4.1 General
Securities clearing and settlement systems are a key component of the financial system. As a consequence, they are generally subject to oversight because weaknesses in such systems can be a source of risk for the financial system as a whole. Disruptions in securities settlement systems can impact on the payments systems to which they are linked, either directly through a ‘spill-over’ effect, or because they are used to receive collateral backing the provision of intraday credit to participants in payment systems. Similarly, disruptions in a securities settlement system could impact on central banks’ monetary policy operations if the system concerned is used for receipt of collateral.
Settlement of securities trades — whereby securities are transferred by the seller to the buyer and funds are transferred from the buyer to the seller — are typically made by book- entry inSecurities Settlement Systems32
operated byCentral Securities Depositories33.
Settlement generally takes place on the basis ofDelivery versus Payment34 (DvP) which
means that delivery of securities takes place if, and only if, the corresponding payment takes place. DvP addresses principal risk — the risk that a seller delivers a security but does not receive payment, or that a buyer makes payment but does not receive delivery of the security.
In securities and derivatives markets in which a
central counterparty35(CCP) operates, the CCP
32Securities settlement system (SSS) — A system which permits the transfer of securities, either free of payment (FOP) or against payment (delivery versus payment — DvP).
33Central securities depository (CSD) — An entity that: 1) enables securities transactions to be processed and settled by book entry and; 2) plays an active role in ensuring the integrity of securities issues. Securities can be held in a physical (but immobilised) or dematerialised form (i.e. so that they exist only as electronic records).
34Delivery versus payment (DvP) — A mechanism which links a transfer of securities (or other financial instruments) and a funds transfer in such a way as to ensure that delivery occurs if, and only if, payment occurs.
35Central counterparty (CCP) — An entity that interposes itself between the counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
interposes itself between the buyer and the seller of a trade, becoming the buyer to every seller and the seller to every buyer. CCPs are usually introduced into a market for the purpose of reducing participants’ exposure to counterparties, facilitating anonymous trading, or post-trade anonymity, and providing multilateral netting of trades.
As part of its oversight activities the Central Bank monitors developments in securities clearing and settlement that have the potential to impact on the infrastructure for clearing and settlement of Irish securities.
4.2 Settlement of Irish securities
Trades in Irish securities — Government Bonds, equities and other securities — are all settled in infrastructures physically located outside Ireland. Irish Government Bonds are settled inEuroclear Bankin Belgium and equities and other securities are settled in the
Euroclear UK and Ireland‘CREST’system in the United Kingdom.
4.2.1 Irish Government Bonds
The register for Irish Government Bonds, which are issued by theNational Treasury
Management Agency(NTMA), is maintained by the Central Bank. This consists of the capital register for each issue, which is the record of the total capital outstanding; and the accounts of the individual holders of each issue. The majority of individual accounts on the register represent the holdings of private investors, with the holdings of institutional investors largely represented in an ‘omnibus’ account in the name ofEuroclear Nominees. At end-2009, holdings in the Euroclear Bank (EB) system represented more than 99 per cent of the outstanding capital of Irish Government Bonds. Irish Government Bonds are settled in EB, which is theInternational Central Securities
Figure 1: Issue, settlement and registration of Irish Government Bonds Central Bank (Registrar) Euroclear Bank NTMA (Issuer) Approved Agents Euroclear Participants Private individuals
Depository36(ICSD) located in Brussels. EB is a
wholly-owned subsidiary ofEuroclear SA/NV, in relation to which additional information is provided later in this chapter. The settlement of trades in Irish Government Bonds in EB is governed by a legal agreement between the Central Bank and EB and an associated service description. Transactions between participants in the EB system (i.e., banks, broker/dealers, custodians and other
institutions professionally engaged in securities markets) take place by means of book-entry37,
under Belgian law, either on adelivery versus payment(DvP) orfree of payment38(FOP)
basis. Settlement is incommercial bank money39with participants having cash
accounts with EB, which typically provides the 36International central securities depository (ICSD) — A central
securities depository (CSD) which was originally set up to settle Eurobond trades and which is now also active in the settlement of internationally traded securities from various domestic markets, typically across currency areas. At present, there are two ICSDs located in EU countries: Clearstream Banking Luxembourg and Euroclear Bank Brussels.
37Book-entry system — An accounting system which enables the transfer of securities and other financial assets without the physical movement of paper documents or certificates (e.g. the electronic transfer of securities).
38Free of payment delivery — A delivery of securities which is not linked to a corresponding payment of funds.
39Commercial bank money — Commercial bank liability that takes the form of deposits at a commercial bank which can be used for settlement purposes.
participants with intraday credit to facilitate settlement. Such transactions are not reflected individually on the register maintained by the Central Bank, as they do not affect the overall balance on theEuroclear Nomineesomnibus account on that register. However, these changes in ownership are reflected in the securities accounts of these participants in EB. Transactions between accounts on the register in the Central Bank are effected on foot of instructions by bond holders using stock transfer forms submitted to the Central Bank via approved agents — banks, stockbrokers or solicitors. Cash settlement in respect of such transactions involving private individuals, or other non-EB participants, takes place between the parties themselves outside the EB system , i.e., there is no DvP settlement.
The Central Bank, in maintaining the capital register for Irish Government Bonds, is responsible for ensuring that the total of individual holdings on the register in a particular bond issue corresponds at all times to the amount recorded in the capital register for that issue. Arrangements are also in place
Figure 2: Clearing and settlement of Irish equities and corporate bonds Registrars Euroclear UK & Ireland (CREST system) Bank of England RTGS System (GBP) Central Bank — TARGET2 (euro) Settlement Banks Eurex Ag (CCP) CCP Clearing Members CREST members
to facilitate changes to the outstanding capital of all bond issues resulting from new
issues/tranches of existing issues and
cancellation transactions by the issuers, and to record these in the EB system. A daily reconciliation process is carried out between the Central Bank, in its role as Registrar, and EB, and a full reporting system is also in place. Irish Government Bonds transferred by counterparties to the Central Bank as part of the collateral arrangements connected with Eurosystem monetary policy operations, or for the purposes of obtaining intraday credit in the TARGET2 RTGS system — see Section 3 of this Report — are recorded in the Central Bank’s name within the EB system. Investments in Irish Government Bonds by the Central Bank for ECB reserves management purposes are also held in EB.
4.2.2 Irish Equities
Irish equities that are dealt on ISE XETRA40,
and also certain Irish corporate bonds, are settled in the ‘CREST’system operated by the
Euroclear UK & Ireland(EUI) central securities 40ISE Xetra is the electronic order book of the Irish Stock Exchange.
depository. EUI, which is incorporated in the United Kingdom, is also a wholly-owned subsidiary ofEuroclear SA/NV. EUI provides DvP settlement in central bank money41via a
number of settlement banks42, and also FOP
settlement. Each CREST participant appoints a settlement bank to settle the cash leg of securities transactions. These settlement banks extend intraday credit to their customers to facilitate settlement; all institutions currently acting as euro settlement banks in EUI are located in the UK (i.e., there are currently no settlement banks located in Ireland providing settlement facilities in euro for Irish trades in Irish securities).
Prior to April 2008, the Bank of England acted as cash settlement agent for both euro and Sterling transactions in EUI. Following the Bank of England’s decision not to participate in TARGET2 (as a consequence of which the Bank of England no longer had direct access 41Central bank money — Liabilities of a central bank that take the
form of banknotes or of bank deposits at a central bank and which can be used for settlement purposes.
42Settlement bank — The entity that maintains accounts with the settlement agent in order to settle payment obligations arising from securities transfers, both on its own behalf and for other market participants.
to euro liquidity) the Central Bank agreed to take over the role of euro cash settlement agent for the EUI settlement banks, at least until the implementation of the EuroclearSingle Platform for Settlement(see later in this chapter). Initially it was anticipated that this interim arrangement would be required for a period of approximately 18 months. With this relatively short timeframe in mind, rather than developing a new process it was decided to implement a largely manual arrangement. Bi- lateral and multilateral contractual
arrangements were put in place between EUI, the Central Bank and the CREST settlement banks to cover these new euro payment arrangements, and also the account
relationship between the Central Bank and the settlement banks. Since their implementation in April 2009, these new euro cash arrangements have operated smoothly.
Transactions in Irish securities in the CREST system take place under Irish law, EUI being approved as an operator under theIrish Companies Act, 1990 (Uncertificated
Securities) Regulations, 1996.As a condition of such approval EUI is required to submit an annual report to the Minister for Enterprise, Trade and Innovation in respect of its activities relating to Irish securities. Figure 2 illustrates the main players in the clearing and settlement of Irish equities and corporate bonds.
4.3 Central Counterparty Clearing
for the Irish Stock Exchange
In December 2005, a central counterparty clearing (CCP)43service was introduced for
Irish securities traded on theISE Xetra
electronic order book that settle in CREST. This service is provided byEurex Clearing AG
(EACG)44, which is based in Germany and is a
subsidiary ofEurex Frankfurt AGand ultimately owned byDeutsche Bo¨rse AGandSix Swiss Exchange AG. Under the service, EACG becomes the counterparty to all eligible trades at the time they are executed. CCP-eligible 43Central counterparty (CCP) — An entity that interposes itself between the counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
44EUREX Clearing AG is licensed as a credit institution in Germany and is subject to supervision by the Bundesanstalt fu¨r Finanzdienstleistungsaufsicht (BaFin) and to the (non-statutory) oversight of the Deutsche Bundesbank.
securities traded on the ISE Xetra platform are generally equities; however, the service also applies to the ‘ISEQ 20’ exchange-traded funds. Use of the CCP service is mandatory for eligible trades, which are fed automatically to the CREST system from the ISE Xetra system. In order to clear trades through EACG, trading firms must be either a Clearing Member or a Non-clearing Member of the CCP. A Clearing Member is entitled to perform the clearing of eligible trades and is responsible for the payment and securities delivery arising from such trades. A Non-clearing member does not clear its own trades and must instead use the services of a General Clearing Member, which is a clearing member that is permitted to clear trades on behalf of other market participants. In addition to clearing, the CCP provides optional settlement netting for eligible trades.
4.4 Oversight of Securities
Clearing and Settlement
Systems
As the settlement infrastructures for Irish securities are located outside Ireland, the Central Bank does not have primary oversight responsibility for the relevant settlement systems. Rather it relies on co-operation with the relevant authorities in Belgium and the UK (the countries in which the relevant systems are located) in order to ensure that, where
necessary, it can be appropriately involved in the oversight of the systems concerned. To date, the focus has been on ensuring that the Central Bank has access to information on oversight activities, an opportunity to comment on proposed activities and a channel for communication in the event of a major incident.
Euroclear Bank(in which Irish Government Bonds are settled), which is located in Belgium, is subject to oversight by the National Bank of Belgium (NBB). Reflecting the importance of the role played by Euroclear Bankvis-à-visIrish Government Bonds, the Central Bank co- operates with the NBB in relation to the oversight of Euroclear Bank, in accordance with the provisions of aMemorandum of Understandingagreed in this regard in 2002. As part of its oversight activities the NBB assesses the EB system against the CPSS-
Figure 3: The Euroclear Group Euroclear SA/NV Euroclear Bank Euroclear France Euroclear UK & Ireland Euroclear Nederland Euroclear Belgium Euroclear Holding Euroclear Sweden Euroclear Finland Euroclear plc
IOSCO recommendations for securities settlement systems and reports on the outcome of this assessment exercise in its Financial Stability Review. In addition, as a system that is eligible for use in Eurosystem credit operations, the Euroclear system is assessed against user standards developed by the Eurosystem. The EUICREST system(in which Irish equities and other securities are settled) is subject to supervision by the Financial Services Authority (FSA) in the United Kingdom; in addition, the Bank of England (BoE) oversees the payment arrangements of the CREST system. The Central Bank has entered a tri-party MoU with the FSA and the BoE regarding the oversight of the CREST system.
Until recently, the BoE’s oversight role was non- statutory. However, the Banking Act, 200945
now provides a statutory framework for the BoE to oversee payment systems designated as ‘recognised systems’ by H.M. Treasury. The inter-bank payment system operated by CREST 45http://www.uk-
legislation.hmso.gov.uk/acts/acts2009/ukpga—20090001—en—1.
has been so designated by H.M. Treasury and in light of these changes, the above-mentioned MoU with the UK authorities is currently being reviewed.
4.5 Co-operative Oversight of
Euroclear SA/NV
46In addition to being the parent ofEuroclear BankandEuroclear UK and Ireland,Euroclear SA/NV(ESA) owns the CSDs ofBelgium, Finland, France, the Netherlands and Sweden.
An MoU is in place between the various national and European authorities responsible for the supervision and oversight of the individual entities of the Euroclear group. This MoU provides a co-operative framework for the monitoring and assessment of common services and other issues of common interest to regulators, and recognises the Belgian authorities as a ‘single entry point’ toESAfor matters covered by the MoU. As the Central Bank is not the primary overseer of the system settling Irish Government Bonds (i.e., Euroclear 46Euroclear SA/NV is a company
(societeanonyme/naamlosevennootschaap) organized under the laws of Belgium.
Bank) it is not a signatory to the MoU, but has been grantedobserverstatus on the technical committee that undertakes the co-operative oversight and, most importantly, is included in the communication framework that would be used in the event of a crisis impacting any of the (I)CSDs of the group.
Figure 3 illustrates in schematic form how the CSDs of the Euroclear Group are related.
4.6 ESCB-CESR
Recommendations for
Securities Clearing and
Settlement in the European
Union
Prior to 2009, the main tools for the oversight of securities clearing and settlement systems in the EU were the recommendations issued by the CPSS and IOSCO in 2001 and 2004 respectively for securities settlement systems and central counterparties. In May 2009, the ESCB and CESR published their
Recommendations for Securities Settlement SystemsandRecommendations for Central Counterparties. The ESCB-CESR
recommendations were adapted to the European context from the CPSS-IOSCO recommendations, and cover all aspects of the design, operation and oversight of securities clearing and settlement systems, and promote the implementation of measures that improve the safety and efficiency of such systems. The ESCB-CESR recommendations cover both individual systems and cross-border securities settlement arrangements and in each case the headline recommendation is supplemented by a list of key issues, an explanatory
memorandum and a methodology for assessing compliance. The headline recommendations are set out in Annex 1.
Work on adapting these requirements had stalled in October 2005 when authorities failed to agree on a number of issues, in particular the extent to which the proposedESCB-CESR standardsshould apply to CSDs with a banking licence and the application of the standards to custodian47banks.
On the basis of compromise principles agreed 47Custodian — An entity, often a credit institution, which provides
custody services to its customers.
by the ECOFIN in June 2008, this work was re-activated and in May 2009 theESCB-CESR Working Groupfinalised its report for
submission to the decision-making bodies of the ESCB and CESR. The compromise principles were that ‘recommendations’would be addressed to public authorities rather than ‘standards’being addressed to systems operators; that custodian banks would be excluded from scope and that for
Recommendation 9(regarding CSD risk controls) the original CPSS-IOSCO wording recommendation would be retained. Furthermore, the Committee of European Banking Supervisors (CEBS)49was invited to
review, in co-operation with CESR, the risks borne by custodians.
Later, in December 2009, ECOFIN requested ESCB-CESR to adapt the recommendations for CCPs to address the risks of OTC derivatives. Regarding OTC derivatives, the group found that the risks did not differ in nature from those of clearing on-exchange transactions and that, in general, the headline recommendations themselves did not need to be changed. It is expected that securities regulators and overseers in the EU will adopt the ESCB-CESR recommendations for the oversight of systems in their jurisdictions. The Central Bank supports the use of the ESCB-CESR recommendations for the oversight of systems that clear and settle Irish securities, although — as mentioned earlier — it does not have primary responsibility for the oversight of such systems; any
assessment of these systems would be undertaken by the authorities in the relevant