneration Committee not explained; no information on remuneration specifics for control functions. - CEO is selected/removed by the Board; CEO decisions supported by Executive Committee and reported to Board. - Disclosure and public interest objectives: - Corporate governance information published on LCH.Clearnet Group Ltd website; duties on directors under French Companies Act of 1985 to disclose interests. - Risk Committee composition designed to reflect diverse member interests; members sign fitness self certification to avoid conflicts. - No legal requirement for LCH.Clearnet SA to have explicit public interest objectives; publicly disclosed Group objectives include: - To reduce risk and safeguard the financial infrastructure in the markets. - To deliver market leading and cost-effective clearing services. - To be the leading multi-asset clearinghouse, independently serving diverse markets around the world. - Assessment: Broadly Observed. - Comments / Recommended actions: - LCH.Clearnet Group Ltd should adjust independence criteria for non-executive Board to align with U.K. Code on Corporate Governance (reintroduce criteria: no material business relationship; no cross-directorships). - Disclose qualification and selection criteria for Board members at Group and SA levels. - Formalize selection criteria for the “user representative” on the Board. - Provide clarity on remuneration policy. - Review structure to identify conflict of interest types and enable prompt actions by independent directors and chairmen. - Ensure further integration within Group does not erode decision making at LCH.Clearnet SA and adversely impact risk management or local market needs. ### Transparency - Disclosures and access: - Rules, procedures, policies, governance and fee grids are disclosed on LCH.Clearnet SA website; Clearing Rule Book and risk methodologies are available online. - Risk parameters, margin and haircut parameters are publicly distributed periodically; Risk Notices emailed to Clearing Members and posted on website. - LCH.Clearnet SA reports daily clearing, settlement and financial information to Clearing Members and provides quarterly statistics and product-level data on request; statistical services are free. - Access to some risk management methodologies and margin calculation engines restricted to Clearing Members of particular segments. - Communication languages and formats: - Information disseminated by e-mail and posted on public or members’ secured website areas; published in English and in French. - Completeness and review: - LCH.Clearnet SA has not completed and disclosed the answers to the key questions of the assessment report against the CPSS-IOSCO Recommendations for CCPs. - LCH.Clearnet SA does not have a formal procedure for review of disclosures. - Assessment: Partly Observed. - Comment / Recommended action: - LCH.Clearnet SA should complete and disclose answers to the key questions set out in the CPSS/IOSCO report on RCCP and review the answers at least once a year or when major changes occur. ### Regulation and oversight - Legal and supervisory framework: - LCH.Clearnet SA registered and operates under French law; clearinghouses have credit institution status (Article L. 440-1 of MFC) and are covered by Banking Directive 2006/48/EC. - Licensed and supervised by ACP; regulated by AMF (Articles L.621-6 to L.621.30 of MFC); oversight by Banque de France (BDF) pursuant to L141-4 II of MFC. - LCH.Clearnet SA branches in Amsterdam and Brussels and representative office in Portugal subject to Dutch, Belgian, and Portuguese authorities in addition to French authorities. - Supervised by U.K. FSA as a Recognised Overseas Clearinghouse (ROCH); approved by FSA as ROCH for CDS. - Parent LCH.Clearnet Group Limited incorporated in UK and subject to ACP prudential supervision. - National authorities’ capacities: - BDF has 13 staff dealing with payment, clearing and securities settlement oversight (3 payment, 4 clearing and settlement, 4 data). - ACP has three staff involved in regulation and supervision of LCH.Clearnet SA. - AMF has four staff involved in regulating and supervising clearing and settlement activities. - Disclosure of objectives and policies: - BDF objectives publicly described in its Oversight Report. - ACP and AMF lack a dedicated documentation related to CCPs outlining objectives, responsibilities and policies, though ACP’s responsibilities for credit institutions are publicly defined. - Two documents provided to LCH.Clearnet SA are part of the “supervisory and oversight Guide of the Coordination Committee on Clearing Euronext” drafted to be understood by LCH.Clearnet SA. - Information requirements and crisis framework: - French authorities empowered to require information from LCH.Clearnet SA (Article L.141-6, Article L612-24 of MFC); AMF cannot be opposed by professional secrecy (Article L.621-9-3). - LCH.Clearnet SA provides ACP information on outsourced activities; crisis management framework lists information to request in crisis and has been tested (including December 2011). - Significant events and changes in risk management procedures must be reported; changes to CRB require AMF and NBB college approval; outage reports communicated monthly with delays up to 3 months. - Cooperation frameworks: - Domestic cooperation per MFC: BDF, AMF and ACP have frequent contacts, joint inspections and reporting; governor of BDF chairs ACP and sits on AMF Board; ACP and AMF signed 1999 agreement for ACP inspections on behalf of AMF. - Cross-border cooperation: Multiple MOUs signed; a Coordination Committee on Clearing (CCC) and a Permanent Secretariat held by BDF coordinate cooperation and information exchange; a Joint Regulatory Authorities (JRA) college exists with FSA and BOE for Group-level cooperation. - Specific MOUs: France-Belgium-Netherlands-Portugal (March 2001 / since 2003), Link LCH.Clearnet SA-CC&G (February 2003), LCH.Clearnet Group (February 2005: Belgium, France, The Netherlands, Portugal, United Kingdom), LCH.Clearnet SA - Bourse du Luxembourg (May 2012), and MOUs in process for Germany (Equiduct). - Assessment: Observed. - Comments / Recommended actions: - BDF should be empowered to issue regulation and undertake measures to effectively enforce its oversight responsibility. - ACP and AMF should produce a policy note clearly defining and publicly disclosing their respective objectives, roles and responsibilities with regard to the soundness and efficiency of LCH.Clearnet SA. - BDF, AMF and ACP should produce a joint policy note clearly defining and publicly disclosing their respective objectives, roles and responsibilities with regard to the soundness and efficiency of LCH.Clearnet SA to increase transparency and accountability. ### Tables: Actions to Improve Compliance and Further Recommended Actions (selected) - Recommendation 13 (Governance) — Recommended actions include aligning independence criteria with U.K. Code, disclosing Board selection criteria, formalizing user representative selection, clarifying remuneration policy, reviewing structure to identify conflicts of interest. - Recommendation 14 (Transparency) — LCH.Clearnet SA should complete and disclose answers to CPSS/IOSCO key questions and conduct regular reviews. - Further recommended actions (selected highlights): - Recommendation 2 (Participation requirements): allow an applicant to appeal to a competent authority rather than a court for membership refusal disputes. - Recommendation 3 (Risk management): measure exposure continuously intraday; use intraday prices for fixed-income exposures; formalize triggers for additional intraday margin calls for exchange traded equities; enable same-day margin calls for CDS. - Recommendation 4 (Margin requirements): improve automation, trailing and accuracy in parameter calculation; formalize policy for wrong-way risk; commission independent review of risk models for all products; apply intraday margin call on cash equity. - Recommendation 6 (Default procedures): introduce segregation mechanisms for CDS and operational segregation for fixed-income products. - Recommendation 8 (Operational risk): conduct annual external audit of BCP; formalize external audits of outsourced activities; test BCP regularly with participants; study feasibility and cost to reduce RTO from four hours to preferably less than one hour. - Recommendation 9 (Money settlements): assess finality of non-euro payments in commercial bank money when volumes increase. - Recommendation 11 (Risk in links): collect adequate additional margin from CC&G; ensure collateral provided to CC&G is safely invested. - Recommendation 15 (Regulation and oversight): empower BDF; ACP and AMF to publish policy notes; joint policy note by BDF/AMF/ACP to increase transparency. * _cr13183 - 6.00 pm CET_* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13183.pdf_