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Escb-Cesr Recommendations for Securities Settlement

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Escb-Cesr Recommendations for Securities Settlement Ref.: CESR/09-622 ESCB-CESR RECOMMENDATIONS FOR SECURITIES SETTLEMENT SYSTEMS AND RECOMMENDATIONS FOR CENTRAL COUNTERPARTIES IN THE EUROPEAN UNION Formatted: Centered, Adjust space between Latin and Asian text, Adjust space between Asian text and Revision marks compare the CPSS-IOSCO Recommendations numbers for securities settlement systems (November 2001) and Deleted: ¶ Recommendations for Central Counterparties (November Formatted: Font: Century Schoolbook, 14 pt 2004) with the ESCB-CESR Recommendations1 Deleted: ¶ Formatted: Font: (Default) Century Schoolbook, 10 pt May 2009 1 Formatted: Font: (Default) Arial, 8 Note: In order to enable a better comparison of the two sets of recommendations the report structure of the ESCB-CESR recommendations was adapted to the format of the CPSS-IOSCO Recommendations for CCPs (e.g. the key issues in the pt ESCB-CESR recommendations follow directly the recommendation, whereas in CPSS-IOSCO RCCPs the key issues follow Formatted: Font: (Default) Arial, 8 the explanatory paragraphs, etc.). pt Table of Contents PART 1: RECOMMENDATIONS FOR SECURITIES SETTLEMENT SYSTEMS ...3 RECOMMENDATION 1: LEGAL FRAMEWORK ...............................................................4 RECOMMENDATION 2: TRADE CONFIRMATION AND SETTLEMENT MATCHING6 RECOMMENDATION 3: SETTLEMENT CYCLES AND OPERATING TIMES...............8 RECOMMENDATION 4: CENTRAL COUNTERPARTIES (CCPS) .................................10 RECOMMENDATION 5: SECURITIES LENDING ..........................................................12 RECOMMENDATION 6: CENTRAL SECURITIES DEPOSITORIES (CSDS) ...............14 RECOMMENDATION 7: DELIVERY VERSUS PAYMENT (DVP)..................................16 RECOMMENDATION 8: TIMING OF SETTLEMENT FINALITY..................................17 RECOMMENDATION 9: CSD RISK CONTROLS TO ADDRESS PARTICIPANTS’ FAILURES TO SETTLE...........................................................................................19 RECOMMENDATION 10: CASH SETTLEMENT ASSETS..............................................21 RECOMMENDATION 11: OPERATIONAL RISK.............................................................23 RECOMMENDATION 12: PROTECTION OF CUSTOMERS’ SECURITIES..................26 RECOMMENDATION 13: GOVERNANCE .......................................................................29 RECOMMENDATION 14: ACCESS....................................................................................30 RECOMMENDATION 15: EFFICIENCY...........................................................................32 RECOMMENDATION 16: COMMUNICATION PROCEDURES, MESSAGING STANDARDS AND STRAIGHT-THROUGH PROCESSING (STP)......................32 RECOMMENDATION 17: TRANSPARENCY ...................................................................34 RECOMMENDATION 18: REGULATION, SUPERVISION AND OVERSIGHT............35 RECOMMENDATION 19: RISKS IN CROSS-SYSTEM LINKS OR INTEROPERABLE SYSTEMS ................................................................................37 PART 2: RECOMMENDATIONS FOR CENTRAL COUNTERPARTIES ................40 RECOMMENDATION 1: LEGAL RISK..............................................................................41 RECOMMENDATION 2: PARTICIPATION REQUIREMENTS ......................................44 RECOMMENDATION 3: MEASUREMENT AND MANAGEMENT OF CREDIT EXPOSURES .............................................................................................47 RECOMMENDATION 4: MARGIN REQUIREMENTS.....................................................48 RECOMMENDATION 5: OTHER RISK CONTROLS .......................................................50 RECOMMENDATION 6: DEFAULT PROCEDURES .......................................................53 RECOMMENDATION 7: CUSTODY AND INVESTMENT RISKS..................................55 RECOMMENDATION 8: OPERATIONAL RISK...............................................................56 RECOMMENDATION 9: MONEY SETTLEMENTS .........................................................60 RECOMMENDATION 10: PHYSICAL DELIVERIES.......................................................62 RECOMMENDATION 11: RISKS IN LINKS BETWEEN CCPS......................................65 RECOMMENDATION 12: EFFICIENCY...........................................................................68 RECOMMENDATION 13: GOVERNANCE .......................................................................68 RECOMMENDATION 14: TRANSPARENCY ...................................................................70 RECOMMENDATION 15: REGULATION, SUPERVISION AND OVERSIGHT............71 Deleted: - - Deleted: - - - 2 - Formatted: Font: (Default) Century Schoolbook, 24 pt, All caps PART 1: Formatted: Centered, Space Before: 12 pt, After: 3 pt, Keep with next, Adjust space between Latin and RECOMMENDATIONS FOR Asian text, Adjust space between Asian text and numbers SECURITIES SETTLEMENT SYSTEMS Formatted: Heading 1 Deleted: - - Deleted: - - - 3 - Deleted: Formatted: Font: Century Schoolbook, 10 pt, Not All caps Recommendation 1: Legal framework The recommendation Securities settlement systems, links between them or interoperable systems should have a well-founded, clear and transparent legal basis for their operations in the relevant Deleted: jurisdictions. Explanatory memorandum 1. The reliable and predictable operation of a securities settlement system depends on two Deleted: an SSS factors: (1) the laws, rules and procedures that support the holding, transfer, pledging and Deleted: ) lending of securities and related payments; and (2) how these laws, rules and procedures work in practice – that is, whether system operators, participants and their customers can enforce their Deleted: ) rights. If the legal framework is inadequate or its application uncertain, it can give rise to credit Deleted: , or liquidity risks for system participants and their customers or to systemic risks for financial markets as a whole. 2. The legal framework applicable to securities settlement systems and to the holding of Deleted: for securities varies from jurisdiction to jurisdiction and reflects the organisation of a jurisdiction’s Deleted: settlements, SSSs entire legal system. The legal framework for securities settlement systems includes general laws such as property and insolvency laws, and may also include laws specifically related to the Deleted: in SSSs operation of the system. In some jurisdictions, the general laws governing property rights and Deleted: SSSs insolvency may not apply to, or may contain special provisions related to, the settlement of Deleted: , securities transactions. Particular attention must therefore be paid to the legal soundness of the applicable legal framework. Laws applicable to securities settlement may also be augmented by Deleted: settlements regulations or other administrative acts. Other important aspects of the legal framework are the rules and procedures of the various parts of the system, many of which represent contractual Deleted: contracts arrangements between the operators and the participants. These define the relationships, rights Deleted: This legal framework and interests of the operators, the participants and their customers and the manner in which and defines time at which rights and obligations, both in respect of contractual obligations and regarding proprietary aspects of the holding of securities, arise through the operation of the system. 3. As a general rule, the laws, regulations, rules and procedures, and generally applicable, non- Deleted: matter negotiable contractual provisions governing the operation of securities settlement systems should Deleted: SSSs be clearly stated, understandable, internally coherent and unambiguous. They should also be public and accessible. Deleted: also Deleted: to system participants. 4. In addition to the requirements of Recommendation 17, CSDs should, where relevant and as a minimum, provide participants with information (supported where appropriate by an analysis or Deleted: <#>Key aspects of the settlement process that the legal opinion) on the following subjects: (1) the legal status of the securities settlement system framework should support include: operator; (2) the legal regime governing the system; (3) the rules governing access to the system; enforceability of transactions, (4) the legal nature of the securities held through the system, e.g. bearer, dematerialised, etc.; (5) protection of customer assets the applicable law governing the contractual relationship between the operator (or relevant office, (particularly against loss upon the insolvency of a custodian), where applicable) and participants; (6) the office(s) where activities related to the maintenance of immobilisation or dematerialisation securities accounts are being conducted; (7) the relevant law that applies to proprietary aspects of of securities, netting arrangements, securities held in the systems; (8) the nature of the property rights with respect to securities held securities lending (including in the system; (9) rules on the transfer of securities (or interest in securities), especially repurchase agreements and other economically equivalent concerning the moment of transfer, irrevocability and finality of transfers, also in links and transactions), finality of settlement, interoperable systems; (10) how DVP is achieved; (11) rules under the applicable proprietary law arrangements for achieving delivery in the system on securities lending, as well as rules governing the use of collateral; (12) rules on versus payment, default rules, and settlement failures, including rules relating to
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