Cooperative Oversight of Euroclear and Swift

COOPERATIVE OVERSIGHT OF EUROCLEAR AND SWIFT Cooperative oversight of Euroclear and SWIFT 1. General principles for the changes when necessary. Central banks have, over the cooperative oversight of cross-border last few years, devoted considerable efforts to setting infrastructures up standards for overseeing systems : besides the already mentioned Core Principles for Systemically Important Financial markets are underpinned by a variety of infra- Payment Systems, the CPSS has cooperated to produce the structures providing facilities for the settlement of transac- Recommendations for Securities Settlement Systems (in tions. For fi nancial markets to perform effi ciently, it is of 2001) and Recommendations for Central Counterparties paramount importance that this settlement infrastructure (in 2004). The focus of the central banking community is functions smoothly. Central banks have long recognised now gradually shifting to issues related to the implemen- this, and have declared the safety and effi ciency of pay- tation and enforcement of these standards. ment and settlement systems to be one of their major public policy objectives (1). As fi nancial markets have become increasingly international, the number of infrastructures with a cross-border The central banks’ interest in the smooth functioning of dimension has increased in recent years. The international the payment and settlement infrastructures derives from payment and settlement infrastructures can be divided their responsibilities relating to the effective implementa- into various types : tion of monetary policy, as well as from their broader – some infrastructures have specifi cally been set up to serve concern with the security and the stability of the fi nancial cross-border, international markets. The best examples system in general. A stable and effi cient fi nancial system here are SWIFT and CLS, which from the outset were in which the systemic risk is kept to a minimum naturally industry initiatives meant to underpin international ban- assists a central bank in achieving the timely and transpa- king activities (messaging services for correspondent rent implementation of monetary policy. Furthermore, as banking, and payment versus payment settlement of lender of last resort for credit institutions, a central bank foreign exchange transactions respectively) ; is directly involved once a systemic risk threatens to mate- – in some cases, the domestic infrastructures of different rialise, since it will be called upon to provide liquidity in countries were merged into a new cross-border infra- crisis situations. structure. Examples here are Clearnet and Euroclear. Clearnet is the result of the merger of the Central Over the last decade, this central bank interest in the Counterparties (CCP) of the French, Dutch and Belgian smooth functioning of payment and settlement systems stock exchanges. It is a credit institution incorporated has crystallised in the development of a more distinct in France, which acts as CCP for the Euronext markets. central bank activity, called oversight of payment and In 2004, it merged with London Clearing House, the settlement systems. Oversight of payment and settle- UK CCP, by bringing both CCPs under one holding ment systems can be defi ned as the activity of monitoring company. Euroclear, an International Central Securities existing and planned systems, in order to assess them against the central banks’ standards (which refl ect safety (1) See for instance Committee on Payment and Settlement Systems (CPSS), Core principles for Systemically Important Payment Systems, 2001, where these public and effi ciency objectives), with the aim of enforcing policy objectives were reaffi rmed. 95 Depository (ICSD), established in Belgium, has merged contains principles for cooperative oversight designed to with the Central Securities Depositories (CSDs) of “provide a mechanism for mutual assistance for central France, the Netherlands, and the UK, in order to banks in pursuit of their shared objectives for the effi ciency provide an integrated settlement solution for these and stability of interbank and settlement arrangements”. securities markets ; Although initially set up to cover specifi cally cross-border – some infrastructures have developed functional links multi-currency netting schemes, these principles, as listed with similar infrastructures in other countries, in order in Box 1, have developed into a general benchmark for to enable their users to access the other infrastructures international cooperation between overseers, regardless as well. Typically, this has happened in securities settle- of the type of system. They centre on : ment infrastructures, where many CSDs have develo- − the delegation to, and the acceptance by, one central ped links with each other. Also, ICSDs such as Euroclear bank of primary responsibility for the oversight of a and Clearstream have established links with a range of system, the presumption being that the central bank of CSDs, in order to enable the ICSD’s participants to settle the country where the system is established (1) will bear the securities registered in these linked CSDs. this primary responsibility ; − consultation with other interested central banks by When a payment and settlement infrastructure provides the central bank with primary responsibility on matters services in more than one jurisdiction or handles several concerning the design and operation of the system as currencies, consultation and cooperation among all the a whole ; relevant central banks is essential to avoid both confl icting − special arrangements in crisis situations. requirements and regulatory / oversight gaps or duplica- tions. Such cooperation is essential to support a coherent According to these principles, the assessment would be and comprehensive approach aiming at enhancing the conducted by the overseer with the primary responsibility overall reliability of the assessment process by involving in close cooperation with the other interested authorities. all the central banks having a direct interest in, and legal The overseer having primary responsibility would act as responsibilities for, the proper functioning of the payment the single entry point to the system, thereby centralis- and settlement infrastructures delivering services in their ing the information requests from other authorities, and markets or handling their currency. would play a leading role in the joint assessment process and in the effective implementation of the recommenda- The need for cooperation amongst central banks in tions that are addressed to the system as the result of this overseeing cross-border systems has already been assessment. recognised in the 1990 Report of the Committee on interbank netting schemes of the central banks of the Group of Ten countries (Lamfalussy Report). This report (1) In terms of incorporation, management and operation. Box 1 – Lamfalussy principles (1) The following principles for the oversight of cross-border and multi-currency netting and settlement systems specify procedures which the Committee recommends for use by central banks in cooperating with one another and with other authorities. 1. Each central bank that has identifi ed the actual or proposed operation of a cross-border or multi-currency netting or settlement system, outside of the country of issue of the relevant currency or currencies, should inform other central banks that may have an interest in the prudent design and management of the system. 2. Cross-border and multi-currency netting and settlement systems should be subject to oversight by a central bank which accepts primary responsibility for such oversight and there should be a presumption that the host-country central bank will have this primary responsibility. (1) Extract from the 1990 Report of the Committee on interbank netting schemes of the central banks of the Group of Ten countries (http://www.bis.org/publ/cpss04.pdf) ▲ 96 COOPERATIVE OVERSIGHT OF EUROCLEAR AND SWIFT 3. In its oversight of a system, the authority with primary responsibility should review the design and operation of the system as a whole and consult with other relevant authorities on its conclusions both in the fi rst instance and, from time to time, with respect to developments in the system’s status. 4. The determination of the adequacy of a system’s settlement and failure-to-settle procedures should be the joint responsibility of the central bank of issue and the authority with primary responsibility for the system. 5. In the absence of confi dence in the soundness of the design or management of any cross-border or multi-currency netting or settlement system, a central bank should discourage the use of the system by institutions subject to its authority and, if necessary, identify the use of, or the provision of, services to such a system as constituting an unsafe and unsound banking practice. These principles have proved to be very robust and effec- through the use of a common settlement platform ope- tive, and have served as basic guidelines for setting up rating for all the entities of the group. the cooperative oversight of a variety of international systems, ranging from service providers, such as SWIFT, The corporate restructuring, fi nalised at the beginning of to payment systems such as CLS, and securities settle- 2005, is basically intended to support the new business ment systems such as those operated by the Euroclear model developed by the Euroclear group. The key objecti- group. In its recent report ”Central Bank

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