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

SECTION 2 Liquidity risk

Article 29 General rules on liquidity risk

1. For the purposes of point (a) of Article 17(2), a CSD-banking service provider shall design and implement policies and procedures that:

(a) measure intraday and overnight liquidity risk, in accordance with Sub-section 1;

(b) monitor intraday and overnight liquidity risk, in accordance with Sub-section 2;

(c) manage liquidity risk, in accordance with Sub-section 3;

(d) report intraday and overnight liquidity risk, in accordance with Sub-section 4;

(e) disclose the framework and tools for the monitoring, measuring, management, and the reporting on liquidity risk, in accordance with Sub-section 5.

2. Any changes to the overall liquidity risk framework shall be reported to the management body of the CSD-banking service provider.

Sub-Section 1 Measurement of intraday liquidity risks

Article 30 Measurement of intraday liquidity risks

1. A CSD-banking service provider shall put in place effective operational and analytical tools to measure, on an ongoing basis, the following metrics on a currency by currency basis:

(a) maximum intraday liquidity usage, calculated using the largest positive net cumulative position and the largest negative net cumulative position;

(b) total available intraday liquid resources at the start of the business day, broken down into all of the following:

(i)

qualifying liquid resources as specified in Article 34:

• cash deposited at a central bank of issue;

• available cash deposited at other creditworthy financial institutions referred to in Article 38(1);

• committed lines of credit or similar arrangements;

• assets that fulfil the requirements of Article 10 and 11(1) of this Regulation applicable to collateral, or financial instruments compliant with the requirements set out in the Delegated Regulation (EU) 2017/392, that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, as referred to in Article 38;

• the collateral referred to in Article 10 and Article 11(1);

(ii)

other than qualifying liquid resources, including uncommitted credit lines;

(c) total value of all of the following:

(i)

intraday liquidity outflows, including those for which there is a time specific intraday deadline;

(ii)

cash settlement obligations in other securities settlement systems where the CSD for which the CSD-banking service provider acts as settlement agent has to settle positions;

(iii)

obligations related to the CSD-banking service provider's market activities, such as the delivery or return of money market transactions or margin payments;

(iv)

other payments critical to the reputation of the CSD and the CSD-banking service provider.

2. For each currency of the securities settlement systems for which a CSD-banking service provider acts as settlement agent, the CSD-banking service provider shall monitor the liquidity needs stemming from each entity towards which the CSD-banking service provider has a liquidity exposure.

Article 31 Measurement of overnight liquidity risks

In relation to overnight liquidity risks, the CSD-banking service provider shall compare on an ongoing basis, its liquid resources to its liquidity needs, where such needs result from the use of overnight credit, for each settlement currency of the securities settlement systems for which the CSD-banking service provider acts as settlement agent.

Sub-Section 2 Monitoring of intraday liquidity risks

Article 32 Monitoring intraday liquidity risks

1. The CSD-banking service provider shall establish and maintain a report on the intraday liquidity risk that it assumes. Such report shall include, at least:

(a) the metrics referred to in Article 30(1);

(b) the risk appetite of the CSD-banking service provider;

(c) a contingency funding plan describing the remedies to be applied where the risk appetite is breached.

The report referred to in the first subparagraph shall be reviewed monthly by the risk committee of the CSD-banking service provider and by the risk committee of the CSD.

2. For each settlement currency of the securities settlement system for which the CSD-banking service provider acts as settlement agent, it shall have effective operational and analytical tools to monitor on a near to real-time basis its intraday liquidity positions against its expected activities and available resources based on balances and remaining intraday liquidity capacity. The CSD-banking service provider shall:

(a) maintain, for a period of at least 10 years, a record of the daily largest positive net cumulative intraday position and the largest negative net cumulative intraday position for each settlement currency of the securities settlement system for which it acts as settlement agent;

(b) monitor its intraday liquidity exposures on an ongoing basis against the maximum intraday liquidity exposure that has been historically recorded.

Article 33 Monitoring overnight liquidity risks

In relation to overnight liquidity risks, the CSD-banking service provider shall apply both of the following:

(a)

maintain, for a period of at least 10 years, a record of the liquidity risks created by the use of overnight credit for each currency of the securities settlement system for which it acts as settlement agent;

(b)

monitor the liquidity risk created by the overnight credit extended against the maximum liquidity exposure created by the overnight credit extended, historically recorded.

Sub-Section 3 Managing Liquidity Risks

Article 34 Qualifying liquid resources

A CSD-banking service provider shall mitigate corresponding liquidity risks, including intraday liquidity risks, in each currency by using any of the following qualifying liquid resources:

(a)

cash deposited at a central bank of issue;

(b)

available cash deposited at one of the creditworthy financial institutions identified in Article 38(1);

(c)

committed lines of credit or similar agreements;

(d)

assets that fulfil the requirements of Article 10 and Article 11(1) of this Regulation applicable to collateral, or financial instruments compliant with the Delegated Regulation (EU) 2017/392, that are readily available and convertible into cash with prearranged and highly reliable funding arrangements in accordance with Article 38 of this Regulation;

(e)

the collateral referred to in Article 10 and Article 11(1).

Article 35 Managing intraday liquidity risk

1. For each currency of any of the securities settlement systems for which it acts as settlement agent, the CSD-banking service provider shall:

(a) estimate the intraday liquidity inflows and outflows for all the banking-type ancillary services provided;

(b) anticipate the intraday timing of those flows;

(c) forecast the intraday liquidity needs that may arise at different periods during the day.

2. For each currency of any of the securities settlement systems for which it acts as settlement agent, the CSD-banking service provider shall:

(a) arrange to acquire sufficient intraday funding to meet its intraday objectives as they result from the analysis referred to in paragraph 1;

(b) manage and be ready to convert into cash the collateral necessary to obtain intraday funds in stress situations, taking into account haircuts in accordance with Article 13 and concentration limits in accordance with Article 14;

(c) manage the timing of its liquidity outflows in line with its intraday objectives;

(d) have arrangements in place to deal with unexpected disruptions to its intraday liquidity flows.

3. For the purpose of meeting its minimum qualifying liquid resource requirement, a CSD-banking service provider shall identify and manage the risks to which it would be exposed following the default of at least two participants, including their parent undertaking and subsidiaries, to which it has the largest liquidity exposure.

4. For the risk of unexpected disruptions to its intraday liquidity flows, referred to in paragraph 2(d), the CSD-banking service provider shall specify extreme but plausible scenarios, including those identified in Article 36(7) where relevant, and based at least on one of the following:

(a) a range of historical scenarios, including periods of extreme market movements observed over the past 30 years, or as long as reliable data have been available, that would have exposed the CSD-banking service provider to the greatest financial risk, unless the CSD-banking service provider proves that recurrence of a historical instance of large price movements is not plausible;

(b) a range of potential future scenarios that fulfil the following conditions:

(i)

they are founded on consistent assumptions regarding market volatility and price correlation across markets and financial instruments;

(ii)

they are based on both quantitative and qualitative assessments of potential market conditions, including disruptions and dislocations or irregularities of accessibility to markets, as well as declines in the liquidation value of collateral, and reduced market liquidity where non-cash assets have been accepted as collateral.

5. For the purposes of paragraph 2, the CSD-banking service provider shall also take into account the following:

(a) the design and operations of the CSD-banking service provider, including in relation to the entities referred to in Article 30(2) and linked financial markets infrastructures or other entities that may pose material liquidity risk to the CSD-banking service provider, and, where applicable, cover a multiday period;

(b) any strong relationships or similar exposures between the participants of the CSD-banking service provider, including between the participants and their parent undertaking and subsidiaries;

(c) an assessment of the probability of multiple defaults of participants and the effects among the participants that such defaults may cause;

(d) the impact of multiple defaults referred to in point (c) on the CSD-banking service provider's cash-flows and on its counterbalancing capacity and survival horizon;

(e) whether the modelling reflects the different impacts that an economic stress may have both on the CSD-banking service provider's assets and its liquidity inflows and outflows.

6. The set of historical and hypothetical scenarios used to identify extreme but plausible market conditions shall be reviewed by the CSD-banking service provider, and, where relevant in consultation with the risk committee of the CSD, at least annually. Such scenarios shall be reviewed more frequently where market developments or the operations of the CSD-banking service provider affect the assumptions underlying the scenarios in a way that requires adjustments to such scenarios.

7. The liquidity risk framework shall consider, quantitatively and qualitatively, the extent to which extreme price movements in the collateral or assets could occur simultaneously in multiple identified markets. The framework shall recognise that historical price correlations may no longer be applicable in extreme but plausible market conditions. A CSD-banking service provider shall also take into account any of its external dependencies in its stress testing, referred to in this Article.

8. The CSD-banking service provider shall identify how the intraday monitoring metrics referred to in Article 30(1) are used to calculate the appropriate value of intraday funding required. It shall develop an internal framework to assess a prudent value of liquid assets which are deemed sufficient for its intraday exposure, including, in particular, all of the following:

(a) the timely monitoring of liquid assets, including the quality of the assets, their concentration and their immediate availability;

(b) appropriate policy on monitoring market conditions that can affect the liquidity of the intraday qualifying liquid resources;

(c) the value of the intraday qualifying liquid resources, valued and calibrated under stressed market conditions, including the scenarios referred to in Article 36(7).

9. The CSD-banking service provider shall ensure that its liquid assets are under the control of a specific liquidity management function.

10. The liquidity risk framework of the CSD-banking service provider shall include appropriate governance arrangements relating to the amount and form of total qualifying liquid resources that the CSD-banking service provider maintains, as well as relevant adequate documentation and, in particular one of the following:

(a) placement of its liquid assets in a separate account under the direct management of the liquidity management function, which may only be used as a source of contingent funds during stress periods;

(b) establishment of internal systems and controls to give the liquidity management function effective operational control to carry out both of the following:

(i)

convert into cash the holdings of liquid assets at any point in the stress period;

(ii)

access the contingent funds without directly conflicting with any existing business or risk management strategies, so that no assets are included in the liquidity buffer where their sale without replacement throughout the stress period would create an open risk position in excess of the internal limits of the CSD-banking service provider;

(c) a combination of the requirements set out in points (a) and (b), where such a combination ensures a comparable result.

11. The requirements of this Article regarding the liquidity risk framework of the CSD-banking service provider shall apply also to cross-border and cross-currency exposures where relevant.

12. The CSD-banking service provider shall review the procedures referred to in paragraphs 2, 3 and 11 at least annually, taking into account all relevant market developments as well as the scale and concentration of exposures.

Article 36 Stress testing the sufficiency of liquid financial resources

1. A CSD-banking service provider shall determine and test the sufficiency of its liquidity resources at relevant currency level by regular and rigorous stress testing that meets all of the following requirements:

(a) it is conducted on the basis of the factors referred to in paragraphs 4 and 5, as well as the specific scenarios referred to in paragraph 6;

(b) it includes regular testing of the CSD-banking service provider's procedures for accessing its qualifying liquid resources from a liquidity provider using intraday scenarios;

(c) it complies with the requirements of paragraphs 2 to 6.

2. The CSD-banking service provider shall ensure, at least through rigorous due diligence and stress testing that each liquidity provider of its minimum required qualifying liquid resources established in accordance with Article 34, has sufficient information to understand and manage its associated liquidity risk, and is able to comply with the conditions of a prearranged and highly reliable funding arrangement set out in points (d) and (e) of Article 59(4) of Regulation (EU) No 909/2014.

3. The CSD-banking service provider shall have rules and procedures in place to address the insufficiency of qualifying liquid financial resources highlighted by its stress tests.

4. Where the stress tests result in breaches to the agreed risk appetite referred to in point (b) of Article 32(1), the CSD-banking service provider shall:

(a) report to both its own risk committee and, where relevant, to the risk committee of the CSD the results of the stress tests;

(b) review and adjust its contingency plan referred to in point (c) of Article 32(1) where breaches cannot be restored by the end of the day;

(c) have rules and procedures to evaluate and adjust the adequacy of its liquidity risk management framework and liquidity providers in accordance with the results and analysis of its stress tests.

5. The stress testing scenarios used in the stress testing of liquid financial resources shall be designed taking into account the design and operation of the CSD-banking service provider, and include all entities that may pose material liquidity risk to it.

6. The stress testing scenarios used in the stress testing of the qualifying liquid financial resources shall be designed taking into account the default, in isolation or combined, of at least two participants of the CSD-banking service provider, including their parent undertaking and subsidiaries, to which the CSD-banking service provider has the largest liquidity exposure.

7. The scenarios used in the stress testing of liquid financial resources shall be designed taking into account a wide range of relevant extreme but plausible scenarios, covering short-term and prolonged stress, and institution specific and market-wide stress, including:

(a) the missed receipt of payments from participants on a timely basis;

(b) the temporary failure or inability of one of the CSD-banking service provider's liquidity providers to provide liquidity, including those referred to in point (e) of Article 59(4) of Regulation (EU) No 909/2014, custodian banks, nostro agents, or any related infrastructure, including interoperable CSDs;

(c) simultaneous pressures in funding and asset markets, including a decrease in the value of the qualifying liquid resources;

(d) stress in foreign exchange convertibility and access to foreign exchange markets;

(e) adverse changes in the reputation of a CSD-banking services provider that casue certain liquidity providers to withdraw liquidity;

(f) relevant peak historic price volatilities of collateral or assets as recurrent events;

(g) changes in the credit availability in the market.

8. The CSD-banking service provider shall determine the relevant currencies referred to in point (c) of Article 59(4) of Regulation (EU) No 909/2014 by applying the following steps in sequence:

(a) rank the currencies from highest to lowest based on the average of the three largest daily negative net cumulative positions, converted into euro, within a period of 12 months;

(b) consider as relevant:

(i)

the most relevant Union currencies that meet the conditions specified in the Delegated Regulation (EU) 2017/392;

(ii)

all remaining currencies until the corresponding aggregated amount of the average largest net negative cumulative positions measured according to (a) is equal to or exceeds 95 % for all currencies.

9. The CSD-banking service provider shall identify and update relevant currencies referred to in paragraph 8 regularly but at least on a monthly basis. It shall provide in its rules that, under stress situations, the provisional settlement services in non-relevant currencies could be executed for their equivalent value in a relevant currency.

Article 37 Unforeseen and potentially uncovered liquidity shortfalls

1. The CSD-banking service provider shall establish rules and procedures to effect intraday and multiday timely settlement of payment obligations following any individual or combined default among its participants. Those rules and procedures shall provide for any unforeseen and potentially uncovered liquidity shortfall resulting from such default with the view to avoiding unwinding, revoking, or delaying the same-day settlement of payment obligations.

2. The rules and procedures referred to in paragraph 1 shall ensure that the CSD-banking service provider has access to cash deposits or overnight investments of cash deposits, and has a process in place in order to replenish any liquidity resources that it may employ during a stress event, so that it can continue to operate in a safe and sound manner.

3. The rules and procedures referred to in paragraph 1 shall include requirements for both of the following:

(a) an ongoing analysis of evolving liquidity needs to allow the identification of events that may develop into unforeseen and potentially uncovered liquidity shortfalls, including a plan for the renewal of funding arrangements in advance of their expiry;

(b) a regular practical testing of the rules and procedures themselves.

4. The rules and procedures referred to in paragraph 1 shall be accompanied by a procedure setting out how the identified potential liquidity shortfalls shall be addressed without undue delay, including, where necessary, by updating the liquidity risk management framework.

5. The rules and procedures referred to in paragraph 1 shall also detail all of the following:

(a) how a CSD-banking service provider shall access cash deposits or overnight investments of cash deposits;

(b) how a CSD-banking service provider shall execute same-day market transactions;

(c) how a CSD-banking service provider shall draw on prearranged liquidity lines.

6. The rules and procedures referred to in paragraph 1 shall include a requirement for the CSD-banking service provider to report any liquidity risk that has the potential to cause previously unforeseen and potentially uncovered liquidity shortfalls to:

(a) the risk committee of the CSD-banking service provider and, where relevant, to the risk committee of the CSD;

(b) the relevant competent authority referred to in Article 60(1) of Regulation (EU) No 909/2014, in the manner set out in Article 39 of this Regulation.

Article 38 Arrangements in order to convert collateral or investment into cash using prearranged and highly reliable funding arrangements

1. For the purposes of point (e) of Article 59(4) of Regulation (EU) No 909/2014 creditworthy financial institutions shall include one of the following:

(a) a credit institution authorised in accordance with Article 8 of Directive 2013/36/EU that the CSD-banking service provider can demonstrate to have low credit risk based on an internal assessment, employing a defined and objective methodology that does not exclusively rely on external opinions;

(b) a third country financial institution that meets all of the following requirements:

(i)

it is subject to and complies with prudential rules considered to be at least as stringent as those set out in Directive 2013/36/EU and Regulation (EU) No 575/2013;

(ii)

it has robust accounting practices, safekeeping procedures, and internal controls;

(iii)

it has low credit risk based on an internal assessment carried out by the CSD-banking service provider, employing a defined and objective methodology that does not exclusively rely on external opinions;

(iv)

it takes into consideration the risks arising from the establishment of that third country financial institution in a particular country.

2. Where a CSD-banking service provider plans to establish a prearranged and highly reliable funding arrangement with a creditworthy financial institution as referred to in paragraph 1, it shall use only those financial institutions that at least have access to credit from the central bank issuing the currency used within the prearranged funding arrangements, either directly or through entities of the same group.

3. After a prearranged and highly reliable funding arrangement has been established with one of the institutions referred to in paragraph 1, the CSD-banking service provider shall monitor the creditworthiness of these financial institutions on an ongoing basis by applying both of the following:

(a) subjecting those institutions to regular and independent assessments of their creditworthiness;

(b) assigning and regularly reviewing internal credit ratings for each financial institution with which the CSD has established a prearranged and highly reliable funding arrangement.

4. The CSD-banking service provider shall closely monitor and control the concentration of its liquidity risk exposure to each financial institution involved in a prearranged and highly reliable funding arrangement, including its parent undertaking and subsidiaries.

5. The CSD-banking service provider's liquidity risk management framework shall include a requirement to establish concentration limits, providing the following:

(a) that the concentration limits are established by currency;

(b) that at least two arrangements for each major currency are put in place;

(c) that the CSD-banking service provider is not overly reliant on any individual financial institution, when all currencies are taken into account.

For the purposes of point (b) major currencies shall be considered to be at least the top 50 % of the most relevant currencies as determined in accordance with Article 36(8). Where a currency has been determined as a major currency, it shall continue to be considered as major for a period of three calendar years from the date of its determination as major currency.

6. A CSD-banking service provider which has access to routine credit at the central bank of issue shall be considered to fulfil the requirements of point (b) in paragraph 5 to the extent it has collateral that is eligible for pledging to the relevant central bank.

7. The CSD-banking service provider shall continuously monitor and control its concentration limits towards its liquidity providers, with the exception of those referred to in paragraph 6, and it shall implement policies and procedures to ensure its overall risk exposure to any individual financial institution remains within the concentration limits determined in accordance with paragraph 5.

8. The CSD-banking service provider shall review its policies and procedures concerning applicable concentration limits towards its liquidity providers, with the exception of those referred to in paragraph 6, at least annually and whenever a material change occurs and affects its risk exposure to any individual financial institution.

9. In the context of its reporting to the relevant competent authority in accordance with Article 39, the CSD-banking service provider shall inform the competent authority of both of the following:

(a) any significant changes to the policies and procedures concerning concentration limits towards its liquidity providers determined in accordance with this Article;

(b) cases where it exceeds a concentration limit towards its liquidity providers set out in its policies and procedures, as referred to in paragraph 5.

10. Where a concentration limit towards its liquidity providers is exceeded, the CSD-banking service provider shall remedy the excess without undue delay following the risk mitigation measures referred to in paragraph 7.

11. The CSD-banking service provider shall ensure that the collateral agreement allows it to have prompt access to its collateral in the event of the default of a client, taking into account at least the nature, size, quality, maturity, and location of the assets provided by the client as collateral.

12. Where assets used as collateral by the CSD-banking service provider are in the securities accounts maintained by another third party entity, the CSD-banking service provider shall ensure that all of the following conditions are met:

(a) it has real-time visibility of the assets identified as collateral;

(b) the collateral is segregated from the other securities of the borrowing participant;

(c) the arrangements with that third party entity prevent any losses of assets to the CSD-banking service provider.

13. The CSD-banking service provider shall take all necessary steps in advance to establish the enforceability of its claim to financial instruments provided as collateral.

14. The CSD-banking service provider shall be capable of accessing and converting non-cash assets referred to in Article 10 and Article 11(1) into cash on a same-day basis through pre-arranged and highly reliable arrangements established in accordance with point (d) of Article 59(4) of Regulation (EU) No 909/2014.

Sub-Section 4 Reporting of Liquidity Risks

Article 39 Reporting to competent authorities on intraday risk management

1. A CSD-banking service provider shall report to the relevant competent authority referred to in Article 60(1) of Regulation (EU) No 909/2014.

2. A CSD-banking service provider shall comply with all of the following reporting requirements:

(a) it shall submit a qualitative statement that specifies all actions taken regarding how liquidity risks, including intraday are measured, monitored and managed, with at least an annual frequency;

(b) it shall notify any material changes to the actions taken, referred to in point (a), immediately after such material changes take place;

(c) it shall submit the metrics referred to in Article 30(1) on a monthly basis.

3. Where the CSD-banking service provider is in breach of, or risks breaching the requirements of this Regulation, including during times of stress, it shall immediately notify this to the relevant competent authority and it shall submit without undue delay to that relevant competent authority a detailed plan for the timely return to compliance.

4. Until compliance with the requirements of this Regulation and Regulation (EU) No 909/2014 is restored, the CSD-banking service provider shall report the items referred to in paragraph 2, as appropriate, at least daily, by the end of each business day unless the relevant competent authority authorise a lower reporting frequency and a longer reporting delay, by taking into account the individual situation of the CSD-banking service provider and the scale and complexity of its activities.

Sub-Section 5 Public disclosure

Article 40 Public Disclosure

A CSD-banking service provider shall publicly disclose a comprehensive qualitative statement that specifies how liquidity risks, including intraday liquidity risks are measured, monitored and managed on an annual basis.

Sub-Section 6 Final provisions

Article 41 Transitional provisions

1. CSD-banking service providers shall identify the relevant currencies under point (ii) of Article 36(8)(b) 12 months after obtaining the authorisation to provide banking-type ancillary services.

2. During the transitional period of 12 months referred to in paragraph 1, the CSD-banking service providers referred to in that subparagraph shall identify the relevant currencies under point (ii) of Article 36(8)(b) by taking into account both of the following:

(a) a sufficiently large relative share of each currency in the total value of settlement by a CSD of settlement instructions, against payment calculated over a period of one year;

(b) the impact of the non-availability of each currency on the smooth functioning of the operations of CSD-banking service providers under a wide range of potential stress scenarios referred to in Article 36.

Article 42 Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.