## _cr1372

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### Executive Summary — key findings and policy recommendations
- Adoption of the European Market Infrastructure Regulation (EMIR) and timely adoption of the draft Central Securities Depositories (CSD) Regulation are crucial to create a single market for Central Counterparties (CCPs) and CSDs.
- Development of recovery and resolution legislation for CCPs and CSDs is encouraged so recovery and resolution plans operate across borders in large market disruptions.
- Recommendation: centralize supervisory responsibilities further; the two international CSDs should be brought under the Single Supervisory Mechanism (SSM) and among the first to be included.
- Cooperation between national supervisors is currently insufficient to contribute to financial stability.
- Resources of the European Securities and Markets Authority (ESMA) should be increased to fulfill responsibilities required by EMIR; independence and adequacy of resources for reviewing CCP risk models should receive appropriate attention.
- National competent authorities bear primary supervisory responsibility for CCPs and CSDs; ESMA participation in CCP colleges should contribute to supervisory consistency and oversight.
- Rights of CCPs and CSDs to access other markets and infrastructures should be further developed in line with international standards.
- Regulatory risks exist due to inconsistencies between EU, U.S., and other frameworks after the mandatory clearing obligation for standardized derivatives; regulators should prioritize identifying and mitigating conflicts, inconsistencies and gaps between EMIR and non-EU frameworks via bilateral and multilateral coordination.
- Central bank oversight should develop a macro view on stability of CCPs and CSDs, with appropriate information sharing between national central banks and the ECB.
- EU crisis management procedures for FMIs should be further developed and tested; ESMA and the ESCB are encouraged to agree on a crisis management framework allowing immediate information sharing among authorities, CCPs, CSDs and market participants.
- Review functioning of the notification scheme under the Settlement Finality Directive (SFD); tests of crisis management plans should be conducted regularly.

### I. Introduction — scope and rationale
- Objective: identify cross-border risks related to CCPs and CSDs in the EU and recommend actions to further financial system safety and stability; analysis based on international standards, e.g., CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI).
- Focus: effectiveness of regulatory, supervisory and oversight frameworks for CCPs and CSDs given their capacity to concentrate systemic risk and increasing systemic importance with G20 mandates for mandatory central clearing of standardized OTC derivatives.
- Emphasis: cooperation among authorities within and outside the EU is critical to reduce cross-border risks; lack of efficient communication/consultation may cause regulatory arbitrage, competition on risk management, protection of national markets, and impede creation of a single market.
- Crisis management arrangements between EU authorities are analyzed, taking into account lessons from Lehman Brothers and MF Global failures.

### II. Description of CCPs and CSDs in the EU — landscape and regulatory framework
- Policy objectives: ensure smooth functioning of internal market, increase safety, ensure high level of investor protection, create level playing field, and improve clearing and settlement efficiency.
- Regulatory developments:
  - EMIR entered into force on August 16, 2012.
  - ESMA delivered draft technical standards to the European Commission in September 2012; these standards are expected to come into force by early April 2013, subject to approval by the European Parliament and the Council.
  - Draft CSD Regulation expected to be adopted by the European Parliament and the Council in the course of 2013 and come into force thereafter.
- EMIR scope and features:
  - Common rules for CCPs; introduction of a passport for CCP services.
  - Clearing obligation for eligible OTC derivatives and measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives.
  - Reporting obligation for derivatives to trade repositories (TRs).
  - Rules on establishment of interoperability between CCPs clearing cash markets.
  - Allows third countries to provide clearing and TR services in the EU if their legal and supervisory regime provides an effective equivalent system.
- Market structure and participants:
  - There are currently more than 20 CCPs in Europe.
  - CCPs clear one or more asset classes: financial and commodity derivatives, cash equities, bonds/repos; instruments traded on organized trading platforms and OTC.
  - Ownership models vary: exchange-owned (Germany, Italy), independent (LCH.Clearnet Group), combined with CSDs (historically in Eastern Europe).
- OTC derivative CCP examples:
  - Largest global CCP for interest rate swaps: London-based Swapclear (launched by LCH.Clearnet Limited in September 1999).
  - ICE Clear Europe (London-based) holds a leading position in clearing credit default swaps (CDSs).
  - Other CCPs expanded OTC derivatives offerings in France, Germany, and Sweden following G20 commitments.
- CSD landscape:
  - There are more than 30 CSDs in the EU.
  - Historical separation of equity and government bond CSDs; consolidation to one CSD per country in recent decades.
  - Ownership types: exchange-owned (Germany, Italy, Poland, Spain), private sector, public sector (Hungary), listed companies, user-owned.
- International CSDs (ICSDs):
  - Two ICSDs located in the EU: Euroclear Bank and Clearstream Banking Luxembourg.
  - ICSDs operate under banking licenses, provide cash accounts and credit lines to participants to facilitate settlement.
  - Several global custodians are considering applying for a CSD license; Bank of New York Mellon applied in the beginning of 2013.
- Market evolution:
  - Since 2006, regulatory changes (MiFID and the Code of Conduct) increased competition among trading platforms, clearing and settlement institutions and encouraged proliferation of Multilateral Trading Facilities (MTFs).
  - New CCPs entered market to serve MTFs (e.g., EMCF and EuroCCP).
  - Interoperability arrangements (EMCF, EuroCCP, LCH.Clearnet Limited and SIX X-Clear) allow access to various trading platforms via one CCP and netting of positions across trading platforms.
  - Recent re-verticalization trend: exchanges holding CCPs as subsidiaries.
- Historical regulatory emphasis shifted from efficiency to financial stability post-crisis.

### Regulatory and supervisory framework for CSDs and CCPs
- Draft CSD Regulation introduces common standards across the EU for securities settlement and CSDs and a passport regime.
- In March 2012 a draft proposal for CSD regulation was passed to the European Parliament and the Council for negotiation and adoption under the co-decision procedure.
- Each member state shall designate a competent authority responsible for authorization and supervision of a CCP or CSD established in its territory.
- Authorized CCPs and CSDs will be granted passport rights to provide their services in other member states.
- Members of the ESCB and other national or public bodies are exempted from authorization and supervision requirements; central banks shall immediately inform ESMA of any CSD that they operate.

### Roles and responsibilities: ESMA, ESCB, national competent authorities
- National authorities remain the competent authorities for CCPs and CSDs, with new roles for ESMA and the ESCB.
- ESMA responsibilities under EMIR and the draft CSD Regulation include:
  - Development of binding technical standards in close consultation with members of the ESCB; these standards have to be adopted by the Commission.
  - Coordination role between competent authorities and across supervisory CCP colleges to build consistent supervisory practices and settle disagreements.
  - Increased emergency powers and annual peer review analysis of supervisory activities of all competent authorities.
  - Initiate and coordinate EU-wide assessments of the resilience of CCPs.
  - Engage in cooperation arrangements with third country authorities before ESMA has recognized a CCP or CSD from a third country.
  - Authority to draft, in consultation with members of the ESCB, binding technical standards under the CSD regulations.
  - Power to withdraw recognition of a third country CCP and CSD.
  - Power to request information from competent authorities and to issue level 3 guidelines.
  - Participation in CCP colleges in a non-voting capacity; in case of disagreement one competent authority can escalate to ESMA and ESMA’s opinion will be binding.
- ESCB involvement:
  - Participation in CCP colleges as overseer and central bank of issue.
  - Involvement in drafting technical standards, guidelines and recommendations (ESMA has final responsibility).
  - Members of the ESCB are involved in authorisation of CCPs, supervision of CCPs and CSDs, recognition of third country CCPs, and approval of links.
  - National central banks typically act as the competent authority or as members of the college; central banks of issue of the most relevant EU currencies of the financial instruments cleared will also be members of the college.
- Competent authorities’ powers under new regulations include obtaining timely information, applying administrative sanctions and measures, and imposing administrative pecuniary sanctions.

### Effectiveness of supervision and oversight — findings and concerns
- Expected positive effects:
  - EU regulations should significantly improve safety, efficiency and level playing field by providing common standards; mitigate risks from diversity of national rules, reduce legal risks from conflicts of law, and address inconsistencies in financial risk management of cross-border clearing.
  - Regulations support cooperation between supervisors, essential during crises (e.g., Lehman defaults).
- Remaining concerns:
  - Inconsistencies between legal and regulatory frameworks in the EU, the U.S., and elsewhere regarding OTC derivatives clearing (examples: segregation and portability requirements, requirements for calculation of margin, extraterritoriality, recognition of CCPs located outside their own territory).
  - Need for continued bilateral and multilateral coordination and mechanisms based on mutual recognition to limit conflicts, inconsistencies and duplication of rules.
  - Need for legislation for recovery and resolution of CCPs and CSDs to ensure cross-border effectiveness.
  - ESMA currently has insufficient resources to develop and execute all new tasks; ESMA should quickly extend its resources and ensure skilled resources are available to validate complex CCP risk models.
  - ESCB resources need to be increased to facilitate new coordination tasks and increased duties representing the Eurosystem as central bank of issue in supervisory colleges.
  - The ECB Governing Council is encouraged to evaluate the effectiveness of information sharing within the ESCB.
- Transparency and disclosure:
  - EMIR and draft technical standards and the draft CSD regulation are available on the Internet; ESMA is to publish lists and registers (competent authorities, authorized and recognized CCPs and CSDs, services, products, branches and links) and its opinions.
  - In practice ESMA’s website is not very accessible and assumes a high level of knowledge on clearing and settlement topics.
  - The Eurosystem discloses oversight policies and annual oversight reports; the Eurosystem has a policy statement “Eurosystem oversight policy framework” regularly updated.

### Cooperation among authorities and supervisory colleges
- EMIR provides legal underpinning for cooperation and requires competent authorities to establish, manage and chair a college for authorization and supervision of a CCP.
- College membership includes ESMA, the CCP’s competent authority, competent authorities responsible for supervision of clearing members in the three member states with the largest contributions to the default fund over a one-year period, competent authorities responsible for supervision of trading venues served by the CCP, competent authorities supervising CCPs with interoperability arrangements, competent authorities supervising CSDs to which the CCP is linked, relevant members of the ESCB responsible for oversight, and central banks of issue of the most relevant union currencies of the financial instruments cleared.
- EMIR colleges and ESMA are expected to ensure consistent authorization, supervision and oversight of CCPs within the EU and contribute to financial stability.
- It remains to be assessed whether the decentralized supervisory structure combined with colleges and ESMA coordination delivers efficient supervision or if a more centralized structure should be explored.

### TARGET2Securities (T2S) and market infrastructure integration
- T2S is a Eurosystem project to centralise settlement operations on a single pan-European platform.
- Features and objectives:
  - Single IT platform for securities settlement in Europe, accommodating market participants’ securities accounts (held at one or multiple CSDs) and central bank cash accounts in TARGET2.
  - Main objective: reduce cross-border settlement fees, on average higher than domestic fees, through a single IT platform and standardized communication protocols.
  - Project initiated in 2006 and is currently under development; based on latest announcements it is scheduled to go-live in 2015.
  - IT platform will be built, owned and operated by the ECB and 17 national central banks in the euro area (Eurosystem).
  - So far 24 national CSDs have signed up to join T2S; central banks in the U.K., Czech Republic and Sweden have announced not to participate.

### Cooperation framework for CSD supervisors and SSM inclusion
- Draft CSD Regulation does not prescribe a supervisory college or comprehensive cooperation framework between national supervisors of CSDs.
- Recommendation: require establishment of such a cooperation framework for national supervisors of CSDs, building on CCP colleges.
- Recommendation: include the two ICSDs, and any systemically important CSD providing banking services, in the list of eligible institutions for the SSM.
- Cooperation framework should include arrangements among the ECB, ESMA and national supervisory authorities for CSDs with a banking license.
- Rationale: relevant national fiscal authorities may have insufficient resources to facilitate an eventual bail out; centralized supervision should reduce competitive pressures to compete on risk measures and provide a level playing field.

### Back-up arrangements, ring-fencing, and protection of settlement operations
- Cooperation among authorities is necessary to support establishment of a back up arrangement for settlement operations if a CSD with a banking license goes bankrupt.
- Ring-fencing of settlement accounts from risk-taking ancillary services aligns with PFMI (Principle 3 regarding plans for recovery and orderly winding down of operations).
- Preferred solution: a CSD should have a back up arrangement with another provider of cash accounts to allow swift continuation of settlement operations; the back up provider should have a limited risk profile.
- The draft CSD Regulation’s requirement to place cash accounts in a separate legal entity could secure protection but may discourage CSDs without a banking license from requesting one.

### Cross-border shocks, collateral, access rights, interoperability, and competition
- Cooperation is crucial in event of default or downgrade of one or more countries to avoid disruptive measures in one member state affecting CCPs or CSDs in other member states.
- Authorities should monitor such situations cooperatively and pursue the interests of the EU as a whole.
- Access rights and interoperability:
  - Re-verticalization of infrastructures requires attention to rights of CCPs and CSDs to access other markets and infrastructures to ensure a level playing field.
  - Interoperability can enhance efficiency but may threaten incumbent CCP market share.
  - Trading platforms that own a CCP can refuse access of other CCPs to their trading platform and potentially CSDs on discriminatory grounds.
  - CSDs should gain non-discriminatory access to CCPs.
  - Restrictions to access rights as prescribed in EMIR, and potentially MIFIR and the CSD Regulation, should be exclusively risk based (excluding business risk) and publicly disclosed.
  - Reference: PFMI Principle 18.

### Crisis management and information sharing
- Cross-border crisis management for CCPs and CSDs is essential to minimize losses and maintain participants’ confidence.
- Objective: framework for timely, complete information to all relevant stakeholders, providing transparency on the size and severity of the crisis.
- EU legislation recognizes need for crisis management arrangements; information sharing among authorities is covered in several EU Directives.
- The SFD notification scheme did not work properly during recent defaults of major participants and should be reviewed:
  - Perception that information sharing on a defaulting market participant was not always timely and comprehensive.
  - Awareness should be raised among designated authorities under the SFD regarding their obligations and tests should be conducted.
  - ESMA should play a leading role together with the ESCB.
  - The SFD notification scheme should include all relevant authorities, including the ECB in its role as lead overseer of TARGET2 and EURO1.
- Colleges, chaired by respective competent authorities, ESMA and the ESCB, are encouraged to develop and continue a crisis management framework and regularly test and update the plan.

### Recommendations (regulation, supervision, oversight, cooperation, crisis management)
- Regulation, supervision and oversight:
  - Early passage of the EMIR technical standards is recommended to provide tools to implement new requirements for CCPs and establish national colleges.
  - Early adoption of the CSD Regulation is recommended to provide legal basis for raising the bar for CSDs.
  - The Commission is encouraged to develop legislation for the recovery and resolution of CCPs and CSDs.
  - Regulators from the EU, U.S. and other relevant countries should continue bilateral and multilateral coordination to reduce gaps and inconsistencies for OTC derivatives clearing urgently.
  - ESMA resources need to be significantly increased to enable ESMA to adequately accomplish its extended duties.
  - ESCB overseers should improve information sharing and aim for development of a comprehensive macro view on the financial stability of CCPs and CSDs in the EU.
  - The ESCB should be sufficiently staffed to fulfill coordination and information sharing tasks and ensure efficiency in representation of the Eurosystem in supervisory colleges.
- Cooperation between authorities:
  - Euroclear Bank and Clearstream Banking Luxembourg should be among the first institutions taken into SSM supervision; SSM supervision should relate to banking activities while CSD activities should be supervised by ESMA and national supervisors under the CSD Regulation.
  - The ECB, ESMA and supervisory authorities should develop a cooperation framework for CSDs subject to banking supervision under the SSM as well as supervision under the CSD Regulation.
  - The CSD Regulation should include a requirement for colleges or other comprehensive cooperation frameworks for supervisors of CSDs.
  - Securities accounts within a CSD that also provides banking services should be ring fenced to protect settlement operations in case of a crisis.
  - Authorities must cooperate in the event of a potential major downgrade of a member state to optimize protection of CCPs and ICSDs through collateral.
  - The Commission should pay particular attention to drafting access rights for CCPs and CSDs in MIFIR and the CSD Regulation; access criteria should be non-discriminatory and risk based (excluding business risk).
- Crisis management procedures:
  - Crisis management arrangements between ESMA and the ESCB should be further developed and tested.
  - The SFD notification regime should be reviewed, standardized and enhanced, with the inclusion of all relevant authorities, including the ECB as overseer of TARGET2 and EURO1.

*Excerpt from IMF staff report content unit _cr1372.*

### 2013. The views expressed in this document are those of the staff team and do not necessarily reflect

### _cr1372 - 2013. The views expressed in this document are those of the staff team and do not necessarily reflect

### Executive Summary — key findings and policy recommendations
- The adoption of the European Market Infrastructure Regulation (EMIR) and timely adoption of the draft Central Securities Depositories (CSD) Regulation are crucial for creating a single market for Central Counterparties (CCPs) and CSDs; development of recovery and resolution legislation is encouraged.
- The regulations aim to reduce risks related to cross-border clearing and settlement and to provide a level playing field enhancing fair and efficient competition between CCPs and CSDs.
- The Commission is encouraged to develop EU legislation for recovery and resolution of CCPs and CSDs to ensure recovery and resolution plans operate across borders in large market disruptions.
- Recommendation: centralize supervisory responsibilities further; the two international CSDs should be brought under the Single Supervisory Mechanism (SSM) and among the first to be included, because failure could be highly disruptive and current national supervision is suboptimal.
- The cooperation between national supervisors is considered insufficient to contribute to financial stability.
- Resources of the European Securities and Markets Authority (ESMA) should be increased to fulfill responsibilities required by EMIR; independence and adequacy of resources for reviewing CCP risk models should receive appropriate attention.
- National competent authorities bear primary supervisory responsibility for CCPs and CSDs; ESMA participation in CCP colleges should contribute to supervisory consistency and oversight.
- Recommend establishing a cooperation framework for national supervisors for CSDs given cross-border nature.
- Rights of CCPs and CSDs to access other markets and infrastructures should be further developed in line with international standards.
- Regulatory risks exist due to inconsistencies between EU, U.S., and other frameworks after the mandatory clearing obligation for standardized derivatives; regulators should prioritize identifying and mitigating conflicts, inconsistencies and gaps between EMIR and non-EU frameworks via bilateral and multilateral coordination.
- Central bank oversight should develop a macro view on stability of CCPs and CSDs, with appropriate information sharing between national central banks and the ECB; ESCB is encouraged to implement information sharing plans and the ECB Governing Council to evaluate effectiveness.
- EU crisis management procedures for FMIs should be further developed and tested; ESMA and the ESCB are encouraged to agree on a crisis management framework allowing immediate information sharing among authorities, CCPs, CSDs and market participants.
- Review functioning of the notification scheme under the Settlement Finality Directive (SFD); tests of crisis management plans should be conducted regularly.

### I. Introduction — scope and rationale
- Objective: identify cross-border risks related to CCPs and CSDs in the EU and recommend actions to further financial system safety and stability; analysis based on international standards, e.g., CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI).
- Focus: effectiveness of regulatory, supervisory and oversight frameworks for CCPs and CSDs, given their capacity to concentrate systemic risk and their increasing systemic importance with G20 mandates for mandatory central clearing of standardized OTC derivatives.
- Emphasis: cooperation among authorities within and outside the EU is critical to reduce cross-border risks; lack of efficient communication/consultation may cause regulatory arbitrage, competition on risk management, protection of national markets, and impede creation of a single market.
- Crisis management arrangements between EU authorities are analyzed, taking into account lessons from Lehman Brothers and MF Global failures.
- Structure: Chapter II — overview of CCPs and CSDs and regulatory framework; Chapter III — issues on oversight, cooperation, and crisis management; Chapter IV — recommendations.

### II. Description of CCPs and CSDs in the EU — landscape and regulatory framework
- Policy objectives for CCPs and CSDs in EU: ensure smooth functioning of internal market, increase safety, ensure high level of investor protection, create level playing field, and improve clearing and settlement efficiency.
- Regulatory developments:
  - EMIR (European Market Infrastructure Regulation) entered into force on August 16, 2012.
  - ESMA delivered draft technical standards to the European Commission in September 2012; these standards are expected to come into force by early April 2013, subject to approval by the European Parliament and the Council.
  - Draft CSD Regulation expected to be adopted by the European Parliament and the Council in the course of 2013 and come into force thereafter.
- EMIR scope and features:
  - Common rules for CCPs.
  - Introduction of a passport for CCP services.
  - A clearing obligation for eligible OTC derivatives with measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives.
  - A reporting obligation for derivatives to trade repositories (TRs).
  - Rules on establishment of interoperability between CCPs clearing cash markets.
  - Allows third countries to provide clearing and TR services in the EU if their legal and supervisory regime provides an effective equivalent system for recognition of CCPs under foreign legal regimes.
- Market structure and participants:
  - There are currently more than 20 CCPs in Europe, clearing a wide range of markets and products.
  - CCPs clear one or more asset classes: financial and commodity derivatives, cash equities, bonds/repos; instruments traded on organized trading platforms and OTC.
  - Ownership models vary: exchange-owned (Germany, Italy), independent (LCH.Clearnet Group), combined with CSDs (historically in Eastern Europe).
  - Some CCPs service domestic markets; others provide clearing across multiple EU markets.
- OTC derivative CCPs and prominent examples:
  - Largest global CCP for interest rate swaps: London-based Swapclear (launched by LCH.Clearnet Limited in September 1999).
  - ICE Clear Europe (London-based) holds a leading position in clearing credit default swaps (CDSs).
  - Other CCPs have expanded OTC derivatives offerings in France, Germany, and Sweden following G20 commitments.
- CSD landscape:
  - More than 30 CSDs in the EU.
  - Historical separation of equity and government bond CSDs; in recent decades consolidation to one CSD per country handling all securities.
  - Ownership types: exchange-owned (Germany, Italy, Poland, Spain), private sector, public sector (Hungary), listed companies, user-owned.
  - Some CSDs service domestic markets; others operate cross-border via mergers (Euroclear) or optimized link arrangements (Link Up Markets).
- International CSDs (ICSDs):
  - Two ICSDs located in the EU: Euroclear Bank and Clearstream Banking Luxembourg.
  - Created in the 1970s to settle Eurobonds; extended scope to internationally-traded equities and investment funds.
  - Under banking licenses, ICSDs provide cash accounts and credit lines to participants to facilitate settlement.
  - ICSDs compete with each other and with global custodians.
  - Several global custodians are considering applying for a CSD license; Bank of New York Mellon applied in the beginning of 2013.
- Market evolution:
  - Since 2006, regulatory changes (MiFID and the Code of Conduct) increased competition among trading platforms, clearing and settlement institutions and encouraged proliferation of Multilateral Trading Facilities (MTFs).
  - New CCPs entered market to serve MTFs (e.g., EMCF and EuroCCP).
  - Interoperability arrangements among CCPs (EMCF, EuroCCP, LCH.Clearnet Limited and SIX X-Clear) allow access to various trading platforms via one CCP and netting of positions across trading platforms.
  - Recent re-verticalization trend: exchanges holding CCPs as subsidiaries (examples: NYSE LIFFE developing a CCP; ICE Clear and London Metal Exchange decisions noted).
- Historical regulatory emphasis shifted from efficiency to financial stability post-crisis.

*International Monetary Fund — Financial Sector Assessment Program, Technical Note, March 2013.*

### 22.      It is the Commission’s intention that the draft CSD Regulation will provide for

### _cr1372 - 22.      It is the Commission’s intention that the draft CSD Regulation will provide for

### Regulatory and supervisory framework for CSDs and CCPs
- The draft CSD Regulation introduces common standards across the EU for securities settlement and CSDs as well as a passport regime.
- In March 2012 a draft proposal for CSD regulation was passed to the European Parliament and the Council of the European Union for negotiation and adoption under the co-decision procedure.
- Each member state shall designate a competent authority that is responsible for the authorization and supervision of a CCP or CSD established in its territory.
- Authorized CCPs and CSDs will be granted passport rights to provide their services in other member states.
- The members of the ESCB and other national or public bodies are exempted from the authorization and supervision requirements. Central banks shall immediately inform ESMA of any CSD that they operate.

### Roles and responsibilities: ESMA, ESCB, national competent authorities
- National authorities remain the competent authorities for CCPs and CSDs, with new roles for ESMA and the ESCB.
- ESMA responsibilities under EMIR and the draft CSD Regulation include:
  - Development of binding technical standards in close consultation with members of the ESCB; these standards have to be adopted by the Commission.
  - Coordination role between competent authorities and across supervisory CCP colleges to build consistent supervisory practices and settle disagreements between authorities.
  - Increased emergency powers.
  - Annual peer review analysis of supervisory activities of all competent authorities.
  - Initiate and coordinate EU-wide assessments of the resilience of CCPs.
  - Engage in cooperation arrangements with third country authorities before ESMA has recognized a CCP or CSD from a third country.
  - Authority to draft, in consultation with the members of the ESCB, binding technical standards under the CSD regulations.
  - Power to withdraw the recognition of a third country CCP and CSD.
  - Power to request information from competent authorities about CCP or CSD compliance and to issue level 3 guidelines addressed to authorities.
  - ESMA participates in CCP colleges in a non-voting capacity; in case of disagreement one competent authority can escalate to ESMA and ESMA’s opinion will be binding.
- ESCB involvement:
  - Participation in CCP colleges as overseer and central bank of issue.
  - Involvement in drafting technical standards, guidelines and recommendations (ESMA has final responsibility).
  - Members of the ESCB are involved in authorisation of CCPs, supervision of CCPs and CSDs, recognition of third country CCPs, and approval of links.
  - National central banks typically act as the competent authority or as members of the college; central banks of issue of the most relevant EU currencies of the financial instruments cleared will also be members of the college.
- Competent authorities’ powers under new regulations:
  - Obtain timely information and induce change.
  - Apply administrative sanctions and measures to CCPs and CSDs, designated credit institutions, members of management bodies, and controllers or persons responsible for breaches.
  - Administrative sanctions and measures include: public statements, withdrawal of authorizations, dismissal of members of management bodies responsible for a breach, and administrative pecuniary sanctions.

### Effectiveness of supervision and oversight — findings and concerns
- Positive effects expected:
  - EU regulations should significantly improve safety, efficiency and level playing field in the EU post-trade market by providing common standards across the EU.
  - Regulations should mitigate risks and inefficiencies from diversity of national rules and supervisory frameworks, reduce legal risks from conflicts of law, and address inconsistencies in financial risk management of cross-border clearing.
  - Regulations support cooperation between supervisors, essential during crisis situations (e.g., Lehman defaults).
- Remaining concerns and issues:
  - Inconsistencies exist between legal and regulatory frameworks in the EU, the U.S., and elsewhere regarding OTC derivatives clearing (examples: segregation and portability requirements, requirements for calculation of margin, extraterritoriality, recognition of CCPs located outside their own territory).
  - Need for continued bilateral and multilateral coordination and mechanisms based on mutual recognition of regulations to limit conflicts, inconsistencies and duplication of rules.
  - Need for legislation for recovery and resolution of CCPs and CSDs to ensure recovery and resolution plans work across borders in large market disruptions.
  - ESMA currently has insufficient resources to develop and execute all new tasks; ESMA should quickly extend its resources and national competent authorities and ESMA should ensure skilled resources are available to validate complex CCP risk models.
  - ESCB resources need to be increased to facilitate new coordination tasks and increased duties representing the Eurosystem as central bank of issue in supervisory colleges.
  - The ECB Governing Council is encouraged to evaluate the effectiveness of information sharing within the ESCB.
- Transparency and disclosure:
  - EMIR and draft technical standards and the draft CSD regulation are available on the Internet; ESMA is to publish lists and registers (competent authorities, authorized and recognized CCPs and CSDs, services, products, branches and links) and its opinions.
  - In practice ESMA’s website is not very accessible and assumes a high level of knowledge on clearing and settlement topics.
  - The Eurosystem discloses oversight policies and annual oversight reports; the Eurosystem has a policy statement “Eurosystem oversight policy framework” regularly updated.

### Cooperation among authorities and supervisory colleges
- EMIR provides legal underpinning for cooperation and requires competent authorities to establish, manage and chair a college for authorization and supervision of a CCP.
- Colleges:
  - Governed by written agreements and EMIR-prescribed decision-making and voting procedures (general principle: each member has one vote).
  - Members include ESMA, the CCP’s competent authority, competent authorities responsible for supervision of clearing members in the three member states with the largest contributions to the default fund over a one-year period, competent authorities responsible for supervision of trading venues served by the CCP, competent authorities supervising CCPs with interoperability arrangements, competent authorities supervising CSDs to which the CCP is linked, relevant members of the ESCB responsible for oversight, and central banks of issue of the most relevant union currencies of the financial instruments cleared.
- Expectations:
  - EMIR colleges and ESMA are expected to ensure consistent authorization, supervision and oversight of CCPs within the EU and contribute to financial stability.
  - It remains to be assessed whether the decentralized supervisory structure combined with colleges and ESMA coordination delivers efficient supervision or if a more centralized structure should be explored.

### TARGET2Securities (T2S) and market infrastructure integration
- T2S is a Eurosystem project to centralise settlement operations on a single pan-European platform to further integrate the post-trade market in the EU.
- T2S features and objectives:
  - Single IT platform for securities settlement in Europe, accommodating market participants’ securities accounts (held at one or multiple CSDs) and central bank cash accounts in TARGET2.
  - Main objective: reduce cross-border settlement fees, which are on average higher than domestic fees, through a single IT platform and standardized communication protocols.
  - Project initiated in 2006 and is currently under development; based on latest announcements it is scheduled to go-live in 2015.
  - IT platform will be built, owned and operated by the ECB and 17 national central banks in the euro area (Eurosystem).
  - So far 24 national CSDs have signed up to join T2S; central banks in the U.K., Czech Republic and Sweden have announced not to participate.

### Other EU legislative initiatives and directives
- Securities Law Legislation:
  - Aims to ensure investors have full control over their securities and give lenders confidence in their claim to securities collateral.
  - Focuses on addressing “who owns what”, legal, operational and economic challenges in holding, buying, selling and lending securities, and the securities financing aspects of shadow banking.
  - Will consider how to improve exercise of rights flowing from securities for investors.
- Consultation on possible recovery and resolution framework for financial institutions other than banks:
  - Issued by the Commission in October 2012 and includes recovery and resolution issues for CCPs and CSDs.
- Other directives:
  - SFD contains provisions to reduce risk linked to the insolvency of a participant of FMIs; adapted to include lessons from the 2008 financial crisis (moment of entry of a transfer order into a system and irrevocability for interconnected systems).
  - The collateral directive contains provisions on enforceability of collateral arrangements to limit contagion effects in event of default by a participant of the FMI.

*Source: EMIR, draft CSD Regulation, Eurosystem Oversight Annual Report 2011.*

### 43.      It is necessary that a comprehensive framework for cooperation between

### _cr1372 - 43.      It is necessary that a comprehensive framework for cooperation between

### Cooperation framework for CSD supervisors
- The draft CSD regulation does not prescribe a supervisory college or another comprehensive cooperation framework between national supervisors of CSDs.
- Recommendation: require the establishment of such a cooperation framework for national supervisors of CSDs in the foreseen CSD Regulation, building on the example of CCP colleges.
- Expected effects of colleges or other comprehensive frameworks:
  - Oblige national supervisors to cooperate on a broader range of topics than currently requested under the draft CSD Regulation.
  - Give authorities more means to influence decision making or refer to ESMA, important for CSDs that provide cross border settlement services.
  - Anticipate that with the development of the Securities Law Legislation potentially more CSDs will be of interest to authorities from other member states.
- Footnote: Although the competent authority is required to cooperate closely with ESMA and various other authorities in certain cases.

### SSM inclusion and centralized banking supervision for ICSDs and systemically important CSDs
- Recommendation: include the two ICSDs, and any systemically important CSD providing banking services, in the list of eligible institutions for the SSM.
- Cooperation framework should include arrangements among the ECB, ESMA and national supervisory authorities for CSDs with a banking license.
- Rationale for centralized banking supervision:
  - Relevant national fiscal authorities may have insufficient resources to facilitate an eventual bail out.
  - Centralized supervision should reduce the chance that competitive pressures will result in competition on risk measures.
  - Centralized supervision should provide for a level playing field and ensure enhancements to the credit and liquidity risk management frameworks of the ICSDs.
- Coordination requirement: since ICSDs will be supervised by different authorities for banking and CSD activities, a cooperation framework should coordinate among ECB (as banking supervisor), ESMA, the ESCB and national competent authorities responsible for supervision and oversight of CSD activities.

### Back-up arrangements, ring-fencing, and protection of settlement operations
- Cooperation among authorities is necessary to support establishment of a back up arrangement for settlement operations if a CSD with a banking license goes bankrupt.
- Ring fencing of settlement accounts from any risk-taking ancillary services is beneficial and aligns with the PFMI (Principle 3 regarding plans for recovery and orderly winding down of operations).
- A CSD that holds a banking license is exposed to credit and liquidity risks and may be subject to bankruptcy procedures.
- Preferred solution: a CSD should have a back up arrangement with another provider of cash accounts to allow swift continuation of settlement operations; the back up provider should have a limited risk profile.
- The draft CSD Regulation’s current requirement to place cash accounts in a separate legal entity could secure protection of settlement operations, but:
  - Care must be taken to avoid that the backup provider of cash accounts has a risk profile that increases risks for securities account holders.
  - The requirement to hold cash accounts in a separate legal entity may discourage current CSDs without a banking license from requesting one under the new regulation.

### Cross-border shocks, collateral, and market integrity
- Cooperation is crucial in the event of a default or downgrade of one or more countries in the EU to avoid measures in one member state disrupting markets, CCPs or CSDs in other member states.
- Risks and dynamics:
  - Default or downgrade of a country may heavily impact the value of specific government securities held as collateral by CCPs and ICSDs and leave FMIs with insufficient coverage.
  - Wrong way risk should be mitigated as clearing participants holding the securities may default and cause losses to the CCP or ICSD.
  - Authorities should limit pro-cyclicality by balancing protection of the CCP and avoiding exacerbation of financial problems of participants and markets.
- Authorities should monitor and analyze such situations cooperatively and pursue the interests of the EU as a whole.

### Access rights, interoperability, and competition
- With re-verticalization of infrastructures, rights of CCPs and CSDs to access other markets and infrastructures require attention to further a level playing field.
- Interoperability between cash CCPs can enhance clearing market efficiency but may threaten incumbent CCP market share.
- Trading platforms that own a CCP can refuse access of other CCPs to their trading platform and potentially CSDs on discriminatory grounds.
- CSDs should gain non-discriminatory access to CCPs.
- Restrictions to access rights as prescribed in EMIR, and potentially MIFIR and the CSD Regulation, should be exclusively risk based (excluding business risk) and publicly disclosed.
- Competitive distortions should be avoided.
- Reference: PFMI Principle 18.

### Crisis management and information sharing
- Cross-border crisis management for CCPs and CSDs is essential to minimize losses and maintain participants’ confidence.
- Objective: a framework for timely, complete information to all relevant stakeholders, providing transparency on the size and severity of the crisis to support authorities and enable CCPs, CSDs and participants to take timely action.
- EU legislation recognizes need for crisis management arrangements for authorities of CCPs and CSDs; information sharing among authorities is covered in several EU Directives.
- Relevant instruments mentioning ESMA’s role: EMIR, the draft CSD Regulation and the SFD. Other information sharing requirements are in the banks winding up directive, the market abuse directive and the capital requirements directive.
- The SFD notification scheme did not work properly during recent defaults of major participants and should be reviewed:
  - Both market participants and public authorities perceived information sharing on a defaulting market participant not always as timely and comprehensive.
  - Awareness should be raised among designated authorities under the SFD regarding their obligations in case of a crisis and tests should be conducted.
  - ESMA should play a leading role together with the ESCB.
  - The SFD notification scheme should include all relevant authorities, including the ECB in its role as lead overseer of TARGET2 and EURO1.
  - Example cited: ECB, Report on the lessons learned from the financial crisis with regard to the functioning of European financial market infrastructures, April 2010.
- Colleges, chaired by respective competent authorities, ESMA and the ESCB, are encouraged to develop and continue a crisis management framework to deal with potential failures of CCPs, CSDs or other relevant FMIs:
  - Added value: information sharing can precede actual default and involve all EU competent authorities and central banks.
  - The plan should be regularly tested and updated.

### Recommendations (regulation, supervision, oversight, cooperation, crisis management)
- On the regulation, supervision and oversight of FMIs:
  - Early passage of the EMIR technical standards is recommended to provide supervisory authorities, ESMA and the ESCB with all tools to implement new requirements for CCPs and establish national colleges.
  - Early adoption of the CSD Regulation is recommended to provide national authorities, ESMA and the ESCB with the legal basis for raising the bar for CSDs.
  - The Commission is encouraged to develop legislation for the recovery and resolution of CCPs and CSDs.
  - It is of critical importance that regulators from the EU, U.S.and other relevant countries continue bilateral and multilateral coordination to reduce gaps and inconsistencies between legal and regulatory frameworks for OTC derivatives clearing as a matter of urgency.
  - ESMA resources need to be significantly increased to enable ESMA to adequately accomplish its extended duties.
  - The ESCB overseers should improve their information sharing regarding CCPs and CSDs and aim for the development of a comprehensive macro view on the financial stability of CCPs and CSDs in the EU.
  - The ESCB should be sufficiently staffed to fulfill coordination and information sharing tasks with regard to CCPs and CSDs and ensure efficiency in the representation of the Eurosystem in supervisory colleges.
- On cooperation between authorities:
  - Euroclear Bank and Clearstream Banking Luxembourg should be amongst the first institutions taken into SSM supervision as the current regulatory and supervisory structure is insufficient to ensure financial stability. The SSM supervision should relate to the banking activities while the CSD activities should be supervised by ESMA and national supervisors under the envisaged CSD Regulation.
  - The ECB, ESMA and supervisory authorities should develop a cooperation framework for CSDs that are subject to banking supervision under the SSM as well as supervision under the CSD Regulation.
  - The CSD Regulation should include a requirement for colleges or other comprehensive cooperation frameworks for supervisors of CSDs.
  - Securities accounts within a CSD that also provides banking services should be ring fenced to protect settlement operations in case of a crisis, although additional measures remain needed to ensure continued settlement operations.
  - It is essential that authorities cooperate in the event of a potential major downgrade of one of the member states, to optimize the protection of CCPs and ICSDs in the EU through collateral.
  - The Commission should pay particular attention to drafting of access rights for CCPs and CSDs in the MIFIR and CSD regulation. Access criteria should be non-discriminatory and risk based (excluding business risk), contributing to a level playing field for the offering of CCP and CSD services.
- On crisis management procedures:
  - Crisis management arrangements between ESMA and the ESCB should be further developed and tested.
  - The SFD notification regime should be reviewed, standardized and enhanced, with the inclusion of all relevant authorities, including the ECB as overseer of TARGET2 and EURO1.

*Excerpt from IMF staff report content unit _cr1372 - 43.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1372.pdf_