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Euroclear Response to CEBS Consultation Paper 31: Guidelines on Concentration Risk Management

Core Content

Euroclear, a global leader in providing settlement and related services for bond, equity, fund, and derivative transactions, has responded to the CEBS Consultation Paper 31, which outlines guidelines for managing concentration risk within the supervisory review process. Euroclear emphasizes that concentration risk should not be viewed solely as a risk but can also be a result of strategic risk mitigation measures that enhance financial stability.

Main Views

Euroclear presents several key perspectives on the guidelines:

General Considerations

• Concentration as a Risk Mitigation Tool: Concentration is not inherently risky. It can be part of an institution's strategy to reduce risk, such as relying on long-term stable funding sources or focusing on stable revenue-generating business lines.
• Strategic Concentration: Some forms of concentration may be more beneficial than diversification, depending on the institution's risk appetite and operational focus. For example, Euroclear Bank's limited scope as an ICSD is seen as beneficial for market safety.
• Capital and Concentration Relationship: Euroclear argues that a positive relationship between concentration and capital is only valid when concentrations worsen the risk profile, such as in collateral portfolios with lower quality assets.

Specific Comments on Guidelines

• Guideline 1: Euroclear supports the establishment of a well-documented concentration risk policy at both group and solo levels. However, they suggest that non-material entities, such as the Euroclear CSDs, should be excluded from such documentation to avoid unnecessary burden.
• Guideline 3: They agree that institutions should self-assess the significance of risk concentrations, especially in cases involving uncommitted exposures. The flexibility to cancel credit lines or draw against good quality collateral reduces the likelihood of concentration risk.
• Guideline 5: Euroclear believes that concentration limits should not be mandated at the highest level of consolidation. Instead, a top-down, group-wide approach is more appropriate.
• Guideline 6: They propose that concentration risk reporting should occur at both consolidated and solo levels, depending on the context and relevance.
• Guideline 8: Euroclear highlights the need for clarity on the definition of "connected clients," especially regarding the assessment of "common main sources of funding," which should be publicly disclosed for transparency.
• Guideline 11: They suggest further refinement of the definition and understanding of operational risk concentrations, noting that the Advanced Measurement Approach (AMA) already includes relevant scenarios for assessing capital needs.
• Guideline 12: Euroclear clarifies that the role of Internal Audit is to ensure the adequacy and application of procedures, not to assess risk exposures directly.
• Guideline 13: They are unclear about the term "non-contractual commitments" and request further clarification on what types of commitments could exist without a formal contract.
• Guideline 21: Euroclear disagrees with the notion that there should always be a positive relationship between concentration and capital. They reiterate their arguments from the general comments section, emphasizing that the relationship depends on the nature and impact of the concentration.

Key Information

• Euroclear is a user-owned and user-governed group, including Euroclear Bank in Brussels and several national CSDs.
• The group believes that concentration can be a strategic choice and may contribute to a lower risk profile.
• They advocate for a flexible and context-dependent approach to concentration risk management, including policy documentation, limit structures, and reporting.
• Euroclear calls for clarity on certain definitions and the role of internal audit in the context of concentration risk.

Conclusion

Euroclear supports the CEBS consultation paper but emphasizes the need for a nuanced approach to concentration risk, recognizing its potential as a risk mitigation strategy. They recommend clarity on definitions, flexibility in policy implementation, and alignment with existing regulatory frameworks such as the Large Exposures rule and the AMA.