Commission Delegated Regulation (EU) 2017/390Show full title

Commission Delegated Regulation (EU) 2017/390

of 11 November 2016

supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to regulatory technical standards on certain prudential requirements for central securities depositories and designated credit institutions offering banking-type ancillary services

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012(1), and in particular the third subparagraph of Article 47(3), the third subparagraph of Article 54(8) and the third subparagraph of Article 59(5) thereof,

Whereas:

(1) Regulation (EU) No 909/2014 establishes prudential requirements for central securities depositories (CSDs) to ensure that they are safe and sound and comply at all times with capital requirements. Such capital requirements ensure that a CSD is at all times adequately capitalised against the risks to which it is exposed and that it is able to conduct an orderly winding-down or restructuring of its activities if necessary.

(2) Given that the provisions of Regulation (EU) No 909/2014 concerning credit and liquidity risks relating to CSDs and designated credit institutions explicitly require that their internal rules and procedures allow them to monitor, measure and manage exposures and liquidity needs not only with respect to the individual participants but also with respect to participants that belong to the same group and who are counterparties of the CSD, such provisions should apply to groups of undertakings consisting of a parent undertaking and its subsidiaries.

(3) For the purposes of this Regulation, the relevant recommendations of the Principles for Financial Market Infrastructures issued by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (‘CPSS-IOSCO Principles’)(2) have been taken into account. The treatment of capital of credit institutions under Regulation (EU) No 575/2013 of the European Parliament and of the Council(3) has also been taken into account given that CSDs are to a certain extent exposed to risks that are similar to the risks incurred by credit institutions.

(4) It is appropriate for the definition of capital in this Regulation to mirror the definition of capital laid down in Regulation (EU) No 648/2012 of the European Parliament and of the Council(4) (EMIR). Such a definition is the most suitable in relation to the regulatory requirements given that the definition of capital in Regulation (EU) No 648/2012 was specifically designed for market infrastructures. CSDs authorised to provide banking-type ancillary services under Regulation (EU) No 909/2014 are required to meet capital requirements under this Regulation and own funds requirements under Regulation (EU) No 575/2013 simultaneously. They are required to meet the own funds requirements laid down in Regulation (EU) No 575/2013 with instruments that meet the conditions of that Regulation. In order to avoid conflicting or duplicative requirements and considering that the methodologies used for the calculation of the additional capital surcharge for CSDs under Regulation (EU) No 909/2014 are closely related to the ones provided in Regulation (EU) No 575/2013, CSDs offering banking-type ancillary services should be allowed to meet the additional capital requirements of this Regulation with the same instruments meeting the requirements laid down in either Regulation (EU) No 575/2013 or Regulation (EU) No 909/2014.

(5) In order to ensure that, if required, a CSD would be able to organise the restructuring of its activities or an orderly winding-down, a CSD should hold capital together with retained earnings and reserves that are sufficient, at all times, to withstand operational expenses over a period of time during which the CSD is able to reorganise its critical operations, including by recapitalising, replacing management, revising its business strategies, revising cost or fee structures and restructuring the services that it provides. Given that during the winding-down or restructuring of its activities, a CSD still needs to continue its usual operations and even though the actual expenses during a wind-down or restructuring of the operations of a CSD may be significantly higher than the gross annual operational expenses because of the restructuring or wind-down costs, the use of gross annual operational expenses as a benchmark for calculating the capital required should be an appropriate approximation of the actual expenses during the winding-down or restructuring of the operations of a CSD.

(6) Similarly to point (a) of Article 36(1) of Regulation (EU) No 575/2013, which requires institutions to deduct losses for the current financial year from the Common Equity Tier 1 capital, the role of net income in covering or absorbing the risks arising from adverse changes in the business conditions should also be recognised in this Regulation. Therefore, only in cases where the net income is insufficient to cover losses arising from the crystallisation of business risk, those losses have to be covered by own funds. Expected figures for the current year to take into account new circumstances should also be considered where data from the previous year are not available, such as in the case of newly established CSDs. In line with similar provisions in Commission Delegated Regulation (EU) No 152/2013(5), CSDs should be required to hold a minimum prudential amount of capital against business risk in order to guarantee a minimum prudential treatment.

(7) In accordance with the CPSS-IOSCO Principles, tangible and intangible assets' amortisation and depreciation costs can be deducted from gross operational expenses for the calculation of the capital requirements. Since those costs do not generate actual cash flows that need to be backed by capital, such deductions should be applicable to the capital requirements for business risk and to those covering winding-down or restructuring.

(8) Since the time necessary for an orderly winding-down or restructuring strictly depends on the services provided by any individual CSD and on the market environment in which it operates, in particular on the possibility that another CSD can take on part or all of its services, the number of months required for restructuring of its activities or winding-down should be based on the CSD's own estimate. However, this period of time should not be less than the minimum number of months required for restructuring or winding-down provided for in Article 47 of Regulation (EU) No 909/2014 in order to ensure a prudent level of capital requirements.

(9) A CSD should design scenarios for restructuring of its activities or winding-down that are adapted to its business model. However, in order to obtain a harmonised application of the requirements on restructuring or winding-down in the Union and to ensure that prudentially sound requirements are satisfied, the discretion on the design of such scenarios should be limited by well-defined criteria.

(10) Regulation (EU) No 575/2013 is the relevant benchmark for the purpose of establishing the capital requirements for CSDs. In order to ensure consistency with that Regulation, the methodologies for the calculation of operational risk laid down in this Regulation should also be understood as covering legal risk for the purposes of this Regulation.

(11) Where there is a failure in the safekeeping of securities on behalf of a participant, such a failure would materialise as either a cost to the participant or as a cost for the CSD that would face legal claims. Therefore, rules for the calculation of the regulatory capital for operational risk already take into account the custody risk. For the same reasons, custody risk for securities held through a link with another CSD should not be subject to any additional regulatory capital charge but should be considered as part of the regulatory capital for operational risk. Similarly, custody risk faced by a CSD on own assets held by a custodian bank or other CSDs should not be double-counted and no additional regulatory capital should be required.

(12) A CSD may also face investment risks with regard to the assets that it owns or with regard to the investments that it makes using collateral, participants' deposits, loans to the participants or any other exposure under the allowed banking-type ancillary services. Investment risk is the risk of loss faced by a CSD when it invests its own or its participants' resources, such as collateral. Provisions set out in Directive 2013/36/EU of the European Parliament and of the Council(6), Regulation (EU) No 575/2013 and Delegated Regulation (EU) No 152/2013 are the appropriate benchmark for the purpose of establishing capital requirements to cover credit risk, counterparty credit risk and market risks that may arise from the investments of a CSD.

(13) Given the nature of the activities of CSDs, a CSD assumes business risk due to potential changes in general business conditions that are likely to impair its financial position following a decline in its revenues or an increase in its expenses and that result in a loss that should be charged against its capital. Given that the level of business risk is highly dependent on the individual situation of each CSD and it can be caused by various factors, the capital requirements of this Regulation should be based on a CSD's own estimate and the methodology used by a CSD for such an estimate should be proportional to the scale and complexity of the CSD's activities. A CSD should develop its own estimate of the capital required against business risk under a set of stress scenarios in order to cover the risks that are not already captured by the methodology used for operational risk. In order to ensure a prudent level of the capital requirements for business risk when making a calculation based on self-designed scenarios, a minimum level of capital, should be introduced in the form of a prudential floor. The minimum level of required capital for business risk should be aligned to similar requirements for other market infrastructures in related Union Acts such as Commission Delegated Regulation on capital requirements for central counterparties (‘CCPs’).

(14) The additional capital surcharge for risks related to banking-type ancillary services should cover all the risks related to the provision of intraday credit to participants or other CSD users. Where overnight or longer credit exposures result from the provision of intraday credit, the corresponding risks should be measured and addressed by using the methodologies already laid down in Part Three, Title II, Chapter 2, for the Standardised Approach, and Chapter 3, for the Internal Ratings Based Approach (IRB Approach), of Regulation (EU) No 575/2013, given that that Regulation provides prudential rules for measurement of credit risk resulting from overnight or longer credit exposures. Intraday credit risks, however, require special treatment since the methodology for their measurement is not explicitly provided for in Regulation (EU) No 575/2013 or other applicable Union legislation. As a result, the methodology that specifically addresses intraday credit risk should be sufficiently risk-sensitive to take into account the quality of the collateral, the credit quality assessment of the participants and the actual observed intraday exposures. At the same time, the methodology should provide proper incentives to the providers of banking-type ancillary services, including the incentive to collect the highest quality of collateral and select creditworthy counterparties. Although providers of banking-type ancillary services have the obligation to properly assess and test the level and value of collateral and haircuts, the methodology used to determine the additional capital surcharge for intraday credit risk should nevertheless cater to and provide enough capital for the case where a sudden decrease in the value of the collateral exceeds estimates and results in partially uncollateralised residual credit exposures.

(15) The calculation of the capital surcharge for risks arising from providing banking-type ancillary services requires taking into account past information on intraday credit exposures. As a result, in order to be able to calculate that capital surcharge, entities that provide banking-type ancillary services to users of CSD services in accordance with Article 54(2) of Regulation (EU) No 909/2014 (‘CSD-banking service providers’) should record at least one year of data concerning their intraday credit exposures. Otherwise they are not able to identify the relevant exposures based on which the calculation is done. Consequently, CSD-banking service providers should not be required to meet the own funds requirement corresponding to the capital surcharge until after they are able to collect all the information necessary to perform the calculation of the surcharge.

(16) Article 54(8) of Regulation (EU) No 909/2014 requires the development of rules to determine the additional capital surcharge referred to in point (d) of Article 54(3) and point (e) of Article 54(4) of that Regulation. Further, Article 54 of that Regulation requires that additional surcharge reflects the intra-day credit risk resulting from the activities under Section C of the Annex to Regulation (EU) No 909/2014, and in particular the provisions of intraday credit to participants in a securities settlement system or other users of CSD services. Therefore, intraday credit risk exposure should also include the loss that a CSD-banking service provider would face if a borrowing participant were to default.

(17) Point (d) of Article 59(3) of Regulation (EU) No 909/2014 relating to the credit risk of a CSD-banking service provider requires the collection of ‘highly liquid collateral with minimal credit and market risk’. Point (d) of Article 59(4) of Regulation (EU) No 909/2014 relating to the liquidity risk of a CSD-banking service provider, requires availability of ‘qualifying liquid resources’. One such qualifying liquid resource is ‘highly liquid collateral’. While it is understandable that the terminology used in each of the two cases is different, given the different nature of the risks involved and the correspondence to different concepts in the regulation of credit and liquidity risk, they both relate to a similarly high quality of providers or assets. Therefore, it would be appropriate to require that the same conditions are met before a collateral or a liquidity resource in the form of collateral can qualify as pertaining to either the ‘highly liquid collateral with minimal credit and market risk' category’, or to the ‘qualifying liquid resources’ category, respectively.

(18) Point (d) of Article 59(3) of Regulation (EU) No 909/2014 requires that a CSD-banking service provider accepts highly liquid collateral with minimal credit and market risk to manage its corresponding credit risk. The same allows for other types of collateral than highly liquid collateral with minimal credit and market risk to be used in specific situations, with the application of an appropriate haircut. To facilitate this, a clear hierarchy of the collateral quality should be set in order to distinguish which collateral should be acceptable to fully cover credit risk exposures, which collateral is acceptable as liquidity resource and which collateral, although remaining acceptable for mitigating credit risk, requires qualifying liquidity sources. Collateral providers should not be impeded from freely substituting collateral depending on their availability of resources or their asset-liability management strategies. Thus, common collateral practices, such as the reliance on participants' pledge accounts, where the collateral is deposited by the participant in its pledged accounts in order to fully cover any credit exposure should be allowed to be used for substituting collateral as long as the quality and liquidity of the collateral is monitored and complies with the requirements of this Regulation. Under such pledge account arrangements, the collateral is deposited by the participant in his pledged accounts in order to fully cover any credit exposure. In addition, a CSD-banking service provider should accept collateral taking into account the hierarchy specified, but may perform the liquidation of the accepted collateral, where necessary, in the most efficient way following a participant's default. However, from a prudential viewpoint, a CSD-banking service provider should be able to monitor the availability of collateral, its quality and its liquidity on an ongoing basis to fully cover credit exposures. It should also have arrangements in place with the borrowing participants to ensure that all the collateral requirements of this Regulation are met at all times.

(19) For the purposes of measuring intraday credit risk, CSD-banking service providers should be in a position to anticipate peak exposures for the day. This should not require a forecast of the exact number but should identify trends in those intraday exposures. This is further supported by the reference to ‘anticipate peak exposures’ also in Basel Committee on Banking Supervision standards(7).

(20) Title II of Part Three of Regulation (EU) No 575/2013 establishes the risk weights to be applied to credit exposures to the European Central Bank and other exempted entities. When measuring credit risk for regulatory purposes, such risk weights are widely understood as the best available reference. Therefore, the same methodology may be applied to intraday credit exposures. However, in order to guarantee the conceptual soundness of that approach, some correction is needed, in particular, when carrying out the computations using the credit risk framework of Part Three, Title II, Chapter 2 for the Standardised Approach, and Chapter 3 for the IRB Approach, of Regulation (EU) No 575/2013, the intraday exposures should be considered as end-of-day exposures as this is the assumption of that Regulation.

(21) In accordance with Article 59(5) of Regulation (EU) No 909/2014, which includes an explicit reference to Article 46(3) of Regulation (EU) No 648/2012, bank guarantees or letters of credit, where appropriate, should be aligned to the CPSS-IOSCO Principles and meet similar requirements as those laid down in Regulation (EU) No 648/2012. These include the requirement that bank guarantees and letters of credit are fully collateralised by the guarantors. In order to preserve the efficiency of security settlement within the Union, however, when bank guarantees or letters of credit are used in relation to credit exposures that may arise from interoperable CSD links, appropriate alternative risk mitigants should be allowed to be considered as long as they provide an equal or higher level of protection than the provisions laid out in Regulation (EU) No 648/2012. This special treatment should only apply to bank guarantees or letters of credit protecting an interoperable CSD link and should cover exclusively the credit exposure between the two linked CSDs. Since the bank guarantee or the letter of credit protects the non-defaulting CSDs against credit losses, the liquidity needs of the non-defaulting CSDs should also be addressed by either a timely settlement of the guarantors' obligations, or alternatively, by holding qualifying liquidity resources.

(22) Point (d) of Article 59(4) of Regulation (EU) No 909/2014 requires that CSD-banking service providers mitigate liquidity risks with qualifying liquid resources in each currency. As a result, non-qualifying liquid resources cannot be used to meet the requirements set out in that Article. Nevertheless, nothing precludes non-qualifying liquid resources, such as currency swaps, from being used in the daily liquidity management in addition to the qualifying liquid resources. This is also consistent with international standards reflected in CPSS-IOSCO Principles. Non-qualifying liquid resources should therefore be measured and monitored for that purpose.

(23) Liquidity risk can potentially arise from any of the banking-type ancillary services performed by the CSD. The management framework for liquidity risks should identify the risks arising from the different banking-type ancillary services, including securities lending and distinguish their management as appropriate.

(24) In order to cover all of the liquidity needs, including the intraday liquidity needs of a CSD-banking service provider, CSD's liquidity risk management framework should ensure that the payment and settlement obligations are effected as they fall due, including intraday obligations, in all settlement currencies of the securities settlement system operated by a CSD.

(25) Given that all liquidity risks, except intraday, are already covered by Directive 2013/36/EU and Regulation (EU) No 575/2013, this Regulation should focus on intraday risks.

(26) Given that CSD-banking service providers are systemically-important market infrastructures, it is essential to ensure that a CSD-banking service provider manages its credit and liquidity risks in a conservative manner. As a result, a CSD-banking service provider should be permitted to grant only uncommitted credit lines to borrowing participants in the course of the provision of banking-type ancillary services as referred to in Regulation (EU) No 909/2014.

(27) In order to ensure that the risk management procedures of a CSD-banking service provider are sufficiently sound even in adverse conditions, the stress testing of the CSD-banking service provider's liquid financial resources should be rigorous and forward looking. For the same reason, tests should consider a range of extreme but plausible scenarios and be conducted for each relevant currency offered by the CSD-banking service provider taking into account the possible failure of one of the prearranged funding arrangements. Scenarios should include but not be limited to the default of two of the CSD-banking service provider's largest participants in that currency. This is necessary in order to establish a rule that is on the one hand prudent, as it takes into account the fact that other participants are also capable of generating liquidity risk, besides the largest one; and, on the other hand, a rule that is also proportionate to the objective, as it does not take into account those other participants that present a lesser potential for generating liquidity risk.

(28) Point (c) of Article 59(4) of Regulation (EU) No 909/2014 requires CSD-banking service providers to ensure sufficient liquid resources in all relevant currencies under a wide range of potential stress scenarios. Therefore, rules specifying the frameworks and tools for the managing of liquidity risk in stress scenarios, should prescribe a methodology for the identification of currencies that are relevant for the management of liquidity risk. The identification of relevant currencies should be based on materiality considerations, rely on the net cumulative liquidity exposure identified and based on data collected over an extended and well-defined period of time. In addition, in order to maintain a coherent regulatory framework in the Union, the most relevant Union currencies identified under the Commission Delegated Regulation (EU) 2017/392(8) under Article 12 of Regulation (EU) No 909/2014 should be included by default as relevant currencies.

(29) The collection of sufficient data for identifying all other currencies than the most relevant Union currencies requires a minimum time period to elapse from the date of authorisation of the CSD-banking service providers until the end of that time period. Therefore, the use of alternative methods to identify all other currencies than the most relevant Union currencies should be allowed for the first year following the authorisation of CSD-banking service providers under the new regulatory framework established by Regulation (EU) No 909/2014 for those CSD-banking service providers that already provide banking-type ancillary services at the date of entry into force of the technical standards referred to in Article 69 of Regulation (EU) No 909/2014. This transitional arrangement should not affect the requirement for CSD-banking service providers to ensure sufficient liquid resources as such, but only the identification of those currencies that are subject to stress testing for the purpose of liquidity management.

(30) Point (d) of Article 59(4) of Regulation (EU) No 909/2014 requires the CSD-banking service providers to have prearranged and highly reliable funding arrangements in place to ensure that collateral that is provided by a defaulting client can be converted into cash even in extreme but plausible market conditions. The same Regulation requires the CSD-banking service provider to mitigate intraday risks with highly liquid collateral with minimal credit and market risk. Given that liquidity has to be readily available, a CSD-banking service provider should be able to address any liquidity need on a same day basis. Given that CSD-banking service providers may operate in multiple time-zones, the provision of converting collateral into cash via prearranged funding arrangements on the same-day basis should be applied in consideration of the opening hours of the local payment systems of each individual currency it applies to.

(31) The provisions in this Regulation are closely linked, since they deal with the prudential requirements for CSDs. To ensure coherence between those provisions, which should enter into force at the same time, and to facilitate a comprehensive view and compact access to them by persons subject to those obligations, it is desirable to include all of the regulatory technical standards required by Regulation (EU) No 909/2014 into a single Regulation.

(32) This Regulation is based on the draft regulatory technical standards submitted by the European Banking Authority to the Commission.

(33) The European Banking Authority has worked in close cooperation with the European System of Central Banks (ESCB) and the European Securities and Markets Authority (ESMA) before submitting the draft technical standards on which this Regulation is based. It has also conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the opinion of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and Council(9),

HAS ADOPTED THIS REGULATION:

(1)

OJ L 257, 28.8.2014, p. 1.

(2)

Principles for Financial Market Infrastructures, Committee on Payment and Settlement Systems — Bank for International Settlements, and Technical Committee of the International Organisation of Securities Commissions, April 2012.

(3)

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

(4)

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, p. 1).

(5)

Commission Delegated Regulation (EU) No 152/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on capital requirements for central counterparties (OJ L 52, 23.2.2013, p. 37).

(6)

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

(7)

Basel Committee on Banking Supervision ‘Monitoring tools for intraday liquidity management’ April 2013

(8)

Commission Delegated Regulation (EU) 2017/392 of 11 November 2016 supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to regulatory technical standards on authorisation, supervisory and operational requirements for central securities depositories (see page 48 of this Official Journal).

(9)

Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12).