## _cr13332 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr13332 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13332.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13332.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13332.pdf.json) --- ### Scope, objective, and methodology - Assessment covers Euroclear Bank (EB) and the ESES CSDs against the CPSS-IOSCO Principles for FMIs (PFMI). - Undertaken in the context of the IMF’s Financial Sector Assessment Program (FSAP) to the European Union in November and December 2012. - Assessor: Froukelien Wendt, IMF Monetary and Capital Markets Department. - Information used: relevant EU directives, national laws, regulations, rules and procedures, annual reports, EB and ESES CSDs’ self-assessments, NBB responses to IMF questionnaire, websites of regulators/overseers/operators/stakeholders, Memoranda of Understanding and cooperation agreements, and discussions with NBB, FSMA, AFM, DNB, AMF, BDF, EB, ESA, and stakeholders. - At the IMF’s request the NBB conducted an assessment of EB against the PFMI and of authorities’ responsibilities; the ESES authorities conducted a self-assessment of regulation, supervision and oversight of the ESES CSDs. ### Role and key statistics of Euroclear Bank - EB is one of the largest securities settlement systems worldwide with a daily average settlement value of around 1.1 trillion euro. - EB provides settlement services for securities from 44 markets in 53 currencies and is linked to more than 40 CSDs. - EB settles for 1,400 financial institutions from more than 90 countries. - EB services tri-party repo arrangements for the largest global banks for interbank financing. - Participant and asset statistics: - About 200,000 national and international securities are accepted by EB for settlement. - Domestic bonds: 157,000. - Other securities: 28,000. - Equities: 19,000. - Turnover (2011): €333 trillion. - OTC transactions accounted for 84 percent of total turnover. - Settlement for CCPs accounted for 12 percent of total turnover. - About 80 percent of EB turnover is settled internally in the books of EB. - 10 percent is settled via the bridge with Clearstream Banking Luxembourg (CBL). - 10 percent is settled via links with other CSDs. - Corporate structure highlights: - Euroclear plc is ultimate holding company; ESA is parent company of group national CSDs and Euroclear Bank. - Ownership split shown in source: User shareholders 86.9% and Sicovam Holding SA 13.1%. ### Key risk characteristics and existing controls - EB holds a Belgian banking license and is usually referred to as an international central securities depository (ICSD). - EB operates a Delivery versus Payment (DVP) Model 1 arrangement (simultaneous gross settlement of cash and securities), mitigating principal risk. - EB settles transactions in commercial bank money in its own books, mainly during the overnight batch process. - EB provides cash and securities accounts, settlement and custody-related banking services including credit, foreign exchange, securities lending and borrowing, and collateral management. - EB maintains a large network of cash correspondents for multi-currency settlement; has a euro account in TARGET2 but no direct access to central bank accounts for other settlement currencies. - Operational risk: - Operational risk is significant but appears well-controlled through contingency plans and back-up facilities allowing for timely completion of settlement processes. - Credit and liquidity risk controls: - Under its banking license EB offers banking and credit facilities linked to custody and settlement functions. - Credit exposures are managed by a combination of credit limits and—in principle—full collateralization. - EB has recently improved the quality of its collateral and liquidity management frameworks. - Disclosure: - Euroclear discloses information to allow participants to identify risks and costs associated with system use. ### Main findings and deficiencies - Systemic importance: - A default of Euroclear Bank has the potential to highly disrupt global financial markets; the disorderly failure would likely lead to systemic disruptions to institutions and the markets it supports, linked payment systems, CSDs and CCPs, and to the financial system more broadly. - Recovery and resolution preparedness: - Euroclear Bank has developed recovery plans and plans for the orderly winding down of its operations. - Recommendation: EB should become operationally ready to fully implement plans for recovery and the orderly winding-down of operations. - Priority: EB and the NBB should accord a high priority to addressing operational readiness for recovery and resolution. - Credit risk and asset servicing: - Credit risks are apparent in current practices for asset servicing. - EB should address this credit risk for normal settlement activities and adopt measures to mitigate similar credit risks for settlements done via the bridge with CBL; this necessitates a review of the link agreement with CBL. - Tiered participation: - EB has no tools in place to identify, monitor and measure risks from tiered participation, which is a requirement of the new international standards. - Reconciliations: - Eurobonds—representing more than half of the deposited value—are reconciled on a daily basis. - Other securities positions are reconciled on a weekly or monthly basis, which can be a potential source of uncertainty related to the integrity of securities issues. - Recommendation: EB should introduce daily reconciliations of positions for all securities. - Cross-jurisdictional cooperation: - EB is subject to effective regulation, supervision and oversight by the NBB and FSMA, but cooperation with Luxembourg authorities should be improved. - The legal framework provides Belgian authorities with sufficient powers to obtain timely information and induce change. - Because EB offers similar settlement and banking services to Luxembourg-based CBL, closer cooperation with Luxembourg authorities is needed to ensure a level playing field in implementation of risk management measures in line with the CPSS-IOSCO principles. - Recommendation: Formalize and enhance cooperation between Belgian and Luxembourg authorities with involvement of the ECB to coordinate recommendations and seek parallel implementation of risk measures in both entities. - The proposed Single Supervisory Mechanism will include both CBL and Euroclear Bank, potentially leveling the playing field. ### Priority actions and high-level recommendations - Euroclear Bank: - Become operationally ready to fully implement recovery and orderly winding-down plans. - Review and strengthen asset servicing practices to remove credit risk from normal settlement activities. - Review link agreement with Clearstream Banking Luxembourg to mitigate credit risks arising via the bridge. - Implement tools to identify, monitor and measure risks from tiered participation. - Introduce daily reconciliations of positions for all securities. - Authorities and cross-border cooperation: - NBB and FSMA should prioritize oversight of EB’s recovery and resolution operational readiness. - Formalize and enhance cooperation between Belgian and Luxembourg authorities, with involvement of the ECB, to coordinate recommendations and seek parallel implementation of risk measures across EB and CBL. --- ### Collateral management, securities lending, and value-added services ### Collateral management and securities lending - EB is developing an international market infrastructure to allow traders and other market participants to source and move collateral across borders to: - gain access to central bank liquidity secured transactions; - provide margins for CCPs; and - support bi-laterally cleared OTC derivative trades. - Collateral valuation is done at least on a daily basis. - Daily average collateral provision was €324 billion in 2011. - EB offers a facility for securities lending and borrowing: - All securities made available by lenders are aggregated in a lending pool. - Borrowings are allocated whenever a borrower’s account lacks securities to execute a delivery instruction. - EB guarantees to each lender the return of lent securities or their cash equivalent in the case of a borrower’s default. ### Regulation, supervision and oversight (collateral context) - EB is regulated, supervised and overseen by the NBB and the FSMA: - NBB: responsible for prudential regulation and supervision; oversight responsibilities; assessments based on the PFMI. - FSMA: responsible for conduct of business rules and protection of investors’ interests in financial transactions and the proper operation, integrity and transparency of markets in financial instruments. - Prudential supervision of the NBB is based on the NBB Organic Law and the Royal Degree 26/09/2005; supervision includes EB, ESA and Euroclear Belgium as well as the financial holding company Euroclear Group plc. - Oversight responsibilities of the NBB are based on Article 8 of the NBB Organic Law. - Cross-border cooperation and coordination: - Multilateral cooperation framework established at the level of ESA for corporate services provided by ESA to EB and national CSDs. - Bilateral arrangements defined at the level of EB with central banks of issue of main currencies settled by EB, and arrangements covering the Hong Kong branch and an informal arrangement with Luxembourg authorities for the bridge with CBL. --- ### ESES CSDs and organizational/operational arrangements ### System overview and links to national CSDs - ESES (Euroclear Settlement of Euronext-zone Securities) is a systemically important SSS for Belgium, France, and the Netherlands: - Settles transactions executed on Paris, Amsterdam and Brussels Euronext stock exchange cash markets; securities are held in the national CSDs: Euroclear Belgium, Euroclear France, and Euroclear Nederland. - The three CSDs are formally the operators of ESES, share a common IT platform, harmonized settlement and custody services, and apply a harmonized pricing model. - ESES also settles OTC transactions. - Organizational arrangements: - The CSDs of Belgium, France and the Netherlands are subsidiaries of ESA (Euroclear group holding company). - IT platform operations are outsourced to ESA; ESA provides audit, financial services, risk management, legal advice, human resources and product management. - Each local ESES CSD has a country manager; three ESES CSDs share the same management team in different compositions. - Settlement mechanics: - ESES settlement is conducted in central bank money on cash accounts outsourced by national central banks to the national CSDs; cash accounts are legally held with the NBB, the BDF, and DNB Bank, but operated by the ESES CSDs. - A DVP model 1 arrangement is used, with settlement of securities and cash on a trade-by-trade basis. ### Supervision and oversight of ESES CSDs - National depositories subject to regulation, supervision and oversight by: - Belgium: NBB and FSMA. - Netherlands: DNB and AFM. - France: BDF and AMF. - Despite differing legal frameworks across the three countries, supervision and oversight are effective and cooperation between authorities contributes to financial stability in Belgium, France, and the Netherlands. - Crisis management frameworks for the ESES CSDs are in place and regularly tested and updated. --- ### Detailed assessment highlights (selected Principles and operational points) ### Legal basis and governance (Principles 1–3) - EB has a sound and enforceable legal basis for settlement, custody and banking activities. - Belgian implementation of European directives provides statutory foundation for netting, set-off and securities lending. - Governance arrangements of Euroclear Group and EB are transparent and objectives support financial stability. - EB’s risk framework is generally sound; a first version of recovery plans has been developed but is not fully finalized or operationally tested. - EB is currently not operationally ready to fully implement plans for recovery or orderly winding down; this is a concern given EB’s size and potential systemic impact. ### Credit, collateral and liquidity risk (Principles 4–7) - Credit risk: - EB offers (uncommitted) credit lines and securities lending to increase settlement efficiency; exposures managed via credit limits and collateral. - In the first half of 2012, 99 percent of credit exposures from settlement activities were collateralized; the remaining 1 percent is mainly on central banks or supranational institutions. - EB should improve framework on advanced income payments; decision planned to be implemented by the end of 2013, but does not include advanced payments for the bridge with CBL. - Collateral: - Securities accounts of participants are used for collateral purposes; collateral arrangements do not explicitly account for potential pro-cyclical adjustments. - Letters of credit and guarantees represent 0.06 percent of total secured credit facilities granted to EB participants. - SVE model aims to protect EB with a confidence level of 99 percent over a 10-days period. - Liquidity: - Relevant currencies for stress testing: EUR, USD, GBP, and JPY represent 95 percent of settlement turnover. - APS collateral totals: US$58 billion total value of APS collateral, of which US$182 billion is ESCB eligible. (Note: values appear in source as stated.) - Over period April–June 2012, no liquidity shortfalls were observed. - Reverse stress test: EB would experience the first liquidity shortfall when only 25 percent of the total expected incoming payments are received before 1 pm CET. - Committed swap facility available within 30 minutes. - Backstop facility available same day at 2:00 p.m. CET for EUR and 3:00 p.m. CET for USD. ### Settlement finality, money settlement and use of cash correspondents (Principles 8–10) - Finality: - Settlements in EB systems are final under the Belgian Settlement Finality Law. - Final at the end of the overnight settlement batches and on a real time basis for settlements during the day. - Night batch timings: first batch from 22:00 (S-1) until 23:30 (S-1); second batch from 01:00 (S) until 02:30 (S). - Real-time processing during the day: from 2:30 am CET to 6:30 pm CET. - Year-to-date settlement efficiency (until end July 2012): 99.28 percent. - In practice about 70 percent of transactions settle in the two overnight settlement batches. - Money settlement: - All money settlements, for all types of operations and all eligible settlement currencies, are settled in commercial bank money in the books of EB. - EB has a TARGET2 account with the NBB and can access euro central bank liquidity by providing eligible collateral. - Although 80 percent of settlements take place in euro, EB mainly uses cash correspondents for payments; realignment of payments between cash correspondents is done through TARGET2. - Recommendation: EB is encouraged to further investigate ways to replace commercial bank money arrangements by central bank money and to limit its exposures towards its cash correspondents. ### Securities custody, reconciliation, and CSD controls (Principle 11 and related) - Securities are immobilized and held in book-entry form; participants’ assets and EB’s own assets are separated. - Reconciliations: - Eurobonds: daily reconciliation with depositaries (Eurobonds representing more than half of deposited value). - Domestic securities: weekly reconciliation. - Other securities: monthly reconciliation. - Current shortcoming: daily reconciliation is only conducted for Eurobonds, not for domestic securities that represent half of the deposited value of securities in EB. - Recommendation: Reconciliation of all securities positions should be done on a daily basis for all securities. ### Default management and recovery tools (Principles 13–14) - Default procedures: - EB has default rules and discretionary powers to implement them; internal default tests conducted several times a year. - EB does not publicly disclose its full set of default procedures and has not conducted tests with participants and other stakeholders. - Recommendation: Improve disclosure of default procedures and conduct tests with participants and other relevant stakeholders. - Bridge exposures and loss allocation: - Bridge agreement Section 7.02(b) obliges EB to make payments to CBL each day; no provision to stop payments even if CBL bankrupt. - Syndicated letter of credit covers net exposures; letter of credit can be called with cash proceeds as soon as day three and no later than five days after CBL fails to pay. - If letter of credit insufficient, EB can debit participants’ cash accounts proportionally (right-to-debit); unsecured excess exposures may need to be covered by EB’s capital. - Recommendation: Reopen discussions within the ESCB to extend the operating hours of TARGET2 to allow for night time processing of the cash deliveries between CBL and EB to significantly reduce overnight exposures between the two ICSDs and increase settlement efficiency. ### Operational resilience, contingency and testing (Principle 17) - Operational resilience: - Uptime objective for core services: 99.50 percent (achieved and exceeded). - Capacity: maximum capacity 250,000 transactions per day; average processing 170,000 transactions per day. - Data centers and recovery objectives: - Two nearby data centers (DC1 and DC2) provide real-time synchronized data mirroring; second datacenter located on a distance of 20 kilometers. - Third data centre (DC3) located over three hundred kilometers from primary and secondary sites. - Recovery time objectives: - Local disaster recovery: recovery time objective two hours for critical operations; recovery point objective zero data loss. - Regional disaster recovery: recovery time objective four hours for crucial operations; recovery point objective data loss less than one minute. - Testing limitations: - Contingency arrangements are accessible by participants; tests do not include participants or linked FMIs outside the Euroclear Group. - Recommendation: EB should include participants and other external stakeholders, such as other FMIs, in BCP tests. ### Access, tiered participation and monitoring (Principles 18–19) - Admission criteria: - Include financial resources, technology capability, need for EB services, reputation, and AML program; applied uniformly to all applicants. - Shortcoming: access criteria do not include an explicit requirement that the entity be subject to regulation and supervision. - Recommendation: EB should consider adding the requirement that participants should be subject to regulation and supervision. - Tiered participation: - EB does not recognize tiered arrangements and lacks tools to identify, monitor or manage risks from indirect participants or omnibus account underlying clients. - Recommendation: Develop tools to identify, monitor and mitigate risks from tiered participation arrangements. ### Communication standards and disclosure (Principles 22–23) - EB uses internet/IP, BT, SWIFT and ISO15022 messaging; ISO 20022 planned where applicable. - Main rule documents: Terms and Conditions and Operating Procedures (version May 16, 2012: 452 pages). - EB publishes annual disclosure (last published July 2012) under CPSS-IOSCO/ESCB-CESR Disclosure Framework. - Recommendation: Finalize review of operational procedures to improve participants’ understanding of risks using EB systems. --- ### Authorities, responsibilities, cooperation and resource findings ### Regulatory framework and institutional roles - Legal bases cited: NBB Organic Law; Royal Decree 26/09/2005; Banking Law; Law of August 2, 2002. - NBB responsibilities: oversight (Article 8 NBB Organic Law) and prudential supervision (including authorizations) for clearing and settlement institutions. - FSMA responsibilities: market surveillance and investor protection; powers to obtain information and undertake on-site inspections (Law of August 2, 2002). - NBB issued circular n° 2012–06 on July 20, 2012 stating CPSS-IOSCO Principles dated April 2012 will guide oversight/supervision of FMIs. - Protocol for oversight of Euroclear system signed February 2007. ### Responsibilities assessments (A–E) and recommendations (selected) - Responsibility A — Regulation, Supervision, and Oversight of FMIs: - Assessment: Observed. - Recommendation: The Dutch authorities should enforce the legal basis of their supervision on SSS. - Responsibility B — Powers and Resources: - NBB oversight dedicated resources: 3.58 FTE to oversight of Euroclear Group (ESA, EB, ESES/Euroclear Belgium). - NBB prudential supervision available resources: FTE 6.50 (additional resources expected by the end of 2012). - FSMA: one senior FTE appointed to post-trading issues. - France (BdF oversight unit SEPI): 12 agents (including 10 executives); AMF market infrastructures division: 7 senior personnel; 2 FTE dedicated for supervision of Euroclear France’s ESES. - Netherlands: DNB oversight department 8 FTE (one FTE dedicated to oversight of Euroclear Nederland); AFM Securities Markets and Financial Infrastructure Supervision Division: 9 FTE (three FTE dedicated to securities clearing and settlement), Euroclear Nederland supervised by two FTE. - Assessment: Observed. - Recommendations: NBB should consider increasing resources for supervision and oversight of EB; FSMA should increase capacity on post-trade matters. - Responsibility C — Disclosure of Policies: - Assessment: Observed. - Recommendation: AFM should publicly disclose the OFCS. - Responsibility D — Application of the PFMI: - Assessment: Observed. - Recommendation: Authorities should consider harmonizing approaches related to PFMI adoption and similar non-legal/regulatory practices. - Responsibility E — Cooperation with Other Authorities: - Findings: Cooperation arrangements exist domestically and internationally; for the EB/CBL bridge current cooperation between Belgian and Luxembourg authorities is considered insufficient. - Assessment: Broadly Observed for EB/ICSD bridge issues; Observed for ESES cooperation. - Recommendation: Belgian and Luxembourg authorities should develop a formal supervisory framework to implement necessary risk measures in parallel, with involvement of the ECB. ### Authorities’ responses (NBB summary) - NBB generally agrees with IMF assessments and recommendations. - NBB will monitor EB’s implementation of recommended actions, particularly for Principles 3, 4, 11, and 19. - Action plan on advanced income and redemption issue discussed before IMF assessment; expected to make EB compliant with Principle 4 by the end of 2013. - For Principles 11 and 19, Euroclear will be requested to set up action plans to achieve full observance. - NBB will initiate discussions with Luxembourg authorities and the ECB to strengthen cooperation on oversight/supervision of the two ICSDs. --- ### Prioritized recommendations (selected from Table 4) - Principle 3 - Issue: EB and ESA are not operationally ready to implement plans for recovery and orderly winding down of operations. - Recommended action: EB and ESA should finalize plans for recovery and orderly winding down of operations and become operationally ready to implement them. - Relevant parties: EB, ESA, NBB - Comments and priority: It is noted that the plans are about to be finalized. - Principle 4 - Issue: EB is exposed to unsecured credit usage through advanced income payments. - Recommended action: EB is encouraged to implement plans with regard to the advanced income payments as soon as possible. - Relevant parties: EB - Comments and priority: High priority. It is noted EB plans to comply with the PFMI with regard to advanced income payments by end of 2013. - Principles 4, 20 - Issue: EB could be exposed to unsecured credit usage through advanced income payments for bridge settlements. - Recommended action: EB should address credit risks on advanced income payments related to the bridge. - Relevant parties: EB, NBB and Luxembourg authorities - Comments and priority: High priority. - Principle 11 - Issue: EB does not reconcile all securities positions on a daily basis. - Recommended action: Reconciliation of all securities positions should be done on a daily basis. - Relevant parties: EB - Priority: High priority. - Principle 19 - Issue: EB has no tools in place to identify, monitor and measure risks from tiered participation arrangements. - Recommended action: EB should develop tools for risks related to tiered participation arrangements. - Relevant parties: EB - Priority: High priority. - Principle 5 - Issue: The collateral framework could be further improved in line with the requirements of the PFMI. - Recommended action: EB is encouraged to further improve its collateral framework by addressing pro-cyclicality, and reducing the use of non-standard types of collateral. - Relevant parties: EB - Priority: Medium priority. - Principle 7 - Issue: Not all participants have signed an APS agreement. - Recommended action: EB is encouraged to further improve its liquidity management framework by concluding APS agreements with all participants. - Relevant parties: EB - Priority: Medium priority. - Principle 13 - Issue: Default procedures are not disclosed fully and tests are not conducted with participants. - Recommended action: EB should disclose comprehensive default procedures and conduct tests with participants. - Relevant parties: EB, ESA - Priority: Medium priority. - Principle 17 - Issue: Contingency tests are conducted without participants. - Recommended action: EB should develop contingency tests that include the participation of its (main) participants. - Relevant parties: EB - Priority: Medium priority. - Principle 20 - Issue: EB is exposed to credit risk from the bridge that can be further reduced by the extension of operating hours of TARGET2. - Recommended action: The NBB and EB should reopen the discussions on the opening hours of TARGET2 to reduce overnight exposures and increase settlement efficiency. - Relevant parties: EB, NBB, ESCB and Luxembourg authorities - Priority: Medium priority. - Principle 9 - Issue: EB mainly uses commercial banks for payments rather than central banks. - Recommended action: EB is encouraged to further investigate ways to replace commercial bank money for central bank money and to reduce concentration of flows at its cash correspondents. - Relevant parties: EB - Priority: Medium priority. - Principle 18 - Issue: Access criteria do not include requirements of regulation and supervision. - Recommended action: EB should consider adding the requirement that participants should be subject to regulation and supervision. - Relevant parties: EB - Priority: Medium priority. --- ### Appendix 1 — Key statistics (2011, selected) - Participants - EB: Number of participants 1,383 - Domestic 30 - Foreign 1,356 - Central banks 99 - CCPs 4 - CSDs 13 - Banks 309 - Other 931 - CBL: Number of participants 1,283 - Domestic 106 - Foreign 1,177 - Central banks 54 - CCPs 13 - CSDs 33 - Banks 840 - Other 237 - DTCC: Number of participants 378 - Domestic 362 - Foreign 16 - Central banks 0 - CCPs 1 - CSDs 12 - Banks 1 - Other 2 - Federal Reserve: Number of participants 2,406 - Domestic nav - Foreign Nav - Central banks nav - CCPs nav - CSDs nav - Banks nav - Other nav - Turnover - (EUR bln/USD bln) 332,958 - Number of securities held (thousands) - EB: 203.90 - CBL: Nav - DTCC: 3,690.0 - Federal Reserve: 1,187.1 - International and domestic bonds (EB): 157.01 - Equities (EB): 18.68 - Other securities (EB): 28.21 - Value of securities held (Euro billions) - EB: 10,769.27 - International and domestic bonds 10,130.89 - Equities 455.00 - Other securities 183.39 - CBL: 4,889.23 - International and domestic bonds 4,495.51 - Equities 275.24 - Other securities 118.48 - DTCC: 40,000.00 - Federal Reserve: 60,295.90 *Source: IMF FSAP assessment executive summary of Euroclear Bank and the ESES CSDs (excerpts as provided in the source content).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### _cr13332 - EXECUTIVE SUMMARY ### Scope, objective, and methodology - Assessment covers Euroclear Bank (EB) and the ESES CSDs against the CPSS-IOSCO Principles for FMIs (PFMI). - Undertaken in the context of the IMF’s Financial Sector Assessment Program (FSAP) to the European Union in November and December 2012. - Assessor: Froukelien Wendt, IMF Monetary and Capital Markets Department. - Information used: relevant EU directives, national laws, regulations, rules and procedures, annual reports, EB and ESES CSDs’ self-assessments, NBB responses to IMF questionnaire, websites of regulators/overseers/operators/stakeholders, Memoranda of Understanding and cooperation agreements, and discussions with NBB, FSMA, AFM, DNB, AMF, BDF, EB, ESA, and stakeholders. - At the IMF’s request the NBB conducted an assessment of EB against the PFMI and of authorities’ responsibilities; the ESES authorities conducted a self-assessment of regulation, supervision and oversight of the ESES CSDs. ### Role and key statistics of Euroclear Bank - EB is one of the largest securities settlement systems worldwide with a daily average settlement value of around 1.1 trillion euro. - EB provides settlement services for securities from 44 markets in 53 currencies and is linked to more than 40 CSDs. - EB settles for 1,400 financial institutions from more than 90 countries. - EB services tri-party repo arrangements for the largest global banks for interbank financing. - Participant and asset statistics: - About 200,000 national and international securities are accepted by EB for settlement. - Domestic bonds: 157,000. - Other securities: 28,000. - Equities: 19,000. - Turnover (2011): €333 trillion. - OTC transactions accounted for 84 percent of total turnover. - Settlement for CCPs accounted for 12 percent of total turnover. - About 80 percent of EB turnover is settled internally in the books of EB. - 10 percent is settled via the bridge with Clearstream Banking Luxembourg (CBL). - 10 percent is settled via links with other CSDs. - Corporate structure highlights: - Euroclear plc is ultimate holding company; ESA is parent company of group national CSDs and Euroclear Bank. - Ownership split shown in source: User shareholders 86.9% and Sicovam Holding SA 13.1%. ### Key risk characteristics and existing controls - EB holds a Belgian banking license and is usually referred to as an international central securities depository (ICSD). - EB operates a Delivery versus Payment (DVP) Model 1 arrangement (simultaneous gross settlement of cash and securities), mitigating principal risk. - EB settles transactions in commercial bank money in its own books, mainly during the overnight batch process. - EB provides cash and securities accounts, settlement and custody-related banking services including credit, foreign exchange, securities lending and borrowing, and collateral management. - EB maintains a large network of cash correspondents for multi-currency settlement; has a euro account in TARGET2 but no direct access to central bank accounts for other settlement currencies. - Operational risk: - Operational risk is significant but appears well-controlled through contingency plans and back-up facilities allowing for timely completion of settlement processes. - Credit and liquidity risk controls: - Under its banking license EB offers banking and credit facilities linked to custody and settlement functions. - Credit exposures are managed by a combination of credit limits and—in principle—full collateralization. - EB has recently improved the quality of its collateral and liquidity management frameworks. - Disclosure: - Euroclear discloses information to allow participants to identify risks and costs associated with system use. ### Main findings and deficiencies - Systemic importance: - A default of Euroclear Bank has the potential to highly disrupt global financial markets; the disorderly failure would likely lead to systemic disruptions to institutions and the markets it supports, linked payment systems, CSDs and CCPs, and to the financial system more broadly. - Recovery and resolution preparedness: - Euroclear Bank has developed recovery plans and plans for the orderly winding down of its operations. - Recommendation: EB should become operationally ready to fully implement plans for recovery and the orderly winding-down of operations. - Priority: EB and the NBB should accord a high priority to addressing operational readiness for recovery and resolution. - Credit risk and asset servicing: - Credit risks are apparent in current practices for asset servicing. - EB should address this credit risk for normal settlement activities and adopt measures to mitigate similar credit risks for settlements done via the bridge with CBL; this necessitates a review of the link agreement with CBL. - Tiered participation: - EB has no tools in place to identify, monitor and measure risks from tiered participation, which is a requirement of the new international standards. - Reconciliations: - Eurobonds—representing more than half of the deposited value—are reconciled on a daily basis. - Other securities positions are reconciled on a weekly or monthly basis, which can be a potential source of uncertainty related to the integrity of securities issues. - Recommendation: EB should introduce daily reconciliations of positions for all securities. - Cross-jurisdictional cooperation: - EB is subject to effective regulation, supervision and oversight by the NBB and FSMA, but cooperation with Luxembourg authorities should be improved. - The legal framework provides Belgian authorities with sufficient powers to obtain timely information and induce change. - Because EB offers similar settlement and banking services to Luxembourg-based CBL, closer cooperation with Luxembourg authorities is needed to ensure a level playing field in implementation of risk management measures in line with the CPSS-IOSCO principles. - Existing cooperation exists in relation to the interoperability link; recommendation to formalize and enhance cooperation between Belgian and Luxembourg authorities with involvement of the ECB to coordinate recommendations and seek parallel implementation of risk measures in both entities. - The proposed Single Supervisory Mechanism will include both CBL and Euroclear Bank, potentially leveling the playing field. ### ESES CSDs and authorities - The national securities depositories of Belgium, France and the Netherlands (the ESES CSDs) share a common IT platform provided by the Euroclear Group. - These national CSDs are subject to regulation, supervision and oversight by: - Belgium: NBB and FSMA. - Netherlands: DNB and AFM. - France: BDF and AMF. - Despite differing legal frameworks across the three countries, supervision and oversight are effective and cooperation between authorities contributes to financial stability in Belgium, France, and the Netherlands. - Crisis management frameworks for the ESES CSDs are in place and regularly tested and updated. ### Priority actions and recommendations (high-level) - Euroclear Bank: - Become operationally ready to fully implement recovery and orderly winding-down plans. - Review and strengthen asset servicing practices to remove credit risk from normal settlement activities. - Review link agreement with Clearstream Banking Luxembourg to mitigate credit risks arising via the bridge. - Implement tools to identify, monitor and measure risks from tiered participation. - Introduce daily reconciliations of positions for all securities. - Authorities and cross-border cooperation: - NBB and FSMA should prioritize oversight of EB’s recovery and resolution operational readiness. - Formalize and enhance cooperation between Belgian and Luxembourg authorities, with involvement of the ECB, to coordinate recommendations and seek parallel implementation of risk measures across EB and CBL. *Source: IMF FSAP assessment executive summary of Euroclear Bank and the ESES CSDs (excerpts as provided in the source content).* ### 16. Besides core securities settlement services, EB offers value added services in the area ### Besides core securities settlement services, EB offers value added services in the area of collateral management, where it administers the exchange of collateral and cash associated to the transactions as a third party service provider. ### Collateral management and securities lending - EB is developing an international market infrastructure to allow traders and other market participants to source and move collateral across borders, enabling clients to move securities from where they are currently held to serve as collateral for: - gaining access to central bank liquidity secured transactions; - margins for CCPs; and - bi-laterally cleared OTC derivative trades. - Collateral valuation is done at least on a daily basis. - Daily average collateral provision was €324 billion in 2011. - EB offers a facility for securities lending and borrowing: - All securities made available by lenders are aggregated in a lending pool. - Borrowings are allocated whenever a borrower’s account lacks securities to execute a delivery instruction. - EB guarantees to each lender the return of lent securities or their cash equivalent in the case of a borrower’s default. ### Regulation, supervision and oversight - EB is regulated, supervised and overseen by the NBB and the FSMA: - NBB: responsible for prudential regulation and supervision; oversight responsibilities; assessments based on the PFMI. - FSMA: responsible for conduct of business rules and protection of investors’ interests in financial transactions and the proper operation, integrity and transparency of markets in financial instruments. - Prudential supervision of the NBB is based on the NBB Organic Law and the Royal Degree 26/09/2005; supervision includes EB, ESA and Euroclear Belgium as well as the financial holding company Euroclear Group plc. - Oversight responsibilities of the NBB are based on Article 8 of the NBB Organic Law, which tasks the NBB to ensure that clearing, settlement and payment systems operate properly, efficiently and soundly. - Cross-border cooperation and coordination: - Multilateral cooperation framework established at the level of ESA for corporate services provided by ESA to EB and national CSDs. - Bilateral arrangements defined at the level of EB with central banks of issue of main currencies settled by EB, and arrangements covering the Hong Kong branch and an informal arrangement with Luxembourg authorities for the bridge with CBL. - Appendix 2 (source) provides a detailed list of cooperative arrangements. ### Overview of the ESES system and links to national CSDs - ESES (Euroclear Settlement of Euronext-zone Securities) is a systemically important SSS for Belgium, France, and the Netherlands: - Settles transactions executed on Paris, Amsterdam and Brussels Euronext stock exchange cash markets; securities are held in the national CSDs: Euroclear Belgium, Euroclear France, and Euroclear Nederland. - The three CSDs are formally the operators of ESES, share a common IT platform, harmonized settlement and custody services, and apply a harmonized pricing model. - ESES also settles OTC transactions. - Organizational arrangements: - The CSDs of Belgium, France and the Netherlands are subsidiaries of ESA (Euroclear group holding company). - IT platform operations are outsourced to ESA; ESA provides audit, financial services, risk management, legal advice, human resources and product management. - Each local ESES CSD has a country manager; three ESES CSDs share the same management team in different compositions. - Settlement mechanics: - ESES settlement is conducted in central bank money on cash accounts outsourced by national central banks to the national CSDs; cash accounts are legally held with the NBB, the BDF, and DNB Bank, but operated by the ESES CSDs. - A DVP model 1 arrangement is used, with settlement of securities and cash on a trade-by-trade basis. ### Key findings and follow up for Euroclear Bank — General organization (Principle 1–3) - Legal and regulatory framework: - EB has a sound and enforceable legal basis for settlement, custody and banking activities. - Belgian implementation of European directives provides a statutory foundation for netting, set-off and securities lending. - Securities and payment transfers, when finalized, and default arrangements are protected from ordinary Belgian insolvency law. - The banking license regulates EB’s credit activities. - Governance: - Governance arrangements of Euroclear Group and EB are transparent and objectives support financial stability. - In 2011 the board of the Euroclear Group formally decided to be a non-profit company aiming for a limited return on equity. - Procedures adopted to handle potential conflicts between shareholders and users (follow-up to 2006 FSAP assessment). - Recovery and orderly wind-down: - EB’s risk framework is generally sound but recovery plans for EB and Euroclear Group have been developed but are not yet finalized. - EB is currently not operationally ready to fully implement plans for recovery or orderly winding down; this is a concern given EB’s size and potential systemic impact. ### Credit and liquidity risk management (Principle 4–7) - Credit risk measures and gaps: - EB’s activities under its license are limited to banking and credit facilities linked to custody and settlement functions. - EB offers (uncommitted) credit lines and securities lending to increase settlement efficiency; exposures are managed via credit limits and collateral. - Conservative investment policy mitigates credit and liquidity risks from investments. - Reverse repo arrangements mitigate credit and liquidity risks related to cash correspondents and treasury counterparts. - EB should improve its framework regarding advanced income payments to mitigate exposures in case the issuer fails to pay; decision planned to be implemented by the end of 2013, but does not include advanced payments for the bridge with CBL. - Collateral practices: - Securities accounts of participants are used for collateral purposes; in principle all securities can be used if reliable valuation is obtainable. - Collateral arrangements do not explicitly account for potential pro-cyclical adjustments. - EB accepts non-standard collateral types (letters of credit, bank guarantees); use is relatively small but recommended to be further reduced. - EB is encouraged to further automate monitoring of collateral concentration. - Liquidity risk management: - On NBB instigation EB improved its liquidity risk framework. - EB identifies, measures and monitors settlement and funding flows on an ongoing basis and uses various liquid resources including central bank liquidity in line with the PFMI. - EB’s liquidity management framework aims to ensure sufficient liquid resources in severe stress defined as the default of the two participants with the largest exposure and limited access to liquid sources. - EB back tests sufficiency of collateral on at least a daily basis. ### Settlement (Principle 8–10) - Finality and timing: - Settlements in EB systems are final under the Belgian Settlement Finality Law. - Settlements are final at the end of the overnight settlement batches and on a real time basis for settlements during the day. - Settlements over the bridge with CBL are final upon confirmed acceptance of the securities, either real time or at the end of the overnight settlement batch. - External settlements are final according to local market rules and practices. - Money settlement medium: - Money settlements are conducted in commercial bank money on the cash accounts in Euroclear Bank. - Settlement in central bank money is considered not practical because (i) EB settles more than 50 currencies and (ii) many of EB’s clients do not have access to central bank money in these currencies. - Use of cash correspondents: - Cash is deposited at accounts of designated cash correspondent banks or treasury counterparts that execute payments and may provide free and mostly unsecured intra-day liquidity facilities and overnight credit. - EB controls risks from cash correspondents through strict selection and due diligence, monitoring of cash balances and mitigation via repo transactions. - TARGET2 access and use: - EB has access to central bank liquidity and has opened a TARGET2 account with the NBB. - EB can access euro central bank liquidity by providing eligible collateral. - Although 80 percent of settlements take place in euro, EB mainly uses cash correspondents for deposit of participants’ cash in euro; realignment of payments between cash correspondents is done through TARGET2. - EB has started to use TARGET2 for other payments in euro, such as income payments from the issuer to EB. ### Central Securities Depositories and exchange-of-value settlement systems (Principle 11–12) - Securities custody and DVP: - Securities in EB systems are immobilized and held in book-entry form. - EB uses a model 1 DVP system, ensuring simultaneous final settlement of securities and funds transfers on a gross (trade-by-trade) basis via book-entry debits and credits. - Reconciliation and integrity: - EB has arrangements to ensure integrity of securities issues, supported by the legal framework and statutory lien enabling use of proprietary assets of participants. - Not all securities balances are reconciled on a daily basis: daily reconciliation of securities positions is currently only conducted for Eurobonds and not for other securities that represent a significant part of deposited value. - Recommendation: improve reconciliation arrangements and apply daily reconciliation for all securities positions. ### Default management (Principle 13–14) - Default risk and procedures: - Default of one or more large participants could impact safety and efficiency of the EB system causing losses through credit and securities lending and causing liquidity shocks. - EB has developed default rules and procedures and has discretionary power to implement them. - Internal default tests are conducted several times a year and include participation of all relevant hierarchical levels. - EB does not publicly disclose its full set of default procedures and has not conducted any tests with participants and other stakeholders. ### General business and operational risk management (Principle 15–17) - Business risk and capital: - Management and control systems are in place for general business risks; sufficient resources available to cover six months of operating expenses. - As a bank EB is subject to capital requirements; EB’s capital invested in high quality and liquid assets. - Protection of participants’ assets and investment policy: - Participants’ assets are protected; assets are held at supervised and regulated entities and legal opinions ensure ownership rights are protected. - EB only invests in Eurozone securities to ensure prompt access to assets. - More than 80 percent of cash investments are secured. - Operational resilience and contingency: - Operational risk is significant but well-controlled; system is reliable, secure, scalable with capacity regularly reviewed. - Contingency plans and back-up facilities allow timely recovery and completion of settlement. - A second datacenter is located at a distance of 20 kilometers; operations can switch between both sites without data loss. - A third datacenter is located at a distance of 300 kilometers. - Contingency arrangements are accessible by participants; participants do not participate in tests. ### Access (Principle 18–20) - Access criteria and monitoring: - Access criteria are risk-based and publicly disclosed; include financial and operational requirements but do not require that an entity be subject to regulation and supervision. - Monitoring officers are responsible for ongoing monitoring of participants’ compliance with access criteria. - Participants have an obligation to meet participation requirements on an ongoing basis, but do not have a formal reporting obligation. - Tiered participation and interdependencies: - No arrangements in place to review risks arising from interdependencies between direct and indirect participants; contractual agreements are concluded between EB and its participants and not all relevant data is available to identify and manage tiered participation risks. ### Links with other CSDs, bridge exposures and recommended actions - Links and exposures: - Exposures between EB and CBL are mitigated but could be further reduced by extending TARGET2 opening hours. - EB has established a bilateral direct link via the bridge to CBL and several unilateral direct and indirect interfaces with domestic market clearing systems. - Credit exposures from the bridge are covered by a syndicated letter of credit; additional exposures will be covered by a loss sharing arrangement and EB’s capital. - Liquidity risk is sufficiently covered by the existing liquidity management framework. - Recommendation: - Reopen discussions within the ESCB to extend the operating hours of TARGET2 to allow for night time processing of the cash deliveries between CBL and EB to significantly reduce overnight exposures between the two ICSDs and increase settlement efficiency. *Source: IMF staff Report — selected excerpts from the chapter on Euroclear Bank (EB) and the ESES CSDs.* ### 47. Mechanisms are in place to guard the efficiency and effectiveness of EB. As EB is owned ### _cr13332 - 47. Mechanisms are in place to guard the efficiency and effectiveness of EB. As EB is owned ### Efficiency and user orientation of Euroclear Bank (EB) - EB is owned by a large part of its users; EB’s main objectives and activities are defined in line with the requirements of its main users. - EB operates in a competitive environment and is exposed to market pressure to operate in an effective manner. - Various tools are applied to assess user satisfaction. ### Cross-border settlement procedures - EB uses the relevant international communication procedures and standards in order to facilitate efficient settlement of cross-border transactions. ### Transparency (Principle 23–24) - EB provides its participants and the public with a large amount of information on its website. - Recommendation: EB could better structure the information provided to market participants to accurately identify the risks associated with the use of the ICSD. ### Responsibilities of the Authorities of Euroclear Bank (Responsibility A–E) - EB is subject to effective regulation, supervision and oversight of the NBB and FSMA. - The authorities have sufficient powers to obtain timely information and induce change. - The NBB has adopted the PFMI and has informed the market by distributing a circulaire in July 2012. - Other relevant policies are disclosed as well. - Recommendation: Given the global systemic importance of EB, the NBB should consider to increase its resources for the supervision and oversight of EB in order to ensure high quality and in-depth inspections and assessments. - Recommendation: The FSMA should increase its capacity on post-trade matters to enhance the quality and consistency of its conduct of business supervision. ### Cross-border cooperation: Belgian and Luxembourg authorities, and the ECB - The current cooperation between the Belgian and Luxembourg authorities regarding the bridge should be improved. - As both ICSDs are highly relevant for the global financial stability the Belgian and Luxembourg authorities should continuously cooperate together, take common decisions and implement these in both ICSDs to ensure a level playing field in the implementation of risk management measures in line with the CPSS-IOSCO principles. - Recommendation: The existing cooperation between the Belgian and Luxembourg authorities should be formalized and enhanced, with the involvement of the ECB, to coordinate recommendations and seek for parallel implementation of risk measures in both entities. - Recommendation: An involvement of the ECB in its responsibility for financial stability should be pursued. - Note: The plans to include EB on the list of eligible banks for the Single Supervisory Mechanism may further contribute to a level playing field. ### Table 1. Ratings Summary of Euroclear Bank - Assessment Category: Observed — 1, 2,5, 7, 8, 9, 12, 13, 15, 16, 17,18, 20, 21, 22, 23 - Assessment Category: Broadly observed — 3, 4, 11,19 - Assessment Category: Partly observed — - Assessment Category: Not observed — - Assessment Category: Not applicable — 6, 10, 14, 24 ### Table 2. Ratings Summary Responsibilities for the Authorities of Euroclear Bank - Assessment Category: Observed — A, B, C, D - Assessment Category: Broadly observed — E - Assessment Category: Partly observed — - Assessment Category: Not observed — ### Key findings and follow up for the Authorities of the ESES CSDs (Responsibility A–E) - The ESES CSDs are subject to effective regulation, supervision and oversight of the Belgian (NBB and FSMA), Dutch (DNB and AFM), and French (BDF and AMF) authorities, despite differences in legal frameworks among the three countries. - In the Netherlands the legal underpinning of responsibilities to regulate the SSS lacks a statutory basis. - In France the BDF has only indirect powers to oversee the CSD. - In practice this does not affect the powers of the authorities to regulate the ESES entity in their respective countries and induce change. - The legal and regulatory frameworks will be harmonized with the implementation of the CSD Regulation, which is foreseen for 2015. ### Resources, disclosure, and oversight practices for ESES CSDs - In general the resources of the authorities are considered to be sufficient. - Recommendation: The FSMA should increase its capacity on post-trade matters to enhance the quality and consistency of its conduct of business supervision. - In Belgium and France the authorities have disclosed their policies. - In the Netherlands the Oversight Framework is not publicly available. - All central banks publish an oversight report, which includes information on the oversight and assessments of the ESES CSDs. ### Adoption of Principles for Financial Market Infrastructures (PFMI) - All authorities have adopted or intend to adopt the PFMI, although the timing and procedures are not harmonized. - The NBB has announced the adoption of the PFMI in a circular in July 2012. - The BDF awaits the official decision by the Governing Council of the ECB. - The board of DNB has taken the decision that from January 1, 2013 onwards the oversight department of DNB will use these principles for all FMIs in the Dutch jurisdiction. *Source: _cr13332 - 47. Mechanisms are in place to guard the efficiency and effectiveness of EB. As EB is owned* ### 56. The cooperation between the ESES authorities is assessed as effective and contributes ### _cr13332 - 56. The cooperation between the ESES authorities is assessed as effective and contributes ### Cooperation and oversight - Cooperation between the ESES authorities is assessed as effective and contributes to the safety and efficiency of the ESES CSDs. - Cooperation is governed by the ESA MOU and the ESES working arrangements. - The authorities meet regularly during technical level and high level meetings and conduct assessments together. - A crisis management framework exists and is regularly tested and updated. ### Ratings summary (excerpt) - Assessment Category Responsibility: Observed A, B, C, D, E; Broadly observed; Partly observed; Not observed; Not applicable. ### Prioritized recommendations for Euroclear Bank (Table 4 — selected items) - Principle 3 - Issue: EB and ESA are not operationally ready to implement plans for recovery and orderly winding down of operations. - Recommended action: EB and ESA should finalize plans for recovery and orderly winding down of operations and become operationally ready to implement them. - Relevant parties: EB, ESA, NBB - Comments and priority: It is noted that the plans are about to be finalized. - Principle 4 - Issue: EB is exposed to unsecured credit usage through advanced income payments. - Recommended action: EB is encouraged to implement plans with regard to the advanced income payments as soon as possible. - Relevant parties: EB - Comments and priority: High priority. It is noted EB plans to comply with the PFMI with regard to advanced income payments by end of 2013. - Principles 4, 20 - Issue: EB could be exposed to unsecured credit usage through advanced income payments for bridge settlements. - Recommended action: EB should address credit risks on advanced income payments related to the bridge. - Relevant parties: EB, NBB and Luxembourg authorities - Comments and priority: High priority. See also recommendations Responsibility E. - Principle 11 - Issue: EB does not reconcile all securities positions on a daily basis. - Recommended action: Reconciliation of all securities positions should be done on a daily basis. - Relevant parties: EB - Priority: High priority. - Principle 19 - Issue: EB has no tools in place to identify, monitor and measure risks from tiered participation arrangements. - Recommended action: EB should develop tools for risks related to tiered participation arrangements. - Relevant parties: EB - Priority: High priority. - Principle 5 - Issue: The collateral framework could be further improved in line with the requirements of the PFMI. - Recommended action: EB is encouraged to further improve its collateral framework by addressing pro-cyclicality, and reducing the use of non-standard types of collateral. - Relevant parties: EB - Priority: Medium priority. - Principle 7 - Issue: Not all participants have signed an APS agreement. - Recommended action: EB is encouraged to further improve its liquidity management framework by concluding APS agreements with all participants. - Relevant parties: EB - Priority: Medium priority. - Principle 13 - Issue: Default procedures are not disclosed fully and tests are not conducted with participants. - Recommended action: EB should disclose comprehensive default procedures and conduct tests with participants. - Relevant parties: EB, ESA - Priority: Medium priority. - Principle 17 - Issue: Contingency tests are conducted without participants. - Recommended action: EB should develop contingency tests that include the participation of its (main) participants. - Relevant parties: EB - Priority: Medium priority. - Principle 20 - Issue: EB is exposed to credit risk from the bridge that can be further reduced by the extension of operating hours of TARGET2. - Recommended action: The NBB and EB should reopen the discussions on the opening hours of TARGET2 to reduce overnight exposures and increase settlement efficiency. - Relevant parties: EB, NBB, ESCB and Luxembourg authorities - Priority: Medium priority. - Principle 9 - Issue: EB mainly uses commercial banks for payments rather than central banks. - Recommended action: EB is encouraged to further investigate ways to replace commercial bank money for central bank money and to reduce concentration of flows at its cash correspondents. - Relevant parties: EB - Priority: Medium priority. - Principle 18 - Issue: Access criteria do not include requirements of regulation and supervision. - Recommended action: EB should consider adding the requirement that participants should be subject to regulation and supervision. - Relevant parties: EB - Priority: Medium priority. ### Recommendations for authorities (Responsibilities E, B, C, D — selected items) - Responsibility E - Issue: Cooperation between NBB and Luxembourg authorities is insufficient. - Recommended action: The Belgian and Luxembourg authorities should develop a formal supervisory framework to implement necessary risk measures in parallel. Cooperation with the ECB is preferred. - Relevant parties: NBB, FSMA, Luxembourg authorities - Priority: High priority. - Responsibility B - Issue: Resources are limited. - Recommended action: The FSMA should increase its capacity on post trade conduct of business supervision. The NBB is encouraged to increase its resources given the systemic relevance of EB/ESA and other systems under oversight. - Relevant parties: FSMA, NBB - Priority: Medium priority. - Responsibility C - Issue: The Oversight Framework for Clearing and Settlement is not publicly available. - Recommended action: The Dutch authorities should publicly disclose relevant policies. - Relevant parties: AFM, DNB - Comments: It is recognized that this issue relates to the lack of a statutory basis for supervision of SSS. - Responsibility A - Issue: The legal underpinning of supervision of the Dutch authorities on the SSS should be enforced. - Recommended action: The Dutch authorities should enforce the legal basis of their supervision on SSS. - Relevant parties: AFM, DNB - Comments: This is foreseen with the implementation of the EU CSD Regulation. - Responsibility D - Issue: The authorities operate independently in relation to the adoption of the PFMI. - Recommended action: The authorities should consider harmonizing their approaches related to the adoption of the PFMI and similar practices that are not related to the legal and regulatory framework. - Relevant parties: NBB, DNB, BDF ### Detailed assessment highlights — Principle outcomes (selected) - Principle 1 (Legal Basis) - Key conclusion: EB has a sound and enforceable legal basis for its settlement, custody and banking activities. The regulatory framework is clear and transparent. - Assessment: Observed. - Relevant facts: - EB is an incorporated company under Belgian law (naamloze vennootschap/société anonyme). - EB is a settlement institution under Royal Decree n° 62 and legally recognized as a “central securities depository for financial instruments.” - EB is licensed by the NBB as a credit institution under the Belgian Banking Law in line with European Banking Directive 2006/48. - Principle 2 (Governance) - Key conclusion: Governance arrangements of Euroclear Group and EB are transparent and its objectives support financial stability. - Assessment: Observed. - Relevant facts: - Euroclear plc capital: 86.9 percent held by around 200 user-shareholders; remaining 13.1 percent held by Sicovam Holding SA; voting rights limited to 5 percent per shareholder. - ESA board: out of 28 board members, 25 are currently non-executive and five of these 25 are independent in the meaning of Art. 526ter of the Belgian Companies Code. - EB board: out of 11 board members, six are non-executive and one is independent in the meaning of Art. 526ter of the Belgian Companies Code. - Principle 3 (Comprehensive risk management) - Key conclusion: EB’s risk framework is generally sound; a first version of recovery plans has been developed but is not fully finalized or operationally tested. - Assessment: Broadly observed. - Recommendation: EB and ESA should finalize their recovery plans and be operationally ready to implement the plans if needed. - Principle 4 (Credit risk) - Key conclusion: Risks are generally properly identified, monitored and mitigated but EB is exposed to significant credit risk resulting from advanced income payments. - Assessment: Broadly observed. - Recommendations and comments: - EB is encouraged to implement the plans regarding advanced income payments as soon as possible. - EB should extend its decision on advanced income payments related to the bridge with CBL. - Relevant statistics and facts: - In the first half of 2012, 99 percent of credit exposures from settlement activities were collateralized; the remaining 1 percent is mainly on central banks or supranational institutions. - Project deadline: synchronization of tri-party repo settlement — Q1 2013. - Principle 5 (Collateral) - Key conclusion: Securities and cash accounts of participants are used for collateral; EB has tools to set and enforce haircuts and monitor concentration but does not explicitly address pro-cyclicality and accepts some non-standard collateral. - Assessment: Observed. - Recommendations and comments: - EB is encouraged to formally address pro-cyclicality, reduce use of non-standard collateral, and further automate monitoring of collateral concentration. - Relevant facts and figures: - Letters of credit and guarantees represent 0.06 percent of total secured credit facilities granted to EB participants. - SVE model aims to protect EB with a confidence level of 99 percent over a 10-days period. - Principle 6 (Margin) - Assessment: NA. - Principle 7 (Liquidity risk) - Key conclusion: On NBB instigation EB improved its liquidity risk framework; EB is able to identify, measure, and monitor settlement and funding flows; framework aims to cover default of the two participants with the largest exposure. - Assessment: Observed. - Recommendations and comments: - EB is encouraged to further improve its liquidity management framework by concluding APS agreements. - Relevant liquidity facts, scenarios and figures: - Relevant currencies for stress testing: EUR, USD, GBP, and JPY represent 95 percent of settlement turnover. - APS collateral totals: US$58 billion total value of APS collateral, of which US$182 billion is ESCB eligible. (Note: values appear in source as stated.) - Stress-testing results: - Over period April–June 2012, no liquidity shortfalls were observed. - Reverse stress test: EB would experience the first liquidity shortfall when only 25 percent of the total expected incoming payments are received before 1 pm CET. - Operational availability: - Committed swap facility available within 30 minutes. - Backstop facility available same day at 2:00 p.m. CET for EUR and 3:00 p.m. CET for USD. - Principle 8 (Settlement finality) - Key conclusion: EB rules and procedures clearly define finality; systems are designated under relevant finality laws. - Assessment: (implied Observed in detailed text) - Relevant facts and timings: - Night batch processing: first batch from 22:00 (S-1) until 23:30 (S-1); second batch from 01:00 (S) until 02:30 (S). - Real-time processing during the day: from 2:30 am CET to 6:30 pm CET. - Year-to-date settlement efficiency (until end July 2012): 99.28 percent. - In practice about 70 percent of transactions settle in the two overnight settlement batches. ### Other notable operational and legal details - EB publishes an Asset Protection Pack for participants containing copies of Depositary Agreements and other relevant information. - EB obtains collateral survey opinions from foreign external counsels of 47 countries where participants of EB are incorporated. - EB uses a risk-management system called I-Track and an Exposure Management Tool (EMT). - EB plans further automation: automated collateral concentration tools by Q4 2013; automation of monitoring of EB nostro accounts at cash correspondents planned for 2014. - Recovery planning: EB has developed a recovery plan with seven scenarios (including insolvency of a major counterparty, loss of funding, long-term IT outage); NBB is reviewing the plans; EB not yet operationally ready to fully implement or test plans. *Source: IMF staff assessment as presented in the provided PDF content unit.* ### Section 6.6.2 of EB’s Operating Procedures defines which instructions ### Section 6.6.2 of EB’s Operating Procedures defines which instructions can be cancelled by participants ### Cancellation instructions and irrevocability deadlines - Cancellation instructions must be sent by the input deadline of the settlement process for which instructions are eligible for settlement (i.e., received and validated but not yet executed by EB). After this input deadline, instructions become irrevocable. - Transfer instructions entered before the settlement date (eligible for the night batch): - Cancellation instructions must be received before 20 pm CET on the day before the intended settlement date. - Real-time processing settlement instructions: - Settle in principle immediately (provided they are matched and sufficient cash and securities are available). - If they have not settled yet, they can be cancelled until the input deadline (6:30 pm CET at the latest). - Bridge instructions input deadlines: - 8:30 p.m. CET on the day before the intended settlement date (overnight securities settlement processing). - 4:00 p.m. at the latest for the real time processing (for free of payment instructions). - Deadlines for external instructions depend on local rules. - After the above deadlines, instructions become irrevocable for participants and can only be cancelled by EB itself under specific circumstances (examples: pending instructions related to a closed account, pending bridge instructions as of the final maturity date, or old external instructions). ### Settlement finality and modes (Principle 8) - Settlements in the EB systems are final under the Belgian Settlement Finality Law. - Finality timing: - Final at the end of the overnight settlement batches and on a real time basis for settlements during the day. - Settlements over the bridge with CBL are final upon confirmed acceptance of the securities, either real time or at the end of the overnight settlement batch. - External settlements are final according to local market rules and practices. - Assessment: Observed. ### Money settlements conducted in commercial bank money (Principle 9) - All money settlements, for all types of operations and all eligible settlement currencies, are settled in commercial bank money in the books of EB. - EB model and rationale: - All EB participants have cash accounts in the relevant settlement currencies in the books of EB. Money settlements are effected by crediting and debiting the relevant cash accounts of the participants. - Chosen for efficiency given settlements in more than 50 currencies and participants in many jurisdictions. - Settlement asset is a claim on EB, an AA+ rated limited-purpose bank. - Credit and liquidity risk management regarding cash correspondents: - EB uses reverse repos to secure end-of-day nostro exposures; for USD, FDIC insurance can mitigate risks; for EUR, re-deposit with the NBB is possible; contingency deposit facilities with certain central banks are available. - EB diversifies nostro risk by opening accounts with several cash correspondents per currency. - EB can charge negative interest to discourage excessive long balances. - Monitoring of long balances with agents; hourly monitoring or active/dormant back-up cash correspondent measures for certain countries. - Careful selection, due diligence and continuous monitoring of participants. - Access to central bank liquidity: - EB has opened an account in TARGET2 with the NBB and can access euro central bank liquidity by providing eligible collateral. - Although 80 percent of settlements take place in euro, EB mainly uses cash correspondents for the payments of participants’ cash in euro. Realignment of payments in euro between cash correspondents is done through TARGET2. - Assessment: Observed. - Recommendation excerpt: EB is encouraged to further investigate ways to replace commercial bank money arrangements by central bank money arrangements and to limit its exposures towards its cash correspondents. ### Securities safekeeping, immobilization, reconciliation and CSD controls (Principle 11 & related) - Accounting and asset segregation: - EB applies Belgian and European accounting principles (CBFA Circular 2007–7): client assets and own assets must be completely separated. - Participants’ securities are credited at securities clearance accounts representing co-ownership rights in a pooled book-entry category (Article 2 of Belgian Royal Decree N° 62). - EB has separated participants’ securities from EB’s own assets and other participants’ assets; underlying customers’ securities are separated from participant assets; EB has waived its statutory lien on customer securities that are expressly identified. - Reconciliations and audits: - Internal reconciliations automatically detect discrepancies between sum of participants’ securities balances and EB’s internal account reflecting total securities held at EB’s depository. - External reconciliations: - Eurobonds: daily reconciliation with depositaries. - Domestic securities held with CBL and not realigned: weekly reconciliations. - New global notes at common safekeepers: daily reconciliation. - Other securities: monthly reconciliation with depositaries. - Internal audit reviews safekeeping and network management; audits performed at least every three–five years (most recent audit in this domain: 2008; next audit planned for Q4 2012–Q1 2013). - External auditor issues yearly ISAE 3402 report available to participants. - Creation and deletion of positions: - Creation only upon receipt of securities; deletions generally upon final maturity or corporate event; automated processing as norm; manual interventions subject to four-eye principle. - Overdrafts: - Overdrafts and debit balances in securities accounts are prohibited; transactions without sufficient securities will not be executed. - Immobilization and dematerialization: - All Eurobonds held in EB are immobilized; 0.3 percent of Eurobonds issued are dematerialized. - Domestic securities can be dematerialized, immobilized or physical; physically issued securities must be immobilized to be held in EB. - Key conclusions and assessment: - Securities are held in book-entry form and immobilized. Assets are protected against custody risk supported by legal framework (Royal Decree N°62; Art. 77bis of the law of April 6, 1995 prohibits EB from using participants’ assets without consent). - Current shortcoming: daily reconciliation is only conducted for Eurobonds, and not for domestic securities that represent half of the deposited value of securities in EB. - Assessment: Broadly observed. - Recommendation: Reconciliation of all securities positions should be done on a daily basis for all securities. ### Investment and custody risk controls (Principle 16) - Depositories, cash correspondents and counterparty controls: - EB holds participants’ and own assets at supervised and regulated entities (depositories, treasury counterparties, cash correspondents). - Depository agreements require records, safekeeping procedures, segregation, prohibition of sub-deposits except as approved, and insurance coverage. - Candidate agents undergo due diligence and risk assessment; EB’s management committee approves new agents and annual re-approval. - Investment strategy: - Very prudent, risk-averse; avoids trading; market risk board policy limits activities/instruments. - Investment criteria: - Quality: each instrument must have issue or issuer rated AA- or higher by at least two out of Moody’s, S&P, Fitch and confirmed by internal EB rating. - Asset classes: EUR-denominated sovereign, supranational or agency debt instruments or temporary cash. - In practice, invests in EU government, EFSF and supranational bonds; maximum duration of five years; assets chosen to be ESCB-eligible collateral if needed. - More than 80 percent of cash investments are secured. - Assessment: Observed. ### Participant-default rules, procedures and loss mitigation (Principle 13) - Default definitions and triggers: - Financial default includes: - Participant cannot fulfill payment obligations (e.g., declared bankrupt). - Participant in debit for at least US$100,000 above advised credit facility for more than 90 consecutive days. - Participant in default on any financial obligation in excess of 3 percent of its total shareholders’ equity. - Default management architecture: - Crisis levels and roles: Bronze (operational monitoring), Silver (tactical, department heads), Gold (strategic, senior managers). - EB can put participant in default, block positioning of securities, block incoming instructions and wire transfers initiated after default declaration, and liquidate pledged collateral to cover exposures. - For participants signed APS arrangements: EB can immediately appropriate pledged securities. Without APS, EB needs to wait 24 hours before liquidating collateral (statutory lien or general pledge allows immediate liquidation in unexpected circumstances). - EB has a statutory lien on participants’ assets (waived discretionarily for certain customer-only accounts). - Recovery and liquidity contingencies: - Exposure Management Tool to overview accounts, exposures and collateral; aids collateral selection for sale. - Recovery plan sequencing: - Use operational liquidity sources (including uncommitted interbank market or cash correspondents) or liquidity via APS. - Use bilateral committed facilities, then trigger backstop facility (syndicated; contractually available on day 1 if triggered before 12:00 p.m., less practical after that for same-day receipt except for USD). - If mitigation insufficient and EB must rely on capital, implement recovery plan. - Bridge counterparty (CBL) failure: - Bridge agreement Section 7.02(b) obliges EB to make payments to CBL each day; no provision to stop payments even if CBL bankrupt. - Letter of credit from CBL in favor of EB is unconditional; demand for payment can be sent to agent for payment in USD on the third banking day. - If letter of credit insufficient, EB can debit participants’ cash accounts proportionally (right-to-debit) for unpaid amounts due by CBL; decision to implement right-to-debit taken by EB management committee. - Testing and disclosure: - EB conducts internal desktop BCP testing and crisis tests; regulators may attend as observers. - Several key aspects of default rules and procedures are publicly available, but a consistent and comprehensive disclosure is lacking; key aspects of a default of CBL or depositories are not clearly disclosed. - EB does not test participant-default procedures with participants; plans a joint test with CBL for the bridge. - Assessment: Observed. - Recommendation: Improve disclosure of default procedures and conduct tests with participants and other relevant stakeholders. ### General business risk and capital for business continuity (Principle 15) - Business risk framework: - General business risk is one of six key risks in Euroclear’s Risk Register and managed within the Enterprise Risk Management (ERM) Framework. - Revenue and cost risks monitored monthly via the financial plan. - Capital methodology and amounts: - Current model: statistical model for potential negative deviations from planned earnings at a 12-month horizon at the 99.98 percent confidence level; conservative but limited in structural specificity. - EB has developed a first version of recovery plan (2012) covering multiple scenarios; plan in process of finalization. - Estimate to cover six months of operating expenses: €379 million (based on 2011 figures and worst-case scenario where all activity stops). - EB has internally dedicated equity capital for business risk: €184 million. - Together with stress risk (€325 million), these amounts are sufficient to cover the six months of operating expenses of €379 million. - Equity invested in liquid net assets (EU government, supranational and EFSF bonds rated at least AA+ or held in cash at central bank). - Capital-raising measures: - If capital falls below minimum requirements: excess capital of other Euroclear Group entities can be injected; subordinated debt can be converted into profit sharing certificates; potential capital increase by existing or new shareholders may be decided. - EB’s Board has still to review and approve the first version of the recovery plan. - Assessment: Observed. ### Operational risk, resilience and business continuity (Principle 17) - Operational risk framework: - Euroclear operational risk board policy and ERM cycle (identification, assessment, response, reporting, monitoring). - Standards alignment: COSO, ISO 31000:2009, ISO 27001:2005, Basel II definitions, ITIL, COBiT, ISO/IEC 27000:2005 series. - Fraud prevention and whistle-blowing procedures defined; formal hiring policies and training programs in place. - Change management and testing: - Formal risk assessments for new products/services; controlled change and release processes; four-eye principle for production release approvals. - Operational reliability and capacity: - Uptime objective for core services: 99.50 percent (achieved and exceeded in recent years). - Capacity: maximum capacity 250,000 transactions per day; average processing 170,000 transactions per day. - Business continuity architecture and recovery objectives: - Business Impact Analysis (BIA) forms BCP basis; three-tiered Bronze-Silver-Gold crisis management structure. - Data centers: - Two nearby data centers (DC1 and DC2) provide real-time synchronized data mirroring (primary and secondary). - Third data centre (DC3) located hundreds of kilometers away receives a-synchronized data for regional disaster recovery. - Recovery time objectives: - Local disaster recovery (one data center affected): recovery time objective two hours for critical operations; recovery point objective zero data loss. - Regional disaster recovery (both primary and secondary affected): recovery time objective four hours for crucial operations; recovery point objective data loss less than one minute. - Distance specifics: second datacenter located on a distance of 20 kilometers; third data centre located over three hundred kilometers from primary and secondary sites. - Critical production services swapped between two data centers at least six times a year. - Testing limitations: - Internal tests conducted annually; every BCP component tested at least once a year. - Testing does not involve participants or linked FMIs outside the Euroclear Group; no BCP tests with external stakeholders (service providers, other FMIs). - Assessment: Observed. - Recommendation: EB should include participants and other external stakeholders, such as other FMIs, in BCP tests. ### Access, participation requirements and monitoring (Principle 18) - Admission criteria (applied to all applicants regardless of identity, type and location): - Financial resources: demonstrate adequate financial resources and ability to maintain them. - Technology capability: adequate staff, facilities, technological infrastructure, communications systems, books, records and procedures. - Need for EB services: candidate must demonstrate material benefit and sufficient volume of depot or transactions to justify admission. - Reputation in the market: good reputation, regulatory status, management reputation and other relevant factors. - Anti-Money Laundering Program: must demonstrate an adequate AML program; EB may require compliance measures for reputation protection. - Ongoing monitoring and termination: - Monitoring officers perform ongoing compliance monitoring; sponsorship process includes initial KYC and regular KYC reviews (annually or every two years if criteria scored ‘sufficient’). - Termination procedures: EB may terminate participation with at least 30 days’ notice; immediate termination possible in cases of bankruptcy, non-payment or where delay materially affects interests of EB or participants. - Shortcoming and recommendation: - Participation criteria do not include an explicit requirement that the entity be subject to regulation and supervision. - Assessment: Observed. - Recommendation: EB should consider adding requirement that participants be subject to regulation and supervision and encourage participants to promptly report non-compliance with access criteria. ### Tiered participation and indirect participant risks (Principle 19) - EB’s stance: - EB does not recognise tiered arrangements and has only contractual relationships with direct participants. - Participants may open additional accounts (omnibus or individual), and EB does not have full visibility on underlying clients for omnibus accounts. - Current gaps: - No formal procedure to identify, monitor or manage risks from underlying clients of participants beyond existing account-level data. - No systematic process to identify indirect participants responsible for significant transaction volumes relative to direct participants’ capacity. - Assessment: Broadly observed. - Recommendation: Develop tools to identify, monitor and mitigate risks from tiered participation arrangements. ### Links with other FMIs, bridge with CBL and link-related risk management (Principle 20) - Types of links: - Links with more than 40 local CSDs as an “investor CSD” (direct or indirect/relayed links). - Bilateral bridge link with CBL. - Pre-link and ongoing assessments: - Risk assessment committee, network management, risk management, legal and credit input; assessments cover domestic securities criteria, agent due diligence (AML, operational readiness, reputation, financial soundness), and legal/tax/regulatory issues. - Legal opinions obtained for all links; asset protection opinions renewed at least every three years or ad hoc when needed. - Bridge credit and liquidity risk controls: - Bilateral net exposures between EB and CBL can arise; net exposures covered by a syndicated letter of credit (updated twice a year or ad hoc). - Syndicate contains more than 30 banks; letter of credit can be called and syndicate should honor the demand by the third business day after demand; EB can receive cash proceeds as soon as day three and no later than a maximum of five days after CBL fails to pay. - Mechanisms to reduce net exposure: early morning inter-ICSD payments (between 03:00 and 05:00 CET) and currency set-off across currencies. - Capping mechanism verifies net exposure remains below letter of credit after transfers; may not always be fully effective and unsecured exposures may exist. - Advanced income and redemption payments: EB advances proceeds to participants and to CBL (credits the night before payment day) creating credit exposure on CBL; these advances are deducted from net exposure calculation, but in theory could lead to exposures above the letter of credit—fourth quarter of 2012 exposures remained covered by letter of credit (including currency set-off). - Ultimate loss-allocation tools: right-to-debit participants’ cash accounts and pro rata cash reversals; unsecured excess exposures may need to be covered by EB’s capital. - Other link controls: - Provisional transfers of securities are generally prohibited; one exception: provisional newly-issued money market instruments received from DTC in the U.S., which are blocked until final in the local market. - For investor CSD links, depositary agreements and legal opinions are used to protect investor CSD participants’ rights; EB does not impose minimum reconciliation frequency on agents but relies on local practices. - Assessment: Observed. - Recommendation excerpt: Reopen discussions within the ESCB to extend TARGET2 operating hours to allow night time processing of cash deliveries between CBL and EB to reduce overnight exposures and increase settlement efficiency. ### Communication standards and disclosure (Principles 22 & 23) - Communication standards: - EB uses internationally accepted communication protocols: internet/IP, BT, SWIFT. - Message standards: ISO15022 in use; corporate actions not yet fully ISO compliant but improvements underway; plans to introduce ISO 20022 where applicable. - Identifiers: Common Code and ISIN used; several external instruction formats depending on market (BIC or five-digit EB code). - Disclosure and participant information: - Main rule documents: Terms and Conditions and Operating Procedures (version May 16, 2012: 452 pages). - EB is reviewing operational procedures to improve clarity and participant understanding; first step completed September 2012 with summaries of participants’ rights after sections. - Participants receive documentation at admission; documents available on Euroclear website; updates via newsletters. - Fees: Public “General Fees” brochure with detailed fees and discounts; monthly updates with at least 10 business days’ notice for adverse tariff changes. - CPSS-IOSCO/ESCB-CESR Disclosure Framework: EB publishes annual disclosure (last published July 2012). - Assessment: Observed. - Recommendation: Finalize review of operational procedures to improve participants’ understanding of risks using EB systems. *Source: _cr13332 - Section 6.6.2 of EB’s Operating Procedures defines which instructions (IMF staff report content provided in the source PDF).* ### conclusions of the evaluation, with a brief description of the reasons ### _cr13332 - conclusions of the evaluation, with a brief description of the reasons ### Regulatory framework and institutional roles - Legal bases: NBB Organic Law; Royal Decree 26/09/2005; Banking Law; Law of August 2, 2002. - NBB responsibilities: oversight (Article 8 NBB Organic Law) and prudential supervision (including authorizations) for clearing and settlement institutions. - FSMA responsibilities: market surveillance and investor protection; powers to obtain information and undertake on-site inspections (Law of August 2, 2002). - NBB issued circular n° 2012–06 on July 20, 2012 stating CPSS-IOSCO Principles dated April 2012 will guide oversight/supervision of FMIs. - Protocol for oversight of Euroclear system signed February 2007 (covers EB, Euroclear Belgium, and ESA). - Cooperation arrangements exist domestically (NBB–FSMA) and multilaterally via ESA and ESES college structures (ESES Working arrangements dated March 18, 2010). ### Responsibility A — Regulation, Supervision, and Oversight of FMIs Findings: - ESA and EB are subject to appropriate and effective regulation, supervision, and oversight by the NBB and the FSMA. - NBB oversight team: 10 experts with multidisciplinary backgrounds; applies a risk-based approach and uses “Chinese Walls” (separate reporting lines for oversight and operational departments up to board level). - ESES CSDs are subject to effective regulation, supervision and oversight by Belgian (NBB and FSMA), Dutch (DNB and AFM) and French (BdF and AMF) authorities, despite legal-framework differences across jurisdictions. Assessment: - Responsibility A: Observed. Recommendations: - The Dutch authorities should enforce the legal basis of their supervision on SSS. ### Responsibility B — Regulatory, Supervisory, and Oversight Powers and Resources Findings: - Powers to obtain information: NBB (Protocol Feb 2007) has access to all information it judges necessary, on-site inspection rights, and can request auditors; Royal Decree 26/09/2005 and Banking Law supplement powers. FSMA law (Aug 2, 2002) permits access to documents/IT systems and special reports from auditors. Provisions exist to share confidential information under restrictions with domestic and foreign authorities. - Powers to induce change: NBB uses moral suasion; prudential supervision powers include moral suasion, exceptional recovery measures, administrative sanctions, criminal sanctions. FSMA powers include publication, financial penalties, appointment of special auditor. AMF (France) has enforcement commission with sanctions including warning, reprimand, temporary or permanent bans, and fines. AFM/DNB powers under OFCS include a range of measures via regulated markets. Resources (exact figures preserved): - NBB oversight dedicated resources: 3.58 FTE to oversight of Euroclear Group (ESA, EB, ESES/Euroclear Belgium). - NBB prudential supervision available resources: FTE 6.50 (additional resources expected by the end of 2012). - FSMA: one senior FTE appointed to post-trading issues. - France (BdF oversight unit SEPI): 12 agents (including 10 executives); half the staff of the Oversight Unit dedicated to securities clearing and settlement oversight. AMF market infrastructures division: 7 senior personnel; 2 FTE dedicated for supervision of Euroclear France’s ESES. - Netherlands: DNB oversight department 8 FTE (one FTE dedicated to oversight of Euroclear Nederland); AFM Securities Markets and Financial Infrastructure Supervision Division: 9 FTE (three FTE dedicated to securities clearing and settlement), Euroclear Nederland supervised by two FTE. Assessment: - Responsibility B: Observed (Belgium and ESES jurisdictions generally have sufficient powers and resources). Recommendations: - Given global systemic importance of EB, NBB should consider increasing resources for supervision and oversight of EB to ensure high quality and in-depth inspections and assessments. - FSMA should increase capacity on post-trade matters to enhance quality and consistency of conduct of business supervision. ### Responsibility C — Disclosure of Policies with Respect to FMIs Findings: - Policies are defined by national legal frameworks and reflected in regulations, circulars and communications. NBB circular of July 20, 2012 adopts PFMI as guiding principles. - Public disclosure: NBB publishes regulations and circulars on its website; Financial Stability Review includes reports on prudential supervision and oversight of FMIs; NBB–FSMA cooperation agreement published on FSMA website. BdF publishes oversight report every three years; AMF General Regulation and guidelines published. DNB publishes oversight materials and annual reports; AFM discloses applicable laws and annual supervisory reporting. The OFCS (Netherlands) is not publicly disclosed. Assessment: - Responsibility C: Observed. Recommendations: - AFM should publicly disclose the OFCS. ### Responsibility D — Application of the PFMI Findings: - NBB and FSMA have adopted the PFMI (NBB circular July 2012). BdF is considering adopting PFMI in line with Eurosystem decisions; AMF has welcomed PFMI publication. DNB decided PFMI will be used from January 1, 2013. AFM will adopt PFMI in cooperation with DNB under OFCS. - PFMI apply to all (equivalent) settlement institutions active in Belgium, with a proportionality principle for nature/size/complexity of FMIs. PFMI applicability to Netherlands: wholesale systems and securities clearing/settlement; retail systems methodology under development by ESCB. - Authorities apply road maps/action plans with time lines; escalation used for delays. Internal NBB risk committee ensures consistent application of law/regulations and micro/macro-prudential interaction. Cross-border consistency supported by cooperation with foreign authorities. Assessment: - Responsibility D: Observed. Recommendations: - Authorities should consider harmonizing approaches related to PFMI adoption and similar non-legal/regulatory practices. ### Responsibility E — Cooperation with Other Authorities Findings: - Domestic cooperation: NBB–FSMA cooperation agreement specifies responsibilities for EB. NBB is lead overseer/supervisor for ESA and EB. Crisis committee coordinates internally and with domestic/foreign authorities as needed. Crisis contact list between Belgian and Luxembourg overseers/regulators exists for the Bridge between EB and CBL. - International cooperation: NBB has arrangements with FED (USD), ECB (EUR), Bank of Japan (JPY), and Bank of England (GBP); these currencies represented about 95 percent of total settlement turnover in August 2012. A cooperation agreement with the BOE is pending. NBB has informal agreements with FED and Bank of Japan. By the end of 2011, 97 central banks were a participant in the Euroclear system. - ESES cooperation: ESES Committee and ESA/ESES college structures exist; “ESES Working arrangements” document dated March 18, 2010 endorsed by authorities. Joint assessments have been conducted (full assessment in 2010). Crisis communication pack “Euroclear Crisis Regulatory Co-ordination Pack” (version 4) dated May 31, 2010 with ESES addendum dated December 12, 2011; a dedicated MoU dated July 1, 2011 governs outsourcing of EB daily settlement operations to Euroclear France. NBB operates a permanent secretariat for ESA and ESES colleges. Typical meeting frequency: four technical and two high level meetings per year (in principle). Assessment and key conclusions: - For EB/CBL Bridge: current cooperation between Belgian and Luxembourg authorities is considered insufficient to contribute to financial stability; arrangement is informal and mainly covers bridge aspects. Belgian and Luxembourg authorities regulate, supervise and oversee both ICSDs rather independently without regular consultation and parallel implementation of risk management and other improvements. Inconsistent implementation may result in competition on risk management. - Responsibility E (overall): Broadly Observed for EB/ICSD bridge issues; Observed for ESES cooperation. Recommendations: - Belgian and Luxembourg authorities should continuously cooperate, take common decisions and implement these in parallel for both ICSDs. NBB should formalize cooperation with Luxembourg authorities, meet several times per year, agree common positions and implement decisions in parallel within EB and CBL. Scope should include bridge and other operational and risk management matters to ensure a level playing field. ECB involvement in responsibilities for financial stability should be pursued. Inclusion of EB and CBL on the list of eligible banks for the single supervisory mechanism for the euro zone may further contribute to a level playing field. ### Selected detailed assessment highlights (ESES and ESA) - ESES authorities: NBB/BNB, FSMA, AMF, BdF, AFM, DNB. NBB leads organization of cooperative oversight for ESES CSDs. - ESES assessments: the ESES authorities performed a cooperative full assessment in 2010 against ESCB-CESR recommendations; joint assessment documented in a single joint document and a common assessment outcome published by each assessor. - Scope of coordinated assessment of ESA common functions: governance arrangements of the Euroclear Group; operational reliability and business continuity; audit organization and risk management policy; business model and harmonization projects; ESA outsourcing. - Crisis arrangements: conference call facility regularly tested; escalation to appropriate hierarchical levels; crisis communication procedures in place and updated. ### Authorities’ response (NBB summary) - NBB generally agrees with IMF assessments and recommendations. NBB will monitor EB’s implementation of recommended actions, particularly for Principles 3, 4, 11, and 19. - Action plan on advanced income and redemption issue discussed before IMF assessment; expected to make EB compliant with Principle 4 by the end of 2013. - For Principles 11 and 19, Euroclear will be requested to set up action plans to achieve full observance. - For Principle 3 (Framework for comprehensive management of risks), NBB notes international guidance on recovery and resolution (CPSS-IOSCO consultative report on Recovery of FMIs expected by summer 2013) is pending; NBB considers EB operationally ready to implement several recovery-plan elements and thus judges observance differently. - NBB will initiate discussions with Luxembourg authorities and the ECB to strengthen and broaden cooperation on oversight/supervision of the two ICSDs, seeking parallel implementation of applicable principles and a common solution for advanced income and redemption payments over the Bridge. - Belgian, Dutch, and French authorities are in agreement with the ESES assessment. *Source: _cr13332 - conclusions of the evaluation, with a brief description of the reasons (IMF).* ### Appendix 1. Key Statistics 2011 ### Appendix 1. Key Statistics 2011 ### Participants - EB: Number of participants 1,383 - Domestic 30 - Foreign 1,356 - Central banks 99 - CCPs 4 - CSDs 13 - Banks 309 - Other 931 - CBL: Number of participants 1,283 - Domestic 106 - Foreign 1,177 - Central banks 54 - CCPs 13 - CSDs 33 - Banks 840 - Other 237 - DTCC: Number of participants 378 - Domestic 362 - Foreign 16 - Central banks 0 - CCPs 1 - CSDs 12 - Banks 1 - Other 2 - Federal Reserve: Number of participants 2,406 - Domestic nav - Foreign Nav - Central banks nav - CCPs nav - CSDs nav - Banks nav - Other nav ### Turnover - (EUR bln/USD bln) 332,958 ### Number of securities held (thousands) - EB: 203.90 - CBL: Nav - DTCC: 3,690.0 - Federal Reserve: 1,187.1 - International and domestic bonds (EB): 157.01 - Equities (EB): 18.68 - Other securities (EB): 28.21 ### Value of securities held (Euro billions) - EB: 10,769.27 - International and domestic bonds 10,130.89 - Equities 455.00 - Other securities 183.39 - CBL: 4,889.23 - International and domestic bonds 4,495.51 - Equities 275.24 - Other securities 118.48 - DTCC: 40,000.00 - Federal Reserve: 60,295.90 *Source: CPSS Red book and ECB Blue book.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13332.pdf_