Nasdaq CSD SE KEY PARTICIPANTS AND ASSOCIATED RISKS MANAGEMENT

Transcription

1 Nasdaq CSD SE KEY PARTICIPANTS AND ASSOCIATED RISKS MANAGEMENT Effective Date:

2 1. Identification of key participants and tiered participation arrangements RTS art 67 (1). A CSD shall, on an ongoing basis, identify the key participants in the securities settlement system that it operates based on the following factors: (a) their transaction volumes and values (b) material dependencies between its participants and its participants clients, where the clients are known to the CSD, that might affect the CSD; (c) their potential impact on other participants and the securities settlement system of the CSD as a whole in the event of an operational problem affecting the smooth provision of services by the CSD 1.1 Identification of key participants Head of Operations shall be responsible for identifying key participants based on the following factors: Value of holdings in the securities accounts of Nasdaq CSD SE (hereafter: depository ) participants against total outstanding value of securities registered with respective securities settlement system of Depository; Volumes and value of instructions processed by each Depository s participant against total volumes/value of instructions processed in respective securities settlement system of Depository during defined period of time Depository s principles of identifying the key participants are following: key participants are identified per individual securities settlement systems (hereafter: SSS ) i.e. Estonian, Latvian and Lithuanian SSS in case of links with other CSDs key participants are identified per SSS having assets with respective CSD The thresholds of defining key participants in respective SSS are following: Securities Settlement System Proportion from total outstanding value of securities Proportion from total volume of operations Estonian SSS 25% 20% 20% Latvian SSS 25% 20% 20% Lithuanian SSS 25% 20% 20% Table 1. Thresholds of Baltic SSSs The thresholds of defining key participants of Clearstream are following: Securities Settlement System Proportion from total outstanding value of securities Proportion from total volume of operations Estonian SSS 25% 25% 25% Latvian SSS 25% 25% 25% Lithuanian SSS 25% 25% 25% Table 2. Thresholds of Clearstream link Proportion from total value of operations Proportion from total value of operations 2

3 As of March 2017 Latvian and Lithuanian SSS of Depository had a link with Clearstream Banking S.A. (CBL). The different thresholds per SSS are caused by different market structures in Baltic markets. The total value of securities, volume and value of operations per SSS and link is calculated monthly. Head of Operations is responsible for running the reports of key participants based on defined thresholds of Depository SSSs and links. The reports will be provided by Head of Operations for review of management board on a monthly basis. All reports are documented and records are kept electronically in central folders accessible for relevant experts and officers. 1.2 Identification of tiered participation arrangements within key participants RTS art 67. the CSD shall also identify the following: the participants' clients responsible for a significant proportion of transactions processed by the CSD; the participants' clients whose transactions, based on their volumes and values, are significant relative to the respective participants' risk-management capacity. Key participants that are deemed to contribute more risk are monitored more closely by Depository. Depository analyses the activity of the different customers of key participants that make up the total risk of the participant. Depository s account set up and segregation is following: T2S SECURITIES ACCOUNTS Nasdaq CSD account types CSD Participant CSD Account Account Nominee Account Segregated Nominee Account Owner Account Joint Owner Account Co-Owner Account Owner pledge Account Participant own account Participant pledge account Omnibus account Distribution account Issuance account Table 3. Account typology Omnibus Issuance Account Depository can identify some of material dependencies (but not all) between direct participant and indirect (major client) participant based on the design and functional logic of its operational model and account typology. Depository will identify material dependencies between its participants and its participants' clients, where the clients are known to the Depository and that might affect the Depository. Based on the 3

4 account set up and segregation the clients of participants are known to the Depositoryin case of (i) owner accounts and (ii) segregated nominee accounts and (iii) nominee accounts. Depository will follow owner, segregated nominee and nominee accounts opened by key participants and those accounts activity on aggregated accounts basis quarterly. Depository will aggregate one customer accounts in case there is more than one. In case the volume or value of settlement instructions of one customer is above 5% from SSS s total transaction value or volume, it is considered to be a tiered participation. Depository is not able to identify tiered participation within participant s omnibus account. Participants will be obliged to report their customers accounts quarterly, with the information stipulated by Depository. Depository expects participant to aggregate customers accounts in case there is more than one. Participant are obligated to report underlying customer in case the volume or value of settled instructions of that customer has increased more than 20% compared to last 12 months. The reporting requirements are described in the Operating Manual document. Depository identifies and monitors the proportion of activity that each key participant conducts on behalf of its clients: (a) direct participants that act on behalf of a material number of indirect participants (b) the proportion of activity that direct participants conduct on behalf of indirect participants (c) indirect participants with significant volumes or values of transactions in the system, and (d) indirect participants whose transaction volumes or values are large relative to those of the direct participants through which they access the CSD As soon as the such monitoring indicates increased volume or value of settlement instructions and provides grounds to believe that these may be due to tiered participation arrangement(s) that may impose risks to the orderly functioning of any of Depository's Settlement System a request for additional information (not available from the Depository s System or other sources accessible to the Depository) shall be provided to the participant in question. Risk assessment will be carried out at least once per year if results of its constant monitoring allow concluding that there is one or more tiered participation arrangement. 2. Procedures of review, gathering of information and criteria to meet operational requirements for the key participants 2.1 Procedure of review of key participants RTS art 67 (2). A CSD shall review and keep the identification of the key participants up-to date on an on-going basis The total value of securities, volume and value of operations per SSS and link is calculated monthly. Head of Operations is responsible for running the reports of key participants based on defined thresholds of Depository SSSs and links. The reports will be provided by Head of Operations for review to 4

5 management board on a monthly basis. All reports are documented and records are kept electronically in central folders accessible for relevant experts and officers. Nasdaq CSD SE Operations monitors compliance of the key participants with the requirements for the settlement operations and settlement discipline throughout the business day. Nasdaq CSD Operations monitors the number and value of settlement fails per participant of Depository for every intended settlement date, including the length of each settlement fail expressed in business days. The report of settlement fails are conducted on a monthly basis by Nasdaq CSD SE Operations and provided for review of management board on monthly basis. Thresholds of value of securities and volume and value of settled securities transactions are subject to annual review in order to be in line with markets development. 2.2 Procedures for gathering information on participant s clients RTS art 67. A CSD shall ensure that its rules, procedures, and agreements allow it to gather relevant information about their participants clients in order to identify, monitor, and manage any material risks to the CSD arising from such tiered participation arrangements. Pursuant to the Rules the participant of the Depository shall provide to the Depository any information, including about participants' clients and their settlement activities, that may be relevant for the Depository to identify, monitor, and manage any risks associated with tiered participation arrangements. Participant shall be responsible for ensuring that it is possible to identify the entire life cycle of a trade in the nominee and omnibus accounts, from the initial recording of the trade, to its subsequent settlement. Depository is not able to identify tiered participation within participant s omnibus account. Participants will be obliged to report their customers accounts quarterly, with the information stipulated by Depository. Depository expects participant to aggregate customers accounts in case there is more than one. Participant are obligated to report underlying customer in case the volume or value of settled instructions of that customer in the CSD Settlement system/t2s is has increased more than 20% compared to last 12 months. The reporting requirements are described in the Operating Manual document. The information submitted to Depository from participants for assessing risks from tiered participations shall be: Name of a participant s client or/and underlying client s customer, address and identification number Internal procedures that the participant has established to manage clients risks Under the Rules of Depository the participants are also obliged to promptly notify the Depository about any and all circumstances that may cause a situation where a participant is not, due to its solvency, change in legal status, technical interruption or restrictions on its activity established against it, able to perform its obligations in connection with its participation in the Settlement System(s) of the Depository (Default Event). This obligation aims to ensure that timely and accurate information to Depository about potential violations or problematic situations relating to participant in question. 5

6 2.3 Criteria, methodologies and standards for operational requirements RTS art 67 (3). A CSD shall have clear and transparent criteria, methodologies and standards in order to ensure that key participants meet the operational requirements Key participants need to meet operational requirements. Depository has made its operational rules and criteria available in different documents: Service Description, Operating Manual and Message Usage Guidelines. The requirements for participants are mainly risk-based or required to ensure smooth operation of the settlement systems and compliance with the applicable regulations. In relation to the operational requirements, in order to be admitted to the settlement system, participants have to demonstrate to have an organizational structure, a technological and IT system that guarantee the ordered, continuous and efficient management of activities arising from membership to the system. Participants must also maintain adequate recovery; prompt reactivation and restoration procedures for data processing. Participants have to comply with the participants obligations set out in the Rules, including the obligation to: (i) (ii) (iii) (iv) (v) comply with the Rules and Contractual Documents of the CSD, applicable laws, and observe good practice of the financial sector considering participant's type(s), participation in the settlement system(s) and activities for which it has applied or subscribed for, and to that effect maintain, among others, at all times operational capacity, financial resources, legal powers, risk-management expertise, compliance, operational and technical arrangements that are adequate to prevent the occurrence of risk for the investors, CSD, other participants and the issuer; considering participant's type(s), participation in the Settlement System(s) and activities for which it has applied or subscribed for, ensure a connection(s) to the CSD System or, other IT systems or platforms (including T2S Platform in case of DCP) that meet(s) at all times the IT security and other technical requirements established by the CSD. ensure that, by means of appropriate administrative, technical and IT security measures information communicated to the CSD by the participant and information available from the CSD or its settlement systems to the participant, including information recorded with regard to securities accounts, is protected against unauthorised access and processing, including use, destruction or alteration; verify correctness and compliance with applicable legal and regulatory requirements of information and instructions communicated to the CSD; Have proper credit and liquidity management arrangements and other systems and controls in place. Depository considers any deterioration in settlement discipline problematic in case the rate of settlement fails based on the (i) number of settlement instructions, or based on the (ii) value of settlement instructions, for the securities settlement systems operated by the Depository exceeds 0.5 per cent per year. 6

7 3. Key Participants Risk Management CSDR art 45 (6). A CSD shall identify, monitor and manage the risks that key participants in the securities settlement systems it operates, as well as service and utility providers, and other CSDs or other market infrastructures might pose to its operations. RTS art 67 (4). A CSD shall, on an ongoing basis, identify, monitor, and manage the operational risks that it faces from key participants As part of the Enterprise Risk Management framework the Depository has established Enterprise Risk Management Policy and related procedures to identify, measure, monitor, manage and enable reporting on the risks that the Depository may be exposed to, including also the risks that the Depository poses to key participants. Depository will assess key participant s potential impact on other participants and the securities settlement systems of the Depository as a whole in the event of an operational problem affecting the smooth provision of services by the Depository. In order to identify and measure operational risks arising from key participants Depository shall implement key participants risk assessment. The Head of Sales and Services shall be responsible for ensuring that: The agreement with each Key Participant shall be in place. In case of tiered participation arrangement, the relevant information about key participant clients shall be gathered and updated on regular basis. Key participants shall meet the operational requirements. Chief Risk Officer (hereafter: CRO ) and Head of Operations shall be responsible for ensuring that: Annual key participants risk assessment shall be performed based on the information about key participant s transactions volumes and values, evaluating also dependencies between key participant and its clients and other information gathered by Depository. The risks arising from arrangements with key participants shall be identified and estimated during risk self-assessment process according to standard Nasdaq Risk Self-Assessment Guidelines. Chief Technology Officer (hereafter: CTO ) of Depository shall be responsible for ensuring that Depository s systems and communication arrangements with key participants are reliable, secure and designed to minimize operational risks. Risk mitigation strategy shall be developed based on Nasdaq Risk Self-Assessment Guidelines classifying risks into the following categories: o o Monitor. Appropriate controls to monitor the risk are in place. This can also represent a conscious decision to accept and monitor an already established mitigation plan so that no additional action is necessary. Reduce. Actions shall be taken to reduce the impact and/or probability of a risk to an acceptable level (e.g. enhanced controls). 7

8 o o Urgently reduce or avoid the risk completely. The red colour is also used to highlight actions that are overdue or new actions requiring immediate attention. Increase the exposure to a risk. The reason may be that significant business opportunities have been identified which justifies an increase of the risk appetite, or that a risk is over-managed in relation to the potential impact. Material risks arising from tiered participation arrangements shall be escalated to the Nasdaq CSD SE Risk Committee and the Nasdaq CSD SE Supervisory Council. 8