Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) Consultation 12/2012 Draft of Minimum Requirement for the Design of Recovery Plans

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1 Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) Consultation 12/2012 Draft of Minimum Requirement for the Design of Recovery Plans Clearstream s response to the consultative report 30 November 2012

2 BaFin Consultative report Page: 2 / 6 Introduction Clearstream Banking AG, Frankfurt (referred to hereafter as Clearstream ) appreciates the opportunity to comment on the consultation regarding the Draft of Minimum Requirement for the issued by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). As a wholly owned subsidiary of Deutsche Börse Group, Clearstream is Germany s Central Securities Depository (CSD). It received permission from BaFin to operate as bank in This banking licence was a restricted one, in line with Clearstream s past functions as a specialised institution, which has been extended recently. Until end-1999, Clearstream under its former name, Deutsche Börse Clearing AG, Frankfurt was a wholly owned subsidiary of Deutsche Börse AG. On 1 January 2000, in the course of a capital increase, Deutsche Börse AG transferred its shares in Deutsche Börse Clearing AG to Clearstream International SA, Luxembourg. In return, Deutsche Börse AG received half of the shares in this newly established holding company. With regard to the ownership structure of Clearstream Banking International SA, Deutsche Börse successfully took over the remaining 50% stake held by Cedel International SA. Thus, Deutsche Börse AG has control of both a national (Clearstream Banking AG, Frankfurt) and an International CSD (Clearstream Banking S.A. Luxembourg). The settlement of market transactions and the custody of securities are Clearstream s most important fields of activity. Clearstream welcomes the overall initiative to address the topic of recovery plans which follows on from the objectives set out originally by the Financial Stability Board (FSB) in October Clearstram also fully intends to respond to the European Commission consulation on this topic and welcomes the objective to harmonize at a global level the adoption of effective measures, rules and procedures to enable CSDs to recover or maintain operations during periods of extreme financial stress. We believe that an end-to-end alignment of initiatives at international, european and domestic level is crucial, and in this respect make our responses to such other initiatives available upon request. (I)CSDs have proven their resilience during the financial crisis, while playing a stabilizing role on the financial markets, in particular in facilitating the movement of collateral between counterparties at a time of severe liquidity stress and in ensuring the availability of global settlement liquidity to the financial centre. This has been a test for infrastructures throughout the world which has proven the appropriate implementation of sound and safe risk management procedures and global best-practice standards. Considering that as far as CSDs are concerned, we are not aware of any CSD having had to be resolved in recent history, and so there is no precedent of using recovery and/or resolution tools for closing down a CSD while maintaining the continuity of its critical operations. It needs to be ensured that newly introduced international rules and the proposed recovery and resolution do not affect the safety, efficiency and services innovation of the current posttrading arrangements.

3 BaFin Consultative report Page: 3 / 6 The comments below are provided with reference to the numbered articles in Consultation 12/2012 Draft of Minimum Requirements for the (the draft requirements ), based on a convenience translation prepared by Freshfields Bruckhaus Deringer. A translation of our response contained in this document can be submitted in German if required. Please contact us if necessary.

4 BaFin Consultative report Page: 4 / 6 Comments on the Consultative report on the Draft of Minimum Requirement for the Design of Recovery Plans Sections A.1, C.1, C.4 inter alia Further clarification and guidance is required from the BaFin with regard to the definition of credit institutions and more specifically, those that are also considered as systemically important. In particular, it should be clarified whether the BaFin s intention is to categorise Clearstream as a national CSD to the same regime as is clearly outlined for (non-csd) credit institutions as defined throughout the draft. Furthermore, attention should be paid throughout the regulatory process to treat CSDs differently to other financial market infrastructures such as CCPs. Clarifying this is important given that the objective of ensuring the continuity of the critical functions of a market infrastructure, it seems to us essential that the rules of the recovery plan should be adapted to the requirements of the particular function in question. Defining clearly appropriate rules specifically adapted to the particular functions provided by CSDs is a prerequisite to the effectiveness of this exercise, just as defining rules appropriate to the particular functions of credit institutions more generally is critical to the effectiveness of the exercise in respect of the particular functions that those entities provide. Whilst taking this into consideration, it should be avoided that a CSDs falls into both categories, which could lead to significant inconsistencies in the application of national recovery plans. Section C.2, E Reference is made to the concept of a group recovery plan. In the context of the definition to be applied to Clearstream (please refer to comment on Sections A.1, C.1, C.4 above), further clarification is required from BaFin on the definitons of group and group of institutions. In particular, does the term group of institutions apply only to credit institutions within the overall entity? In addition, as indicated above, different approaches should be taken for different financial market infrastructures. Various financial market infrastructures with different risk profiles (principally but not exclusively banking and credit risk) and levels of systemic importance but that fall under the same group and therefore, the same group recovery plan, should receive separate and specific consideration. Within this context, we feel it is important to highlight that regulatory oversight for recovery and possible resolution planning is conceptually deferred to the local regulator of group entities similar to the principle of Multiple point of entry. This is important in the context of a CSD such as Clearstream where two regulatory authorities are relevant and where there is separation, in legal form, of the various distinct subsidiaries (both banking and non-banking) within the group. Conversely, single point of entry regulatory oversight would be limited to the

5 BaFin Consultative report Page: 5 / 6 application of resolution powers at the top holding or parent company level which is not appropriate in a Clearstream context. Section D.1, E.3.1, E.3.2, E.3.3, E.3.6 These sections outline explicitly the role of the credit institution to determine appropriate courses of action, apply the concept of stress tests and implement recovery indicators and escalation process. When considering all such aspects, we would like to single out one particularly important indicator of potential loss to a credit institution for consideration, namely the imminent failure of a large financial institution. In cases where supervisory authorities are aware of the impending failure of a financial institution or financial institutions to whom credit institutions may be exposed, consideration should be given to the inclusion of system critical credit institutions into the default preparations of the relevant authorities. Clearstream believes that such a measure would likely mitigate market and systemic risk as forewarned credit institutions would be placed in a position to prepare settlement and clearing routines in order to minimise adverse market impacts and, in the worst case, to absorb losses in a coherent and prepared manner. Consequently the approach of and communication with the supervisory authorities in this regard should be highlighted and taken into consideration as a precursor to any subsequent action affecting the overall responsibility of management and internal process as well as key elements of the recovery plan. Section D.4 Further guidance is required on whether any specific aspects or guidelines for the execution of internal audits is foreseen. Additional clarification on whether the impacted credit institution obligated to put in place specific provisions in this regard outside of the dedicated resources referenced in Section F. Guidance should also be considered with regard to credit institutions that employ separate external auditors for financial and operational areas and how potential overlap should be handled in particular when business continuity plans are also a key audit item. Section E.3 Reference is made within the context of Potential Courses of Action for Recovery to adverse scenarios. Further definition of the elements that constitute the determination of an adverse scenario is required.

6 BaFin Consultative report Page: 6 / 6 The indicators for resolution and for recovery need to be treated quite distinctly. Clearstream believes that in principle there is only one fundamental indicator that can act as a trigger for the resolution of a CSD which is that it can no longer meet its obligations as they fall due or is at imminent and evident risk of being unable to do so. The triggering of a (mandatory) recovery action as a result of other criteria that could constitute an adverse scenario should be treated with the utmost caution given that an misinterpretation of such a scenario could lead to a loss of confidence in the ongoing viability of CSD with undue cause. Section E The scope of recovery indicators appears reasonable, however, any list cannot be regarded as comprehensive. Determining quantative and qualitative assessments on external events and adverse scenarios falls outside of the standard operating sphere of a CSD. Further clarification is required from BaFin to more clearly define exactly what would be expected from Clearstream in this regard. Flexibility is of the essence when enduring adverse scenarios, it is important to keep the discussion away from any automatic benchmark triggers of whatever nature, that would engage the recovery plan. Any such solution would be more likely to cause more damage than the intended service preservation or recovery. In addition, taking recovery actions as a result of one or more triggers by the financial market infrastructure (or credit institution ) should not carry the stigma of having done so or adversely the impact the repution of the firm involved vis-à-vis the regulator and/or supervisory authority. Equally, supervisory authorities should be aware of the more general impact on the market reputation of the firm. Section E.3.6 Specific guidance would be required from BaFin in terms of external communication in particular for public consumption. Obligating Clearstream to communicate externally during the triggering of a recovery plan could have a detrimental effect given the unique interconnectedness of a CSD; in short, our obligations to communicate materially important commercial information do not correlate with those of most (publicly held) credit institutions. Further definition of the specific circumstances as they pertain to a CSD should be considered. For any further details or clarifications, please contact: Mark Gem Member of Clearstream Executive Board Phone Fax Michael Steinicke Head of Department Group Compliance, Information Security & Risk Management