EBA欧洲银行-Report-on-the-outcome-of-the-call-for-evidence-on-custodian-banks-activity_9页_191kb

Summary of the CEBS Report on Custodian Banks' Internalisation of Settlement and CCP-like Activities

Introduction

CEBS initiated a call for evidence in February 2009 to assess the materiality of custodian banks’ internalisation of settlement and CCP-like activities. This was a follow-up to the ECOFIN report on custodian banks, which highlighted regulatory gaps. CEBS received 33 responses, including 17 from members and 16 from market participants. A public hearing was also held on 24 March 2009 to discuss the findings. The report aims to summarise the evidence and draw prudential conclusions on the materiality of internalisation and CCP-like activities.

Internalisation of Settlement

Omnibus Accounts

• Omnibus account structures are well established across EU Member States, though three countries limit their use.
• Clients can request segregated accounts even where omnibus accounts are available.
• Some CSDs require registration numbers or member registration for settlement activities.
• Most custodian banks use omnibus accounts for their clients, with some differentiating between private and institutional clients.
• In some markets, omnibus accounts are not used for domestic investors' securities.
• Clients generally agree to omnibus accounts through Service Level Agreements (SLA), which may imply consent to internal settlement.

Internalisation Rates

• The percentage of trades internalised varies, with most custodian banks not engaging in internalisation at all.
• Among those that do, internalisation rates typically range from 1% to 3%, with rare cases reaching 30%.
• One CSD does not execute DVP on internal trades, making internalisation inevitable.

Monitoring and Reporting

• Most custodian banks apply the same procedures for internal and external settlement.
• Only one bank defined specific rules for automatically matching and settling internal trades.
• Clients are not usually directly informed about the place of settlement, though they may be indirectly informed via SLA agreements, invoicing structures, or order routing systems.

Materiality by Market/Product

• Internalisation is more common in OTC-traded products than in exchange-traded ones.
• In some markets, internal settlement is restricted due to regulatory practices or market structures.
• For cleared trades, CCPs automatically send gross settlement instructions to the CSD, preventing internalisation by custodian banks.

Materiality of CCP-like Activities

General Clearing Member (GCM) Role

• Custodian banks often act as GCMs, which involves risk management practices similar to CCPs.
• This activity is not always part of their custody business and may be carried out by other parts of the group.
• GCM activities are not exclusive to custodian banks and are common among other clearing members.

Risk Management Practices

• Most custodian banks do not take on counterparty risk beyond their role as GCMs.
• Two custodian banks stated they act in a CCP-like function:
  • One by taking on clearing party responsibilities in the absence of a CCP.
  • Another by having a stand-alone CCP within its group.
• Risk management practices vary, with some banks using daily controls for margin requirements and collateral, and others replicating CCP margining approaches.
• Banks may also exceed CCP margin requirements when necessary.

Scope and Relevance

• GCM activities are typically limited to equities and involve selective client acceptance based on risk profile.
• CEBS concluded that only a few custodian banks engage in CCP-like activities beyond their role as GCMs.
• Banking supervisors aligned with the industry view that CCP-like activities are not common outside the GCM role.

Conclusion

• Internalisation of settlement is not widespread among custodian banks.
• CCP-like activities are limited to a few custodian banks, primarily in their role as GCMs.
• CEBS does not currently see a need for European-level intervention regarding internalisation, as the evidence suggests it is not significant.
• However, in cases where internalisation reaches material levels, custodian banks should follow procedures aligned with the ESCB-CESR Recommendations.
• CEBS will continue to monitor internalisation and may revisit the issue if it becomes significant.
• Future work may include a broader assessment of risk management practices among GCMs, not limited to custodian banks.

Annex 1: Relevant ESCB-CESR Draft Recommendations

RSSS 1 - Legal Framework

• Securities settlement systems must have a clear, transparent legal basis.
• Legal frameworks should ensure enforceability of netting and collateral arrangements.
• Systems must be designed to withstand insolvency and ensure legal certainty.

RSSS 2 - Trade Confirmation and Settlement Matching

• Trade confirmations should occur as soon as possible, ideally on T+0.
• Settlement instructions must be matched before settlement, no later than the day before the settlement date.

RSSS 7 - Delivery versus Payment (DvP)

• DVP should be implemented to eliminate principal risk.
• Securities transactions against cash should be settled on a DVP basis.
• The time between blocking and final delivery should be minimised.

RSSS 8 - Timing of Settlement Finality

• Intraday settlement finality should be achieved through real-time or multiple-batch processing.
• Settlement finality must be clear, irrevocable, and supported by legal frameworks.
• Settlement systems should avoid late revocation of unsettled instructions.

RSSS 10 - Cash Settlement Assets

• Cash settlement assets should carry minimal credit and liquidity risk.
• CSDs should use central bank money where possible.
• If commercial bank money is used, it should be at the discretion of the participant.
• Only regulated financial institutions should act as cash settlement agents.
• Proceeds from settlements should be available intraday or same-day.

RSSS 16 - Communication Procedures, Messaging Standards and Straight-Through Processing

• CSDs and participants should use international messaging standards to facilitate STP.
• Communication procedures should be harmonised across systems to support efficient clearing and settlement.