When a CSD participant enters into resolution, the challenge for the CSD and for financial regulators is to strike the right balance between, on the one hand, the need to preserve the safety and soundness of the CSD and to avoid any contagion to other participants in the CSD, and, on the other hand, the need to maintain access by the firm in resolution to critical CSD services to facilitate the resolution process.
The draft FSB guidance issued on 16 December 2016 constitutes a good basis to address this issue. In particular:
- CSDs should not automatically terminate access when a participant enters into resolution. However, access to critical CSD services should remain subject to the fulfilment of all contractual obligations towards the CSD and towards participants in the CSD system.
- Procedures applying to participants should be transparently disclosed in CSD rules. However, CSDs should not be obliged to include specific procedures for participants in resolution in their rulebooks or contractual arrangements. It should be possible to handle resolution scenarios within the general framework in place and CSDs should retain enough flexibility to be able to adapt to the resolution strategies adopted by resolution authorities. These may differ from one firm to another and cannot be known in advance.
- Some of the definitions put forward in the FSB Consultative Document can be further improved. For instance, the guidance should make it clear that “critical services” will be determined by the resolution authority and may differ from one firm to another. Clarifying definitions is especially important to avoid as much as possible inconsistencies between the recovery plans of CSDs and those of their participants.
- CSDs should seek to facilitate the continued access to their critical services by a successor entity to a firm in resolution. However, continued access will only be possible if strict conditions are met and a fast-track application process, if it exists, will not avoid the successor entity from meeting those participation requirements, checks, controls and other obligations which fall onto all other participants.
- Domestic and foreign participants in CSDs should be treated equally for resolution purposes, and national rules and regulations imposing a differentiated treatment should be avoided.
- Because the FSB guidance will apply to different types of financial market infrastructures, it would be helpful if it distinguishes more explicitly between those provisions which apply to all infrastructures, and those which are particularly relevant for a certain type of infrastructures. The participation rules and legal arrangements of CCPs, in particular, are quite different from those of CSDs due to the lower risk profile of CSDs.
- Finally, it is essential that resolution authorities communicate in a timely way with all relevant authorities and market actors in cross-border scenarios. Without timely information, there is a risk that the situation of a CSD participant could be mistakenly taken for a default, thereby triggering a different treatment by the CSD and/or the CSD’s supervisory authority.