Governance of securities clearing and settlement systems ...I.5 G30 Global Clearing and Settlement, a Plan of Action, January 2003 32 I.6 Cross-border clearing and settlement in the

OCCAS IONAL PAPER SER IESNO. 21 / OCTOBER 2004

GOVERNANCE OF SECURITIES CLEARING AND SETTLEMENT SYSTEMS

by D. Russo, T. Hart,M. C. Malaguti and C. Papathanassiou

In 2004 all ECB publications will feature

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OCCAS IONAL PAPER S ER I E SNO. 21 / OCTOBER 2004

GOVERNANCE OF SECURITIES CLEARING AND

SETTLEMENT SYSTEMS 1

by D. Russo 2, T. Hart 3,M. C. Malaguti 4

and C. Papathanassiou 5

This paper can be downloaded from the ECB’s website (http://www.ecb.int).

1 The authors wish to thank Andrea Corcoran of the US Commodity Futures Trading Commission; Patricia White of the US FederalReserve Board of Washington; Matthew Etherfield of the UK Financial Services Authority; Koenraad De Geest of the European

Central Bank; and an anonymous referee for their comments and suggestions during the preparation of this paper. The authorswish to thank Mike Moss of the European Central Bank for his invaluable assistance in editing the paper. The views expressed

herein are solely those of the authors and do not represent the views of the European Central Bank, the InternationalOrganization of Securities Commissions, or any of their respective offices, divisions or members.

2 D. Russo is the Head of the Securities Settlement Policy Division of the European Central Bank.3 T. Hart is an Advisor with the International Organization of Securities Commissions.

4 M. C. Malaguti is a Professor of International Law at the University of Lecce.5 C. Papathanassiou is a Senior Expert in the Securities Settlement Policy Division of the European Central Bank.

© European Central Bank, 2004

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ISSN 1607-1484 (print)ISSN 1725-6534 (online)

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Occa s i ona l Pape r No . 21October 2004

CONTENT SINTRODUCTION 4

1 GENERAL APPROACHES TO CORPORATEGOVERNANCE 8

2 DETERMINANTS OF CORPORATE GOVERNANCESTRUCTURES AND MECHANISMS OF SECURITIESCLEARING AND SETTLEMENT SYSTEMS 10

2.1 The legal and regulatory structure ofsecurities clearing and settlementsystems 10

2.2 The ownership structure 11

2.3 The services provided by thesecurities clearing or settlementsystem 12

2.3.1 The services providedby CSDs 12

2.3.2 The services providedby CCPs 12

2.3.3 The general corporategovernance mechanisms 13

3 CONFLICTS OF INTEREST IN, AND GOVERNANCEMECHANISMS FOR, SECURITIES CLEARING ANDSETTLEMENT SYSTEMS 14

3.1 Mechanisms to address the interestsof customers 15

3.2 Mechanisms to address the publicinterest 16

3.3 Specific cases of conflicts ofinterest 17

3.3.1 Potential conflicts relatingto risk management 17

3.3.2 Financial group-related issues 17

3.3.3 Conflicts of interest betweendomestic and non-residentcustomers and participants 19

3.3.4 Conflicts among public andprivate interests 19

4 OTHER GENERAL POLICY APPROACHES BYAUTHORITIES RELATING TO SYSTEM GOVERNANCE 21

4.1 Transparency 21

4.2 Requirement for effective governanceirrespective of the ownership structure 22

4.3 Competition issues 23

4.4 Oversight 24

4.5 Completing the internal marketrelating to securities clearing andsettlement 25

5 CONCLUSIONS 28

ANNEXES

I STANDARDS AND RECOMMENDATIONS RELATINGTO THE CORPORATE GOVERNANCE OF PAYMENTAND SECURITIES SETTLEMENT SYSTEMS 30

I.1 CPSS Core Principles for PaymentSystems, January 2001 30

I.2 CPSS-IOSCO Recommendations forSSSs, November 2001 30

I.3 ESCB-CESR Standard onGovernance, 2004 31

I.4 CPSS-IOSCO Recommendations forCentral Counterparties, March 2004 31

I.5 G30 Global Clearing and Settlement,a Plan of Action, January 2003 32

I.6 Cross-border clearing and settlementin the European Union(the Giovannini Reports),2001 and 2003 32

I.7 Commission Communication onClearing and Settlement,2002 and 2004 33

I.8 European Parliament Report onClearing and Settlement, 2002 34

II EUROPEAN CSDS AND CCPS 35

II.1 Organisational information on CSDsin the European Union 35

II.2 Organisational information on CCPsin the European Union 37

REFERENCES 38

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I N T RODUCT I ONOver the past few years, numerous securitiesexchanges have altered their ownershipstructures by transforming themselves frommutualised, member-owned companies into for-profit, shareholder-owned companies. WithinEurope, the adoption of the euro, legal andregulatory changes adopted pursuant to theEuropean Commission’s Financial ServicesAction Plan, and the resulting marketintegration have also caused alliances andmergers among exchanges and other institutionsinvolved in the post-trade processing ofsecurities transactions to flourish. These recenttrends in market integration and consolidationhave facilitated an increase in cross-bordertrading and have brought significant increasesin market efficiency: markets are more liquidand provide a wider range of products at lowercosts than in the past. The growth in“collateralised transactions” (including reposand securities lending), many of which involvecounterparties located in different jurisdictions,has also fuelled growth in cross-bordertransactions.

Yet, market integration and consolidation createconditions in which financial turmoil can spreadwith greater speed and virulence. An integratedand consolidated market structure increases theimportance of the integrity of clearing andsettlement systems because these systems tiemarkets and participants together. Thisnecessitates, among other things, that clearingand settlement processes be robust andefficient. Increasing the efficiency of clearingand settlement systems allows marketparticipants to optimise the use of liquidity andreduces the risk of market disruption andsystemic risk.

As part of this ongoing reorganisation,securities clearing and settlement systems, i.e.central securities depositories (CSDs)1 andcentral counterparty clearing houses (CCPs),2

are increasingly being incorporated intocompany groups, either on a vertical basis withan exchange or on a horizontal basis with otherCSDs and CCPs. This process of“demutualisation” and consolidation has

prompted a significant volume of work on thegovernance of the new for-profit exchanges andon the mechanisms by which a for-profitexchange should fulfil its self-regulatoryfunctions.3 However, little work has been doneon the governance of CSDs and CCPs.4 Thegovernance structure of a clearing andsettlement system should address not only theneeds and interests of the different stakeholdersin the system, but also the national,transnational and Community interests in theoperation of the system and the public interest5

in the minimisation of systemic risk. It shouldalso ensure that the ongoing reorganisation ofthe financial infrastructure does not increase theoverall risk in the financial system as a whole.Governance provides one means by which theobjectives of the system may be pre-specified,its performance monitored, and the effects ofpotential conflicts of interest betweenstakeholders minimised.6 Hence, proper

1 In this paper, a CSD is an institution that holds securities, thusenabling securities transactions to be processed by means ofbook entries. Physical securities may be immobilised by thedepository or securities may be dematerialised (so that they existonly as electronic records). Unless otherwise noted, referencesin this paper to CSDs include the international central securitiesdepositories, Euroclear and Clearstream.

2 In this paper, a CCP is an entity that interposes itself between thecounterparties to contracts traded in one or more financialmarkets, becoming the buyer to every seller and the seller toevery buyer.

3 IOSCO Technical Committee, “Issues Paper on ExchangeDemutualization” (June 2001); R. Lee, “The Future of SecuritiesExchanges” (February 2002); B. Steil, “Changes in theOwnership and Governance of Securities Exchanges: Causes andConsequences” (2002); and M. Blume, “The Structure of the USEquity Markets” (March 2002).

4 In this paper, the term “corporate governance” is used to refer tothe internal corporate structures and mechanisms by whichdecisions are taken in relation to the operation of a clearing orsettlement system. The term “governance” is used to refer to allinternal and external structures, mechanisms, regulations, normsand practices which bear on corporate decision-making withinclearing and settlement system operators.

5 CSDs and CCPs are imbued with a public interest because theiroperations support (i) access by economic actors to capital and(ii) risk management within the financial system, and aretherefore fundamental to the functioning of the real economyand to the achievement of broader societal policies and goals.

6 In this paper, the term “conflict of interest” refers generally tosituations where there is an incompatibility between the concernsor aims of different persons or groups of persons. It also mayrefer, in a particular case, to a situation where a person hasinterests that are incompatible (or not totally aligned) with theinterests of other persons, yet that person is called upon to makedecisions in an official capacity that relate to those incompatibleinterests.

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INTRODUCTION

governance should create a framework andprovide the incentives for the board(s) ofdirectors and management to pursue objectivesthat are in the interests of the system, customersand the public and should facilitate the effectivemonitoring of their performance.

Against this background, two issues areconsidered in this paper.

The first relates to conflicts of interest typicallyarising in the securities settlementinfrastructure and the mechanisms for theirresolution. The governance arrangements for aclearing or settlement system must address notonly the conflicts of interest that are common tothe corporate governance of all corporateentities, but also the public interest and thecorresponding interests of regulatoryauthorities. In the context of the ongoingreorganisation of the clearing and settlementinfrastructure within Europe, governancearrangements must also address a number ofconflicts of interest unique to operators ofclearing and settlement systems. First,especially with reference to CCPs and CSDsoffering banking services in addition to coresettlement services, it is important thatcorporate governance mechanisms contribute tofull independence of decisions concerning riskmanagement. In particular, corporategovernance mechanisms can contribute to aclear separation of risk management decisionsfrom other day-to-day decisions relating to thebusiness of the system operator. Second, thevertical and horizontal integration amongtrading, clearing and settlement systems into asingle entity or financial group calls for aninvestigation into potential conflicts of interestbetween the different entities within thefinancial group and mechanisms for theirresolution. Third, the horizontal integration atthe level of exchanges, central counterpartiesand central securities depositories, byincreasing the number of markets served byeach integrated settlement system, introduces orincreases the need also to take into account theinterests of non-resident customers andshareholders . Lastly, the emergence of

business models that consolidate activitiesacross competitive markets creates the need toinvestigate whether and to what extentgovernance mechanisms can contribute topreventing or mitigating the potential for theabuse of monopoly positions in the provision ofsome services.

The second set of issues relates to the actionsthat authorities can take to ensure that adequatecorporate governance mechanisms are adoptedby securities clearing and/or settlementsystems. The interest of payment and settlementsystem regulators and overseers internationallyin issues concerning governance is relativelyrecent. The first international “oversight”standard on governance was only formulated in2001 in the Core Principles for SystemicallyImportant Payment Systems of the Committeeon Payment and Settlement Systems (CPSS)relating to institutions active in the operation oflarge-value payment systems. This standardwas followed up by the adoption of aninternational standard on governance forsecurities settlement systems (SSSs) by CPSS-IOSCO. In particular, the recommendation ongovernance for SSSs calls for governancearrangements for central securities depositoriesand central counterparties to fulfil publicinterest requirements and to promote theobjectives of owners and users. The EuropeanSystem of Central Banks (ESCB) and theCommittee of European Securities Regulators(CESR) are currently considering how to adaptthis recommendation in the European context.7

CPSS-IOSCO also is now finalizing new, morespecific Recommendations for centralcounterparties that also address governancearrangements for CCPs. The importance ofappropriate SSS corporate governancearrangements for innovation and competitionhas also been stressed in the first GiovanniniReport, a report of a group of experts appointedby the European Commission to address issuesconcerning securities transfers, and in a report

7 See “ESCB-CESR Standards for Securities Clearing andSettlement Systems in the European Union: consultative report”(http://www.ecb.int/pub/cons/cesr2003/ecbcesr_report.pdf).


of the European Parliament. Furthermore, theGroup of Thirty (G30), a private sector body,has also developed recommendations on SSSgovernance and regulation. Lastly, the recentCommunication from the Commission to theCouncil and the European Parliament onClearing and Settlement in the European Uniondated 28 April 2004 (COM (2004) 312 final)envisages the adoption of a frameworkDirective addressing inter alia appropriategovernance arrangements for securitiessettlement systems and central counterparties.The Commission also takes the view thatgovernance arrangements applicable tointermediaries should be consistent with thoseenvisaged for securities clearing and settlementsystems. An overview of these variousinitiatives is provided in Annex I. All of theinternational standards adopted to date reflectthe fact that corporate governance mechanismsfor securities settlement systems must becomplemented by adequate transparency,requirements for effective governanceirrespective of the ownership structure(whether mutual or demutualised), appropriateoversight, and regulation. Standards andreports regarding the governance of Europeansecurities clearing and settlement systems alsogenerally address competition concerns and theneed for greater efficiency in securities clearingand settlement within Europe. The reports alsonote that the increased consolidation and cross-border operation of securities settlementsystems may require greater cooperation andpractical protocols among relevant authorities.

The usual mechanisms by which authoritiesintervene to address governance issues rangefrom disclosure requirements to specific anddirect regulatory requirements. Disclosure ortransparency of corporate governancearrangements is already a requirement in almostall the recommendations on governance ortransparency that the authorities (IOSCO,CPSS-IOSCO, CESR, ESCB-CESR) haveformulated to date. It is important to highlight inthis context that the existence of increasinglycomplex mechanisms for corporate governancemay require the disclosure of more precise and

detailed information than that provided today.As far as regulation (e.g. binding standard-setting) on governance is concerned, the policyquestion for European authorities is whether aspecific model of corporate governance shouldbe prescribed or whether general requirementsshould be set that could then be incorporated orreflected in the various existing governancemodels. In this respect, it seems that there is nosingle model of corporate governance that, bydefinition or a priori, is the most appropriatefor European securities clearing and settlementsystems, as authorities are not usually disposedto impose specific structures on commercialenterprises. Several combinations of corporategovernance mechanisms and regulatoryrequirements may provide an effective systemof governance. In this respect, an approach thatsets out requirements to be reflected within themodel of corporate governance as instituted in ajurisdiction (i.e. essentially, clearrepresentation of the interests of the variousstakeholders, clear mechanisms for resolutionof conflicts and adequate risk managementcontrols) seems to be preferable. While thisconclusion is embodied in IOSCO, CPSS-IOSCO and ESCB-CESR recommendations ongovernance and in the conclusions of theGiovannini Reports, it is not completely in linewith the preference for non-profit, publicutility-oriented models expressed in theEuropean Parliament Report on Clearing andSettlement (see Annex I).

This paper is organised as follows: Section 1provides a description of the existing generalapproaches to corporate governance. Section 2identifies determinants of the corporategovernance structures and mechanisms ofsecurities clearing and settlement systems.Section 3 addresses potential conflicts ofinterest among providers of clearing andsettlement services and the governancemechanisms instituted to address them. Section4 provides an overview of authorities’ concernsand other general public policy responsesrelating to the governance of securities clearingand settlement systems. It discusses thenecessity to complete the internal market within

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INTRODUCTION

the Community with regard to securitiesclearing and settlement systems and anapproach to harmonise the mechanismsgoverning those systems to further achieve thatgoal.


1 GENERA L A P PROACHE S TO CORPORAT EGOVERNANCE

In general, in stock corporations, therelationship among shareholders, managementand board(s) of director is characterised by theseparation of ownership and managementcontrol.8 Although shareholders are acompany’s economic owners, in publiccorporations, they generally do not take part inthe management of the company, but entrust itto the board(s) of directors and executivemanagers. Entrusting executive managementwith the day-to-day decisions incidental to theoperation of the company is efficient. Thisseparation of ownership and managementcontrol, however, also gives rise to significantrisks of corporate mismanagement because ofactual or potential conflicts of interest betweenmanagement, the board(s) of directors andshareholders. To address these actual andpotential conflicts, the system of corporategovernance of a stock corporation creates asystem of checks and balances throughout thecorporate decision-making processes or mayrequire that certain decisions be put to a vote ofthe shareholders. In this sense, corporategovernance is a “system by which companiesare directed and controlled.”9

Systems of corporate governance can generallybe placed into two categories that can bedistinguished according to the kind of intereststhat are taken into account in corporatedecision-making. The first system is referred toas the “stakeholder model” and is used mostprominently in continental European countries.The second system is referred to as the“shareholder model” and is used mostprominently in the United States and the UnitedKingdom.

The corporation’s overriding goal in thestakeholder model is to balance conflictinginterests among all the stakeholders in thecompany. Implicit in this model is apresumption that shareholder value in the longterm will be maximised if corporationscontribute to broad societal goals. Stakeholdersinclude the shareholders, creditors, suppliers,employees and customers. In a stakeholdermodel, the interests of stakeholders are taken

into account and are sometimes represented, asin the case of the German Corporations Act(Aktiengesetz), in the structure of the companyto make sure that the company meets thesebroader goals.

The corporation’s overriding goal in theshareholder model is to maximise shareholdervalue. This goal is manifested in law by meansof fiduciary duties owed by the board ofdirectors to shareholders coupled with the rightof shareholders to bring an action in the case ofa breach of those duties. The shareholders arethe residual claimants on the assets of thecompany and therefore management’s primaryduty to the company’s shareholders is toincrease the company’s value and thus the valueof their shares. Other stakeholders generallyreceive a fixed return and their claims must besatisfied before any distribution to shareholdersin the event the company is subject tobankruptcy proceedings. Under this model, theboard of directors monitors corporate affairs tomaximise the value of the corporation. Theboard takes account of the interests of otherstakeholders only as a factor in its deliberationsas to what is in the long-term interest ofshareholders and there is a presumption thatenhancing shareholder value will further othersocietal objectives.

Relevant differences already emerge from arough comparison of the two models. In the

8 A. Berle and G. Means, “The Modern Corporation and PrivateProperty”, New York, Harcourt, Brace & World, Inc. (1932 and1968); M. Jensen and W. Meckling, “Theory of the Firm:Managerial Behaviour, Agency Costs, and OwnershipStructure”, in 3 Journ. Fin. Econ. 305 (1976); E. Fama, “AgencyProblems and the Theory of the Firm”, in 88 Journ. Pol. Econ. 288(1980); A. Schleifer and R. W. Vishny, “A Survey of CorporateGovernance”, 52 J. Fin., pp. 737-754 (1997).

9 This definition is given by the Cadbury Committee in its finalreport “The Financial Aspects of Corporate Governance” ofDecember 1992. The “Report of the High Level Group ofCompany Law Experts” on a modern regulatory framework forcompany law in Europe of 4 November 2002 (the “WinterReport”) considers corporate governance as a system rootedpartly in company law and partly in wider laws, practices andmarket structures (see page 44). See also the “OECD Principlesof Corporate Governance” (1999), as revised in 2004, whichnotes that “corporate governance involves a set of relationshipsbetween a company’s management, its board, its shareholdersand other stakeholders.”

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TO CORPORATEGOVERNANCE

shareholder model, the fact that the board isrequired to take into account the interests of theeconomic owners of a company (i.e. theshareholders) and is only held accountable tothem could lead to fewer conflicts of interest atthe level of the board of directors than in thestakeholder model. The stakeholder model, onthe other hand, while potentially leading togreater conflicts of interest within corporatedecision-making processes, may result incorporate policies that contribute more directlyto broad social policies and objectives. In thissense, a country with a stakeholder model usesits corporate governance policies to achievesocietal objectives not solely related to the day-to-day operations and objectives of companies.

The model of corporate governance chosen by ajurisdiction is generally reflected in itscompany law, which sets out binding legalrequirements relating to the management andoperation of companies. Additionally, public orprivate organisations in most jurisdictions haveadopted one or more corporate governancecodes, which may or may not be legallybinding.10 Governance requirements may alsobe addressed in the standards that must be metto list the securities of a company on anorganised securities market. However,notwithstanding the proliferation of nationalcodes and principles relating to corporategovernance, there remains a certain level ofdissatisfaction internationally regardingcorporate governance practices generally and aconsiderable amount of work is ongoing both atnational and international levels in this area.Governance failures, particularly relating to therelationship of companies to their externalauditors, played a role in some recent high-profile incidents of securities fraud and haveprompted an extensive national andinternational review of governancearrangements concerning the relationship ofcompanies to their auditors and of arrangementsfor regulation and oversight of the auditingprofession generally. The EuropeanCommission also recently proposed a newDirective on the statutory audit of annualaccounts and consolidated accounts of

companies in the European Union that includesgovernance requirements for the relationshipbetween companies and their externalauditors.11

International recommendations and standardson the governance of securities settlementsystems (e.g. CPSS-IOSCO Recommendation13), without expressing any preference for aspecific model of corporate governance, havebridged the differences between the shareholderand stakeholder models by requiring in all casesthat customers’ interests and the public interestbe properly considered in board decision-making. This may be achieved through internalcorporate governance structures or throughmore general, external governance mechanisms,e.g., regulatory requirements. This approach togovernance of clearing and settlement systemsreflects that stakeholders’ interests arepronounced if a company’s insolvency wouldhave a strongly adverse impact on a publicmarket, as would be the case in the event of theinsolvency of an operator of a securitiesclearing or settlement system.

10 See the list of codes and principles maintained by the EuropeanCorporate Governance Institute at http://www.ecgi.org/codes/index.htm. See also the Organization for Economic Cooperationand Development’s “Principles of Corporate Governance”(2004), which are the internationally recognised standardsrelating to corporate governance, at http://www.oecd.org/dataoecd/32/18/31557724.pdf.; “Principles for AuditorOversight”, IOSCO Technical Committee (October 2002);“Principles of Auditor Independence and the Role of CorporateGovernance in Monitoring an Auditor’s Independence”, IOSCOTechnical Committee (October 2002); the work of theInternational Federation of Accountants on the development ofinternational standards on auditing at http://www.ifac.org; andthe work of the European Commission on a new Directive on thestatutory audit of annual accounts at http://europa.eu.int/comm/internal_market/auditing/officialdocs_en.htm. This paper doesnot provide a complete review of all the general work in the fieldof corporate governance.

11 The board of directors of a CSD or CCP has a particularly heavyresponsibility to oversee the accounting and auditing processes ofthe organisation. A CSD, for example, should conduct a periodicaudit to reconcile the books of the CSD with the books of the issueror the official registrar to verify that the total number of securitiesreflected on the books of the CSD equals the number of sharesissued on the books of the issuer, as CPSS-IOSCORecommendations for securities settlement systems prescribe.Appropriate internal procedures at board level relating both to theinternal and external accounting function are necessary to ensurethat the system operator makes adequate ongoing disclosure toshareholders, customers and the public relating to its financialcondition, that the external auditors are independent, and that theexternal audit is accurate and objective.


2.1 THE LEGAL AND REGULATORY STRUCTUREOF SECURITIES CLEARING ANDSETTLEMENT SYSTEMS

The corporate form of CSDs currently variesacross Europe. Most CSDs are commercialentities, while four CSDs are organised asbanks: Clearstream Banking Luxembourg, thenational CSD for Luxembourg and an ICSD;Clearstream Banking Frankfurt, the nationalCSD for Germany; Euroclear Bank, an ICSD;and Keler, the national CSD for Hungary. Allare specifically authorised or licensed tooperate as CSDs under the national law of thejurisdiction in which they operate. Thelegislation of many Member States requires thata CSD be a commercial entity. The choice ofcorporate form has obvious implications forboth the organisation of corporate governanceand the regulation of the CSD.

A non-bank CSD would adopt the generalcorporate governance mechanisms of thejurisdiction in which it operates and wouldcomply with any specific corporate governancerequirements that constitute conditions for themaintenance of its licence or authorisation tooperate as a CSD. The general corporategovernance mechanisms and the conditionsrelating to corporate governance formaintaining a CSD licence vary from MemberState to Member State. Member States generallyimpose prudential requirements on non-bankCSDs resembling in many respects thoseimposed upon banks or investment firms,including a requirement that their operations besubjected to periodic review and inspections.The regulatory authority that would grant thisnon-bank CSD licence may vary depending onthe general institutional arrangements for theregulation of financial services adopted by ajurisdiction. In jurisdictions with a singlefinancial services regulator, the single regulatorwould generally issue the CSD’s licence in itsrole as securities regulator. In jurisdictions thathave a so-called “twin peaks” model of financialservices regulation in which one authority(generally the central bank or an arm thereof)has competence for the licensing and prudential

2 DE T ERM INANT S O F CORPORAT E GOV ERNANC ES T RUC TUR E S AND ME CHAN I SM S O F S E CUR I T I E SC L E A R I NG AND S E T T L EMENT S Y S T EM S

supervision of both banks and investmentfirms, while another authority (the securitiesregulator) has competence over marketregulation and supervision and compliance withrules governing the conduct of business, thesecurities regulator would generally grant theCSD’s licence to operate. However, in somejurisdictions, either the Ministry of Finance orthe prudential regulator, or both, may authoriseor license CSDs or may have some explicit orimplicit right to give input into the granting ofthe CSD’s licence or into its regulation,supervision or oversight. Lastly, injurisdictions that have adopted a sectoral modelof financial services regulation in which thereare separate and independent authorities for thebanking, securities and insurance sectors, thesecurities regulator generally issues the CSD’soperating licence and would have the primarycompetence for its regulation. Additionally,however, in all jurisdictions, the central bankgenerally has either an explicit or an implicitcompetence relating to the CSD for governmentbonds and a strong interest in the efficacy of thesecurities settlement arrangements generally.The efficacy of these arrangements is critical toan effective implementation of the centralbank’s monetary policy operations and to itsoperation of payment systems.

If a CSD were to be organised as a bank, itwould generally adopt the general corporategovernance mechanisms of the jurisdiction inwhich it operates, as well as the specificcorporate governance mechanisms generallyemployed by banks in the jurisdiction. Itscompliance with these corporate governancerequirements would normally be subject tosupervision and audit by the bankingsupervisor. Proposed directors of these bankCSDs would generally be subject to fitness andproperness tests and would be approved by thebanking supervisor. Bank examiners wouldroutinely audit the bank CSD regarding itscapital adequacy and the efficacy of its internalmanagement reporting system in relation to itsrisk management practices and of other internalcontrols. This is not to suggest that theregulatory regime applicable to bank CSDs is

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2 DETERMINANTSOF CORPORATE

GOVERNANCESTRUCTURES AND

MECHANISMS OFSECURITIES

CLEARING ANDSETTLEMENT

SYSTEMS

superior to that applicable to non-bank CSDs.As mentioned previously, non-bank CSDs aregenerally subject to the same kind of prudentialrequirements as bank CSDs and their operationsare also subjected to periodic inspections andreviews by regulators. Theoretically, with abanking licence, the CSD could offer bankingservices beyond the core functions incidental tothe depository and settlement services typicallyoffered by a CSD, such as cash and securitieslending and collateral management services.However, national legislation or the licence orauthorisation of the CSD may prohibit orconstrain the provision of non-core services bythe CSD.12

As with CSDs, the corporate form of CCPscurrently varies across Europe. All operate ascommercial entities except LCH.Clearnet, S.A.,a subsidiary of LCH.Clearnet Group Limited,which operates as a bank. The same generalconsiderations regarding the corporategovernance of CSDs also apply with respect toCCPs.

2.2 THE OWNERSHIP STRUCTURE

The ownership structure of a securities clearingand settlement system has obvious implicationsfor its corporate governance as the equityowners ultimately control the composition ofthe board of directors, subject to any regulatoryrequirements regarding board composition. Theownership structure of securities clearing andsettlement systems varies considerably aroundthe world. The system may be owned bycustomers that are the main participants in thesystem’s operations or by third parties and maybe operated either on a non-profit or a for-profitbasis. The system may also be owned by otherentities involved in trade execution, clearing,settlement or the guaranteeing of securitiestransactions, and may be incorporated into agroup structure either as a partially or whollyowned subsidiary.

The table in Annex II shows that, in the fifteenMember States of the European Union prior to

the accession of new Member States on 1 May2004, the CSDs of twelve Member States aresubsidiary entities owned within a companygroup, while the CSDs of three Member States(Austria, Denmark and Sweden) are heldindependent of a company group. Of the twelveCSDs held within a company group (including,for Belgium, both Euroclear Bank and EuronextCIK), eight are held by a company grouporganised around the official stock exchange ofthe jurisdictions in which they operate (or itsholding company) and four (Euroclear Bank forBelgium and for Irish government bonds,Euroclear France, CrestCo for the UnitedKingdom and for Irish equities, and EuroclearNederland) are organised around the ICSD,Euroclear. The other ICSD, ClearstreamLuxembourg, is held within a company groupcentred on the Deutsche Börse. The holding of aCSD within a company group centred on theregulated markets of a jurisdiction generallyreflects the creation of a vertical silo for tradeexecution, clearing and settlement, generally ona national basis. The holding of national CSDswithin the Euroclear group reflects a horizontalfunctional consolidation at the level of theCSDs.

The CSDs in the ten countries admitted to theEuropean Union on 1 May 2004, many of whichwere organised after the fall of the Berlin Wallin 1989, are generally owned by a governmentalentity (the Ministry of Finance or the nationalcentral bank) or by governmental entities andthe official exchanges.

Among the CCPs in Europe, five arecommercial entities operating as divisions ofthe exchanges for which they provide centralcounterparty services. Four of these five

12 The issue of the ownership of a CSD offering these non-coreservices is somewhat controversial. Given its place at the heartof the f inancial infrastructure of the securities industry, bothCPSS/IOSCO, as the international standard-setter for securitiessettlement systems, and ESCB/CESR, as the European standard-setter for those systems, have adopted strict standards regardingthe risks that CSDs should take and the management of thoserisks. The board of directors of a CSD bears the primaryresponsibility for ensuring that any non-core services it offersand its risk management programme regarding those servicescomply with these international and Community standards.


exchanges (Euronext Lisbon, the HelsinkiExchanges, MEFF in Spain andStockholmsbörsen) are held within a companygroup, while the remaining one (the WienerBörse) is an independent entity. Four CCPs(Eurex Clearing in Germany, ADECH inGreece, CC&G in Italy and FUTOP Clearing inDenmark) are subsidiary commercial entitiesowned within a company group or by anexchange. Clearing Bank Hanover is acommercial entity independent of any exchangeor other company group. LCH.Clearnet isowned 45.1% by exchanges, 45.1% by systemparticipants, and the balance by the EuroclearGroup. Keler, which provides both depositoryand central counterparty services in Hungary, isowned by the Hungarian NCB (Magyar NemzetiBank) and the official Hungarian exchanges.

2.3 THE SERVICES PROVIDED BY THESECURITIES CLEARING OR SETTLEMENTSYSTEM

2.3.1 THE SERVICES PROVIDED BY CSDS

CSDs typically provide securities accountmaintenance, registration services, depositoryservices and settlement services. The nationalCSD is often the official registrar for theissuers of equities, government bonds and otherfinancial instruments within its jurisdiction.Other services provided by CSDs are notentirely uniform. Examples of other servicesinclude: securities numbering (using ISINcodes), administration of corporate actions,interest payment and tax withholding services,collateral management (for equities settlement,repos, or derivatives transactions), cashtransfers, foreign exchange services, securitieslending (as agents for CSD participants assecurities borrower and securities lender), tradematching and confirmation services, orderrouting services, settlement and other servicesacross links with an ICSD or other nationalCSDs, and the provision of other informationand data services. As a general principle, theseservices are provided without extendingunsecured credit to service recipients. If credit

is extended by a CSD to a system participant, itis generally subject to both collateralrequirements and limits (see CPSS-IOSCORecommendation 9).

The greater the extent of services provided by aCSD and the greater the operational complexityin providing those services, the greater theburden on the CSD’s board of directors. Theboard of directors is ultimately responsible forapproving the operational aspects of theservices provided by the CSD, for organisingan internal management reporting systemthrough which the board can remain apprised ofthe CSD’s operations and performance, forensuring that any risks undertaken by the CSDare properly managed, and for ensuring that theservices provided by the CSD interfaceappropriately with other service providersalong the value chain of securities settlement(i.e. other CSDs, ICSDs, CCPs, custodians,exchanges and other trading platforms,settlement banks, and registrars).

2.3.2 THE SERVICES PROVIDED BY CCPS

An exchange generally undertakes to provide abroad array of services relating to tradeexecution, clearing, settlement and thedissemination of trading information and data.When a CCP is a division of an exchange, itgenerally focuses on the provision of centralcounterparty services and the related riskmanagement and audit programmes, althoughsometimes the clearing house division of anexchange may provide services normallyoffered by other divisions of an exchange inother jurisdictions. When the exchange is onelegal entity, which division of the exchangeprovides a particular service is not a significantissue; the legal entity as a whole is liable for allrisks and liabilities undertaken by the exchangeand the clearing house. In general, however,exchanges, outside the clearing house division,do not incur significant amounts of debt (exceptperhaps for real estate and IT) and do not extenda significant amount of credit to their customersor other recipients of their services. Credit riskis undertaken principally through the clearing

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2 DETERMINANTSOF CORPORATE

GOVERNANCESTRUCTURES AND

MECHANISMS OFSECURITIES

CLEARING ANDSETTLEMENT

SYSTEMS

house operations. Consequently, the fact that aCCP is a division of an exchange does not addmaterially to the risks undertaken by theexchange as a CCP and is generally not viewedas more problematic from a risk managementperspective. In fact, it may permit risksassociated with market operation and clearing tobe better coordinated, a factor that may beparticularly important in derivatives markets.

If a CCP is held within a company group,generally the CCP focuses on the provision ofits central counterparty services and its relatedrisk management and audit programmes. Insome cases, however, a CCP may undertake toprovide trade matching and confirmationservices or other data and information services.In these cases, the kind of services provided bythe CCP may have more significance. Acompany group may conclude that it shouldconduct only core central counterparty servicesin the CCP so that the CCP, as a separate legalentity, will be insulated from liabilitiesassociated with other services offered withinthe group. Independent CCPs also focus on theprovision of core central counterparty servicesand their related risk management and auditprogrammes, but may offer other services toenhance their competitiveness vis-à-vis otherservice providers. Whatever the structure inwhich a CCP is held, it is incumbent upon theCCP’s board of directors to ensure that anyrisks associated with the provision of non-coreCCP services will not interfere with orjeopardise the CCP’s provision of its corecentral counterparty services.

2.3.3 THE GENERAL CORPORATE GOVERNANCEMECHANISMS

The corporate governance mechanisms adoptedby a securities clearing or settlement systemgenerally reflect the corporate governancemechanisms employed in the jurisdiction, e.g.relating to board structure and the use ofspecialised board committees. The system willalso be subject to the same accounting standardsas other corporations within its jurisdiction andthe board of directors will have the same degree

of responsibility for ensuring that the processesby which the accounts of the system are statedare sound as the boards of corporationsgenerally. Although there are no best practicesspecifically concerning the corporategovernance of clearing and settlement systems,there are best practice recommendations in allEU countries relating to corporations generallyor specifically to listed companies. In mostcases, the exchanges in each jurisdiction reflectthe best practice recommendations in theirstandards for listing a security for trading onthe exchange. Securities clearing and settlementsystems may or may not be subject to these bestpractice recommendations. However, securitiesclearing and settlement systems operating in aparticular jurisdiction should adopt thecorporate governance standards or bestpractices recommended for companies in thatjurisdiction as such standards or practicesevolve over time. More specifically, securitiesclearing and settlement systems should adoptthe best practices recommended for companieswhose securities are publicly listed for tradingon an official market in the jurisdiction,whether or not the securities of the systemoperator are in fact listed for trading. Inparticular, securities settlement systems shouldadopt the highest standards of corporategovernance with regard to the relationshipbetween the system operator and its externalauditors and should adopt a conservativeapproach in addressing the treatment of anyaccounting issues relating to the maintenance ofits books. Corporate governance best practicesmay have to be supplemented, however, to meetmore specific governance objectives of theclearing or settlement system, including riskmanagement and regulatory policy objectives.


3 CON F L I C T S O F I N T E R E S T I N , A ND GOVERNANC EMECHAN I SM S F O R , S E CUR I T I E S C L E A R I NG ANDS E T T L EMENT S Y S T EM S

Certain conflicts of interest that arise in thegovernance of a securities clearing andsettlement system are common to those arisingin the corporate governance of companiesgenerally, i.e. the typical conflicts discussed inthe corporate governance literature betweenowners and managers. However, other conflictsof interest arise in the governance of securitiesclearing and settlement systems by virtue of theinterests of two other interested groups thatmust be taken into account in the decision-making processes relating to the operation ofthe system, i.e. the customers13 and the publicauthorities interest.

Corporate governance arrangements generallycreate a system of internal checks and balancesto ensure the accountability of board membersand executive management. As notedpreviously, CSDs and CCPs generally adopt thegeneral corporate governance mechanismscommon to the jurisdiction in which they areorganised. One basic objective of thesemechanisms is to permit the shareholders of thecorporation to evaluate the performance of theboard of directors and the executivemanagement so that they can be held to account.

As noted earlier, two basic systems of corporategovernance predominate: one based on a singleboard structure and the other based on a dualboard structure composed of a supervisoryboard and a management board. The singleboard in single board systems and thesupervisory board in dual board systems aregenerally elected by vote of the owners orshareholders.14 In jurisdictions with dual boardstructures, the management board is generallyelected by the supervisory board. In CSDs andCCPs, the supervisory board usually hascompetence, e.g. to oversee the managementgenerally, to resolve conflicts of interest withmanagement, and to review and approvefinancial statements/annual audit reports. It alsoreviews basic policies relating to internalcontrols, the systems of internal reporting tomanagement, and risk management procedures.In single board systems, management directorsare supervised by independent, non-

management directors. Committees of non-management directors generally fulfil thefunctions allocated to the supervisory board indual board systems. Examples of typical boardcommittees include: nominating committees(responsible for nominating new members tothe board); compensation committees(responsible for setting the compensation ofmembers of management); and audit committees(responsible for the board’s relationship withthe corporation’s external auditors).15

Nomination, remuneration and audit committeesshould be composed of independent directors,as stressed in the Winter Report.

The potential conflicts of interest between largeand minority shareholders present anotherclassic problem of corporate governance thatmay be addressed in standard corporategovernance arrangements. This can beaccomplished, for example, by means of clausesin the company statutes to provide minorityshareholders with the opportunity to electcandidates of their choice to a limited number ofboard seats, e.g. by weighting voting rightsdifferently with respect to certain seats. Theability to elect a member of the board assuresthe minority shareholders that they can be keptinformed of the activities of the company andthat they will have an opportunity to have theirviews expressed and taken into account at boardmeetings.

13 The term “customers” refers to both system participants and theircustomers.

14 However, in some jurisdictions with dual board structures, thesupervisory board may elect its own new members.

15 Many jurisdictions have recently been evaluating the properrole, organisation and functioning of the audit committee,particularly in listed companies. See, for example, “StandardsRelating to Listed Company Audit Committees”, US SEC ReleaseNo 33-82209 (April 2003) at http://www.sec.gov/rules/f inal/33-8220.htm and the European Commission’s proposal for aDirective on the statutory audit of annual accounts andconsolidated accounts of companies in the EU at http://e u r o p a . e u . i n t / c o m m / i n t e r n a l _ m a r k e t / a u d i t i n g /officialdocs_en.htm. See also “Principles for OngoingDisclosure and Material Development Reporting by ListedEntities”, IOSCO Technical Committee (October 2002);“Principles of Auditor Independence and the Role of CorporateGovernance in Monitoring an Auditor’s Independence”, IOSCOTechnical Committee (October 2002); and “Principles forAuditor Oversight”, IOSCO Technical Committee (October2002).

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3 CONFLICTS OFINTEREST IN, AND

GOVERNANCEMECHANISMS FOR,

SECURITIESCLEARING AND

SETTLEMENTSYSTEMS

Notwithstanding the variations in theorganisation of corporate governance acrossjurisdictions, the basic system of checks andbalances in typical corporate governancearrangements allows owners to exerciseoversight and control over the board ofdirectors and the board of directors, in turn, toexercise oversight and control over executivemanagement. The unique features ofgovernance arrangements for securitiessettlement systems relate to steps taken toincorporate into this basic scheme mechanismsto provide for oversight and control over theboard of directors and executive management bycustomers and the public authorities, acting inthe public interest. Authorities’ requirements inthis regard may deal specifically with corporategovernance or may consist of other types ofregulation or requirements complementingcorporate governance, such as competition lawrequirements. In this respect, governance ofsecurities clearing and settlement systemsreflects a matrix of internal and external, andprivate and public mechanisms of control andoversight.

3.1 MECHANISMS TO ADDRESS THE INTERESTSOF CUSTOMERS

Several mechanisms are commonly used torequire consideration of the interests ofcustomers in board decision-making:

– A first mechanism is the organisation ofuser-ownership of the CSD or CCP. As thecustomers in this case will determine whowill be elected to the board of directors, theuser-owners are generally assured that theboard members they elect will take theirinterests into account in their deliberationsand be responsive to their concerns.16 Theownership structure of a CSD or CCP isgenerally determined at the time of theorganisation of the system operator.However, unless arrangements are made tooffer an ownership position to newparticipants that begin to use the systemsubsequent to its organisation, newcustomers may have difficulty obtaining an

ownership position reflecting their level ofuse of the system.

– A second mechanism is the establishment ofboard composition requirements by whichcertain seats are reserved for representativesof customers, including non-residentcustomers. This mechanism is similar to thatused to protect the interests of minorityshareholders discussed earlier. Boardrepresentation assures customers that theycan be kept informed of the activities of thesystem operator and that they will have anopportunity to have their views expressedand taken into account in board decision-making. Board members representingcustomers can also act as “witnesses” to theinternal dialogue within the system operatorrelating to system operations. LCH.ClearnetGroup Limited is unique in setting asideboard seats for representatives of the tradingplatforms for which it clears.

– A third mechanism intended to contribute toan adequate consideration of customers’interests, as well as sound and adequate riskmanagement, is the use of advisorycommittees. Advisory committees aregenerally composed of user representatives

16 An example of user-ownership is the CSD for equity securitiesand the CCP for equities, US government debt instruments,mortgage-backed securities, and emerging market debtinstruments in the United States. These have been organised assubsidiaries and affiliates of the Depository Trust & ClearingCorporation (DTCC) that is owned by the principal customers ofits subsidiaries’ services. Section 17A(b)(3)(C) of the USSecurities Exchange Act of 1934 requires that the rules of aclearing agency assure a fair representation of customers in theselection of its directors and in the administration of its affairs.The SEC is also empowered to determine that representation isfair if customers are afforded a reasonable opportunity toacquire the voting stock of the clearing agency, directly orindirectly, in reasonable proportion to their use of the clearingagency. In effect, while the US Congress did not require thatsecurities clearing agencies be user-owned, it stated a clearpolicy preference for user-ownership. In response, the USsecurities industries organised a user-owned organisation toclear and settle most securities transactions. Only clearinghouses for futures and options were not included within thestructure of the DTCC. See also US SEC Release No 34-16900, 45F.R. 41920 (17 June 1980) regarding SEC standards for theregistration of clearing agencies. An example of user-ownershipin Europe is the case of Euroclear plc and Euroclear Bank, theoperator of the Euroclear System, also owned by its primarycustomers.


and a board representative and facilitate adialogue between customers and the board.

– A last mechanism is for the board ofdirectors to solicit the views of customers onthe development of new initiatives regardingthe services provided by the CSD or CCPthrough the publication of publicconsultation documents.

3.2 MECHANISMS TO ADDRESS THE PUBLICINTEREST

The public interest in the operation of securitiesclearing and settlement systems is generallyprotected through the regulatory requirementsof the competent authorities. In all jurisdictions,a licence or authorisation is required to providesecurities clearing and settlement services. Therequirements to obtain such a licence orauthorisation are laid down in laws orregulations. These laws and regulationstypically address the following matters that bearon the corporate governance of the systemoperator:

– requirements relating to the company form,i.e. that system operators must be a companylimited by shares or a bank;

– a review of the company statutes and by-laws;

– a fitness and properness review of membersof the board of directors and executivemanagement;

– control of shareholdings and changes inshareholdings; and

– a review of the operational plan, internalcontrol arrangements, system rules and riskmanagement programme of the systemoperator.17

Some competent authorities specifically takeinto account the arrangements to manageconflicts of interest in the operation of thesystem.18 However, although a review of

corporate governance arrangements per se maynot be specifically addressed in therequirements for authorisation of all competentauthorities, such a review is implicitlyundertaken through an examination of thecompany statutes, the by-laws, the operationalplan, internal control arrangements and systemrules. The competent authorities also generallyreceive periodic reports from system operatorsand have a right of inspection through whichgovernance arrangements can be reviewed on anongoing basis. Lastly, the competent authoritymay have authority to review decisions relatingto the fees charged by the system operator.19

In some jurisdictions, board compositionrequirements may also be used to address publicinterest concerns by reserving seats on theboard for members designated to represent thepublic interest. Such requirements may beimposed by regulation or be voluntarily adoptedby the CSD or CCP itself. Furthermore, suchpublic interest directors may be nominated bythe board of directors or be appointed by apublic official.

17 The laws and regulations applicable to securities clearing andsettlement systems also generally include substantive provisionsrelating to the operation of those systems, such as thespecification of operating hours, the kind of securities that maybe listed within the system, requirements relating to systemaccess, minimum capital requirements and record-keepingrequirements, among others.

18 See, for example, Section 2.4 of the UK Financial ServicesAuthority Handbook on Recognised Investment Exchanges andRecognised Clearing Houses.

19 However, this review generally does not rise to the level of arate-making review of the kind undertaken with respect to thecharges of a public utility. Rather, the competent authoritygenerally reviews decisions relating to fee-setting to determinethat the system operator has set fees within a reasonable range.See, for example, US Securities Exchange Act of 1934, Section17A(b)(3)(D) and Article 81(3) of the Italian LegislativeDecree 58 of 24 February 1998 - Consolidated Law on FinancialIntermediation, pursuant to Articles 8 and 21 of Law 52 of 6February 1996 (as amended by Legislative Decree 37 of 6February 2004). See also Recommendation 15, CPSS/IOSCO,“Recommendations for securities settlement systems” (2001);and Recommendation 11, CPSS/IOSCO, “Recommendations forcentral counterparties” (2004).

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3.3 SPECIFIC CASES OF CONFLICTS OFINTEREST

3.1.1 POTENTIAL CONFLICTS RELATING TO RISKMANAGEMENT

The main function of a CCP is to undertake andmanage credit risk vis-à-vis both parties to asecurities transaction; that is, it is a mechanismto establish or enhance the creditworthiness ofsystem participants to facilitate trading on amarket. A CCP by definition interposes itselfinto a nexus of risk contracts and must managethose risks. Consequently, the management ofrisk represents a critical function in a CCP. As afailure in a CCP’s risk management programmemay affect other linked and interdependentsystems, there is a public interest in the qualityand management of a CCP’s risk managementprogramme and effective governancearrangements represent one component of thisprogramme. In this respect, governancearrangements should address some specificconcerns. This is particularly relevant in casesin which the CCP is not a separate, specialisedlegal entity, but is a division of an exchange.

The main issues can be summarised as follows.First, it is important that the effectiveness ofrisk management decisions not be impaired byextraneous considerations relating to the otherbusiness activities of the CCP. This requires,on one hand, a clear and legally soundseparation/segregation of the financialresources of the CCP used for the managementof the risks stemming from each of the CCP’svarious activities.20 On the other hand, it isnecessary that the decision-making processesgoverning the application of the CCP’s defaultprocedures be absolutely independent and thatthose responsible for the decisions be fullyaccountable. Second, to the extent that theCCP’s customers own the CCP and contributefinancial resources to its default fund, thedecision-making processes relating to thedeclaration of a default and the use of thedefault fund must be organised in such a manneras to eliminate customers’ improper influence

on, or ability improperly to delay, decisionsaddressing a default at the time of the default.

CSDs generally do not undertake credit risk tosystem participants incident to their provisionof core settlement services, although they mayorganize collateral arrangements or guaranteefunds to minimize the credit risk undertaken bysystem participants. If, however, the operatorof a securities settlement system offers inaddition banking and other non-core services,such as collateralised or uncollateralised creditlines, then the CSD undertakes credit andliquidity risks. If those other non-core servicesare profitable, CSDs have an incentive tomaximise the level of the non-core services theyoffer in order to increase their profits and toreduce the costs relating to the management ofthe risks associated with these services. Atension may exist between this profitmaximisation objective and the necessity toassure the uninterrupted provision of CSD coreservices in all market foreseeable conditions.Credit and liquidity risks related to the non-corebanking services could indeed have spillovereffects on the core settlement services and,thus, jeopardise the integrity of the system.Therefore, robust risk management should bepart of the governance arrangements to ensurethat core settlement functions are notjeopardised.

The competent authorities generally reviewthese risk management arrangements as part oftheir review of the corporate governancearrangements and internal rules and controls ofthe system operator to protect the public interestby verifying the integrity of thesearrangements.

3.3.2 FINANCIAL GROUP-RELATED ISSUES

One result of the recent consolidation within thetrading, clearing and settlement infrastructurewithin Europe has been the formation of

20 This is not meant to suggest that separate financial resourcesmust be maintained for each type of product cleared by a CCP.Where risks are adequately managed, cross-product clearingmay create efficiencies for the benefit of customers.


complex financial groups whose operations cutacross the entire value chain of the trading,clearing and settlement processes for securitiestransactions. A CSD or CCP held within afinancial group faces unique issues of corporategovernance arising from actual or potentialconflicts of interest due to the possibility thatmanagement of the parent institution willpursue the interests of the parent company orother affiliates at the expense of the interests ofthe CSD or CCP. Consideration of the corporategovernance mechanisms of a CSD held within acompany group generally requires an analysisof the corporate governance mechanisms inplace within the entire group structure, butparticularly of those at the level of the parentcompany, where decisions on the generalpolicies and business strategies of the entiregroup may be taken.

The typical case of a financial group in thesecurities settlement infrastructure is that of avertically integrated silo where a stockexchange is also the owner of the clearing andthe settlement system. A few examples ofconflicts of interest that might arise in theoperation of a vertically integrated silo can beoutlined:

First, decisions concerning the distribution ofprofits or investments in systems can privilegethe stock exchange over the securitiessettlement system and its customers.

Second, to the extent that the IT infrastructurefor trading, clearing and settlement is based ona single IT system used by the financial group,it is possible that investments in superiorsystems that are available for securitiessettlement systems will not be made, therebyimpairing the efficiency of the settlementsystem and increasing costs to customers. Inother words, a single IT infrastructure is notnecessarily more efficient than three separate“specialised” infrastructures.

Third, a policy of price bundling can lead to asubsidisation of the provision of one service

(e.g. trade execution services) through thecharging of inflated fees for other services (e.g.post-trade processing). In this way, the fixedcosts relating to one service can be recoveredthrough charges for other services. Thispractice may be facilitated if the other service isprovided under monopoly or quasi-monopolyconditions. The same problem however mayalso arise when a single institution providesservices of a different nature, making use or notof the same infrastructure. This is the case whena CSD provides credit or securities lendingfacilities.

Fourth, obstacles to a horizontal consolidationof the post-trade processing infrastructure,either domestically or cross-border, may bethrown up to the extent that such aconsolidation would impair the competitiveposition of the stock exchange.

Fifth, the provision of netting or centralcounterparty services by a CCP outside thefinancial group may be prevented if the CCPwould be in competition with the CSD.Extensive use of a CCP may indeed reduce thenumber and volume of transactions settledwithin the CSD, as well as the need forparticipants in the CSD to make use of other(e.g. banking) facilities provided by the CSD.

Sixth, in the event of a default, the systemoperator may make decisions that favourfinancially one class of persons, such asowners, exchange members or domesticmembers, at the expense of other persons, suchas non-owners or non-domestic customers.

Horizontal groups may also face similar,additional conflicts of interest relative toentities that act on a stand-alone basis.

Because the formation of these financial groupsis relatively recent, no specific mechanismshave yet been developed to address theparticular conflicts of interest that they mayface. Moreover, it is not clear that the traditionalcorporate governance arrangements and the

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SETTLEMENTSYSTEMS

supplemental governance arrangements thathave been developed relating to securitiesclearing and settlement systems generally, asdescribed earlier, are adequate to ensure thatthese conflicts of interest are appropriatelyresolved. Consequently, further considerationby the public authorities of the implications ofthe formation of these financial groups and theadequacy of their governance arrangementswould be appropriate.

3.3.3 CONFLICTS OF INTEREST BETWEENDOMESTIC AND NON-RESIDENTCUSTOMERS AND PARTICIPANTS

The increase in cross-border trading that hasaccompanied efforts to complete the internalmarket within Europe has also raised newissues relating to the interests of non-residentcustomers and system participants vis-à-visthose of domestic customers and participants.In general, the issues concerning adequaterepresentation of the interests of non-domesticparticipants are similar in nature to the issuesnormally arising to ensure adequaterepresentation of “minority” groups.

Given the current consolidation of the securitiessettlement infrastructure within the EuropeanUnion, CSDs and CCPs established in oneMember State may primarily serve participantsand customers from other Member States orother countries. Particularly if the shareholdersof the settlement system are residents of theMember State in which the system isestablished, mechanisms should be instituted inthe system’s decision-making processes to takeinto account the needs and interests of thosenon-domestic participants and customers. Suchmechanisms should be designed to ensure thatthe interests and needs of non-domesticparticipants and customers are givenconsideration equal to those of domesticparticipants and customers. In particular, non-domestic participants should be adequatelyrepresented on the board or in other decision-making and advisory groups.21

In Section 1, reference was made to bestpractice recommendations relating togovernance to be followed by domesticcompanies. While, over the last decade, therehas been considerable convergence in these bestpractice recommendations within the EU, thereremain some substantial differences in theownership structure of listed companies withinthe EU which bear significantly on themechanisms employed in particularjurisdictions to protect the rights of minorityshareholders and to provide transparencyrelating to corporate governance arrangements.These best practice recommendations also donot adequately address the unique needs andinterests of non-domestic customers ofsecurities clearing and settlement systems. Inorder to enhance governance at Communitylevel, there are ongoing efforts to provide for acollective responsibility of board members forfinancial statements and key non-financialinformation, to increase transparency regardingintra-group relations and transactions withrelated parties, and to improve disclosuresconcerning corporate governance practices. Asregards the corporate governance of securitiesclearing and settlement systems, theseinitiatives should refer more explicitly to thefact that, if stakeholders are in differentcountries, the need for clarity about theresponsibility of the board members and non-executive directors and about corporategovernance in general is more pronounced.

3.3.4 CONFLICTS AMONG PUBLIC AND PRIVATEINTERESTS

The monopoly or quasi-monopoly position of asecurities clearing or settlement system hasimplications for both the public interest and

21 The relevant competent authorities should also consider inadvance optimal arrangements to address the cross-borderimplications of a default, e.g. the manner in which liquidity mightbe provided on a cross-border basis to system participants andcustomers.


customers’ interests. In the policy debateregarding the ongoing reorganisation of thesecurities settlement infrastructure in Europe,two main issues in this respect have drawn theattention of public authorities.

The first issue relates to developments in thekinds of services offered by institutions activein the securities settlement infrastructure. Somesettlement systems are now offering servicesthat were historically offered by other kinds ofservice providers under different conditions ofcompetition. For example, an (I)CSD, whichhas the legal status of a bank, mainly providessettlement services, but has also begun toprovide other services, such as credit andcollateral management services, that werehistorically and are still offered by banks orglobal custodians. An ICSD, in such a position,may bundle or tie its provision of bankingservices to the use of its settlement services.However, the banks and custodians which are incompetition with the ICSDs in relation to thesebanking services may not be able to do so underequivalent conditions of competition due tovariations in their regulation or legal status vis-à-vis the ICSD. Another example of bundling ortying of services is the case of a stock exchangethat requires that transactions executed on theexchange be settled solely in an affiliated CSD.This can be due partly to legal barriers, e.g.fiscal barriers or local regulations, or to“rigidity” in the IT infrastructure (or an absenceof standardisation) that can prevent or makemuch more costly the provision of similarservices by other companies.

The second issue relates to the fact that afinancial group can create artificial and anti-competitive links among the different servicesprovided by the group. For instance, the use ofa CSD can be reserved only to participants in anaffiliated stock exchange.

As is the case with regard to the formation offinancial groups generally discussedpreviously, it is unclear whether existinggovernance arrangements relating to securitiesclearing and settlement systems are sufficient,

in themselves, to resolve the public interestissues that have arisen as a result of theconsolidation within the settlementinfrastructure. System operators competewithin the existing legal and regulatoryframework for securities clearing andsettlement systems and can legitimately seek toobtain an advantage over their competitors aslong as their operations comply with those lawsand regulations. Current competitionrequirements may constrain certain kinds ofanti-competitive behaviour, but in the absenceof a harmonised regulatory regime at Europeanlevel, it is unclear whether equivalentcompetitive conditions among the various kindsof service providers within the securitiesclearing and settlement infrastructure can beobtained given the disparities among the currentnational regulations of the Member States.

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4 OTHERGENERAL POLICYAPPROACHES BY

AUTHORITIESRELATING TO

SYSTEMGOVERNANCE

4 O TH ER G EN ERA L PO L I C Y A P PROACHE S B YAU THOR I T I E S R E L AT I NG TO S Y S T EMGOVERNANCE

4.1 TRANSPARENCY

The system of governance of entities subject toregulation and oversight, such as securitiesclearing and settlement systems, differs fromthe corporate governance mechanisms ofunregulated firms both in scope and objectives.Therefore, while unregulated firms mayvoluntarily disclose corporate governancearrangements or be required to disclosecorporate governance arrangements pursuant tothe listing standards of exchanges or securitiesregulations applicable to issuers, publicauthorities should require that corporategovernance arrangements for securities clearingand settlement systems be transparent, thatmeasures be taken to organise a dialoguebetween customers/participants and the board,and that the board be accountable, internally andexternally, for its decisions. Transparency ofcorporate governance arrangements contributesessential information to customers for theirevaluation of the risks associated with the useof the system. Authorities’ requirements may beof a dual nature: soft law, in the form ofrecommendations and best practice guidance, orspecific laws and regulations.

Securities clearing and settlement systemsgenerally disclose their corporate governancearrangements as well as their ownershipstructure in their annual reports and on theirwebsites. Disclosure of corporate governancearrangements may be made in fulfilment ofregulatory requirements, e.g. those relating tolicensing or authorisation; in fulfilment ofrequirements imposed by stock exchangeswhere the system operator is listed; orvoluntarily for business reasons. Some systemshave published reports demonstrating theircompliance with market-initiatedrecommendations, such as the G30’s action planfor clearing and settlement of 2003. Manysecurities settlement systems also havepublished a disclosure framework report forsecurities settlement systems adopted by theBIS/IOSCO in 1997. While corporategovernance is not addressed as a specific topicin this disclosure framework, it provides

relevant corporate governance informationthrough the systems’ answers to questionsregarding its organisation and ownershipstructure. Through answers to questions on thesystems’ rules and procedures, the systemsprovide information about the core of theircorporate governance mechanisms.

The relevant websites generally provideinformation regarding the ownership structure,percentage shareholdings, board structures, thework and composition of internal committees,and, in some cases, the financial groupstructure. Although the current disclosurepractices relating to corporate governanceprovide a good deal of information to thepublic, certain deficiencies are also apparent.

First, the information currently posted bysecurities clearing and settlement systemsrelating to governance varies considerably fromsystem to system. Some systems post detailedgovernance information, while the disclosuresby others are terse and lacking in detail. As thecorporate governance arrangements of systemsbear significantly on any assessment of whetherthe system is properly taking the public interestinto account in its decision-making processes, asystem should properly make disclosures todemonstrate the manner in which the publicinterest is considered in its corporategovernance arrangements. At a minimum, cleardisclosures should be made relating to the riskmanagement programme of the system and themanner in which conflicts of interest betweenowners, the board of directors, the customersand the public authorities interest areaddressed.22 Moreover, when customers groupsare established to represent the interests of thecustomers, the following should be made clear

22 Disclosures relating to risk management should be adequate topermit participants and customers to assess the risks associatedwith using the system and should cover, for example, the sourcesand extent of funds available to cover a participant default, thesequence in which funds from different sources will be assessedto cover a default, the rights and liabilities of the system and ofdefaulting and non-defaulting participants upon a default, themechanisms used to safeguard the customer funds and collateralof non-defaulting participants, and the implications of theinsolvency of a system participant or customer on the rights andliabilities of other participants and customers.


ex ante: (i) the criteria used to select theparticipants in the customers group; (ii) itsprecise functions; and (iii) the extent of theimpact of the work of these groups on thedecision-making process. In particular, wherethe advice of the customers group has not beenfollowed, it would be worthwhile for clearingand settlement systems to make the reasonstransparent.

Second, disclosures relating to corporategovernance of securities clearing and settlementsystems held within a financial group often onlydescribe the corporate governance arrangementsat the level of the parent company. Given thepublic interest in the operation of thesesystems, specific disclosures should be madeconcerning corporate governance at the level ofthe system. Furthermore, any relationships oragreements between members of the financialgroup which bear on the financial condition ofthe system or on its ongoing ability to fulfil itsintended functions in the market in which itoperates should also be disclosed.

Third, disclosures now made voluntarily or atthe discretion of the system may be updatedonly at irregular intervals and may, at a givenpoint in time, become stale and outdated. Toevaluate the risks associated with using asystem, customers and public authorities shouldhave current accurate information at all timesregarding the corporate governance of thesystem, particularly relating to its riskmanagement programme.

Fourth, the adequacy or accuracy of thesevoluntary disclosures may be questioned, ascompetitors sometimes complain about thequality of the disclosures of other systems.

To address these deficiencies, it would beadvisable for competent authorities to developspecific standards relating to the disclosure ofcorporate governance arrangements bysecurities clearing and settlement systems. Thedevelopment of standards might appropriatelybe included in the work of the joint workinggroup of the European System of Central Banks

and the Committee of European SecuritiesRegulators relating to the regulation,supervision and oversight of clearing andsettlement in the Community. As notedpreviously however, looking forward, a strongcase can be made for the development ofharmonised requirements relating to theauthorisation and regulation of securitiesclearing and settlement systems within the EU.Requirements relating to the transparency ofcorporate governance could easily beincorporated into such a harmonised regime as acondition for obtaining and maintaining anauthorisation or licence to operate.

4.2 REQUIREMENT FOR EFFECTIVEGOVERNANCE IRRESPECTIVE OF THEOWNERSHIP STRUCTURE

The corporate governance arrangements of asecurities settlement system are effective whenthose arrangements lead to sound businessdecisions and to an appropriate balancing of theinterests of the various stakeholders incorporate decision-making. The issue is not somuch whether the system operator uses aparticular corporate governance mechanism toachieve this balancing of interests, but whetherthe combination of mechanisms adopted by thesystem operator in the aggregate prompt orcause an appropriate balancing of thoseinterests. As the legal form of an entityoperating a CSD or CCP may be a bank or anon-bank, corporate governance mechanismsmay take various forms. In the absence offurther harmonization at Community level,public authorities should focus on theeffectiveness of the corporate governancemechanisms chosen by a system operator, ratherthan on the form of the legal entity.Furthermore, public authorities should in factfocus on whether system operators achievesound management of the system and onwhether system operators promote the publicpolicy objectives of the public authorities, suchas the promotion of efficiency, technologicalinnovation, transparency, and fair competitionwhile leaving it to the market itself to develop

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the overall structure of the settlementinfrastructure.

As shown in Annex II, the ownership structureof CSDs and CCPs may take several formsranging from user-owned entities to for-profit,publicly traded entities. It is for the businessjudgement of the entities themselves to decidewhether they should attract a particular type ofinvestor through a particular ownershipstructure, and not for regulators, as the secondGiovannini Report points out. The authoritiesshould not discourage particular ownershipstructures if they adequately take account of theinterests of customers and the public authoritiesinterest. This is particularly the case since thelegal form in which CSDs and CCPs mayincorporate varies from banks to stockcorporations depending on the jurisdiction.

In addition, public authorities have policyconcerns in ensuring that risks relating to non-core services of CSDs and CCPs do not impairtheir core clearing and settlement activities. Ifthe corporate governance code in a jurisdictionis not legally binding, but is a voluntary code(as in the case of the German CorporateGovernance Code), and the jurisdiction requiresa company to explain the reasons why it has notcomplied with the voluntary code, authoritiesshould be vested with powers to request from aCSD or CCP an explanation as to why itscorporate governance mechanisms are adequate,taking into account its size, its ownershipstructure, the types of markets it serves, and thegeographical scope of its services (i.e. domesticor cross-border).

4.3 COMPETITION ISSUES

Public authorities also have an interest inensuring that securities settlement systemoperators do not engage in anti-competitivebehaviour and do not abuse their dominantposition in the market-place to the detriment ofcustomers and other competitors. Publicauthorities’ policy objectives relate to fairpricing, fair and objective access and exit

criteria, cost efficiencies and establishingadequate service levels for customers andparticipants. Free and fair competition ingeneral promotes both cost efficiencies andinnovation. Business practices of systemoperators that unreasonably restrict competitionmay prevent the organisation of optimalclearing and settlement arrangements at theexpense of customers and to the detriment of thebroader economy.

Article 82 of the Treaty establishing theEuropean Community prohibits an abuse of adominant position in the Community or asubstantial part of it to the extent that it affectstrade between the Member States. Determiningwhether an undertaking holds a dominantposition requires a definition of the relevantmarket, both from a geographical perspectiveand from the standpoint of the product orservice, and an examination of the position ofthe undertaking in respect to that market. Adominant position is a position of economicstrength enjoyed by an undertaking whichenables it to prevent effective competition beingmaintained on the relevant market by giving itthe power to behave to an appreciable extentindependently of its competitors, customers andultimately its consumers.23 The fact that thedominant position results from the conferral ofspecial or exclusive rights by a Member Statedoes not obviate the prohibition in Article 82.24

As noted earlier, because CCPs and CSDs aregranted special or exclusive rights to provideclearing and settlement services in thejurisdictions in which they operate, and becauseof the economies of scale associated with theiroperations, they often acquire a dominantposition on those markets. A dominant positionclearly would result, for example, if a CSDwere the only entity authorised as a CSD withina jurisdiction and national law required localissuers to use the CSD as a registrar for its

23 See Case T-128/98, Aéroports de Paris v Commission (2000), ECRII-3929, §147. See generally K. Lenaerts & P. Van Nuffel,“Constitutional Law of the European Union” (R. Bray, Ed), Sweetand Maxwell (London 1999), p. 198.

24 See Case 311/84, CBEM v CLT and IPB (1985), ECR 3261, §18.


dematerialised securities. In suchcircumstances, the use of the services of theCSD represents the only manner to obtain rightsin securities registered at the CSD vis-à-vis theissuer and effectively requires all traders toaccess in some manner the services of theCSD.25 Similarly, market rules may require, forlegitimate reasons relating to market operation,that all trades on a particular market besubmitted to a single CCP. Obviously, such aCCP has a monopoly and a dominant positionwith respect to the provision of centralcounterparty services on that market.26

Moreover, it is clear that several practices inwhich CSDs or CCPs may attempt to engagewould constitute an abuse of a dominantposition. For example, the following practicesgenerally would constitute an abuse of adominant position if not undertaken forlegitimate reasons relating to the properoperation of the capital markets:

– A CSD’s denial of access to settlementservices to traders that execute trades onnon-favoured execution platforms to benefita trade execution platform operated by itsaffiliate within a financial group.27

– A CSD’s denial of access to downstreamcompetitors that require access to thesettlement services of the CSD to effectivelycompete on downstream markets, i.e. aCSD’s denial of access to a settlementsystem to an ICSD, another CSD, or acustodian which competed with the CSD or agroup affiliate on the market of the CSD oranother market.

– A CSD’s or CCP’s tying of the pricing of, oraccess to, settlement or clearing services tothe use of other services provided by anaffiliate within a financial group (e.g. thetrade execution services of an exchange orother trading platform).

– Subsidising the provision of other servicesthrough the pricing of settlement or centralcounterparty services (using fees charged

for clearing to subsidise the operation of anexchange or other trading platform).28

One way to avoid abuses of a dominant positionin the securities settlement infrastructure is toput in place rules which allow for open accessto the infrastructure. A right of open access isprovided for in the new Directive on markets infinancial instruments.29 Open access ensuresthe right of investment firms to have access toclearing and settlement facilities outside theMember State of their establishment on thesame objective, transparent and non-discriminatory grounds as domestic ones. TheDirective requires that regulated markets allowtheir members or participants to clear and settletheir transactions through the clearing andsettlement service providers chosen by them.Regulatory authorities may obviate that choiceonly if the necessary links between the chosensystem and other necessary systems do not existto ensure efficient and economic settlement ofthe transaction or the technical conditionsrelating to the services to be provided by theservice provider chosen by the member orparticipant are not such as to allow a smoothand orderly functioning of the market.

4.4 OVERSIGHT

The competence of the various publicauthorities that have an interest in securitiessettlement systems is generally defined in lawor legislation. Sometimes, however, a publicauthority may not have an explicit competence

25 The Giovannini Group recommended that the practice ofrequiring issuers to use the local CSD should be abandoned infavour of allowing the issuer to choose the CSD which will act asthe registrar or depository for its shares. This would also have theeffect of allowing an issuer to choose the regulator that would beresponsible for regulation and oversight of its registrar anddepository relationships.

26 See Case 311/84, CBEM v CLT and IPB (1985), ECR 3261, §23-25.

27 This would constitute the application of dissimilar conditions toequivalent transactions with other trading parties as described inArticle 82 (c). See Case C-163/99, Portugal v Commission(2001), ECR I-2613, §46.

28 See Case T-175/99, UPS Europe v Commission, Rec. (2002), p.II-1915, §62.

29 Official Journal L145/1, 30.4.2004, Articles 34 and 35.

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regarding settlement systems, but by traditionor practice is involved formally or informally inthe regulation or oversight of settlementsystems. This is often the case with respect tocentral banks, which may have no explicitlystated competence over securities settlementsystems, but may influence their operations as auser, e.g. in its monetary policy operations orthrough the operation of a large-value paymentsystem. By tradition, if not by explicitcompetence, central banks often take an interestin every aspect of their jurisdiction’s economyin their monetary policy assessment. Also bytradition, central banks take an interest in anyrisk in the financial system that may havesystemic consequences and in the operation ofgovernment bond markets.

Even if an explicit competence over particularmatters is expressly conferred on a particularpublic authority by law or legislation, it isincumbent upon all interested public authoritiesto cooperate in the regulation and oversight ofsecurities clearing and settlement systems. Togive an example, competition law authoritiesmust assess whether agreements on prices in thesettlement infrastructure are consistent withcompetition law requirements and policies.Nevertheless, the fairness of pricing policies ofsettlement service providers and the effect ofprices on access to the settlement infrastructureare issues for regulators as well as centralbanks in their capacity as overseers.30 In thisregard, it is essential that all interested publicauthorities organise their activities such that thesupervision and oversight of settlement systemsaddresses the legitimate concerns of each of thepublic authorities effectively. This isparticularly so where systems are linked cross-border and the public authorities of multiplejurisdictions have an interest in the operation ofthe linked systems. Cooperation amongauthorities in this regard may be formal orinformal, provided that it is effective,transparent and clear.

4.5 COMPLETING THE INTERNAL MARKETRELATING TO SECURITIES CLEARING ANDSETTLEMENT

Given the national variations and theinadequacies in current governancearrangements relating to securities clearing andsettlement in the Community, EU institutions,in cooperation with competent nationalauthorities, should consider the development ofa harmonised regime which would address thepublic interest in, and which would ensureequivalent conditions of competition for theoperation of, the securities settlementinfrastructure. Obtaining equivalent conditionsof competition in this field should result in themost optimal clearing and settlementarrangements within Europe and wouldcomplete the internal market relating tosecurities clearing and settlement, ascontemplated by the Treaty establishing theEuropean Community.

One approach to developing such a harmonisedregime would be to use the regulatory modelreflected in the Consolidated BankingDirective31 and the Directive on Markets inFinancial Instruments (formerly the InvestmentServices Directive)32 – that is, a minimumsubstantive harmonisation of regulatoryrequirements, including requirements relatingto corporate governance, with respect to eachpost-trade processing service provided alongthe value chain of securities clearing and

30 The organisation of competence for the competition law aspectsof clearing organisations in the United States is interesting in thisregard. In the United States, when approving the authorisation ofa clearing organisation, the Securities and Exchange Commissionand the Commodity Futures Trading Commission are required toassess the impact of the proposed operations of the clearingorganisation on competition. An authorisation of a clearingorganisation carries with it a conclusion that any negative effectsof its proposed operations on competition are justifiable in thecontext of the operation of the market. These determinations bythe market authorities do not obviate the competence of the USDepartment of Justice to enforce the antitrust laws of the UnitedStates, but the Justice Department would likely give great weightto the conclusions of the market authority relating to the effectsof the clearing organisation’s operations on competition. SeeSecurities Exchange Act of 1934, §17A(b)(3)(I) and USCommodity Exchange Act, §7A-1(c)(2)(N) and 7A-1(3).

31 Official Journal L 126, 26.5.2000, p.1.32 Official Journal L 145, 30.4.2004, p.1.


settlement sufficient to justify mutualrecognition of the regulatory authorisations toprovide such service granted in each MemberState; the availability of a passport to provideeach such service throughout the Communitybased on a home country authorisation;regulation and oversight by the home countryregulator or supervisor; and a requirement thathome and host national authorities cooperateand share information relating to the regulationof the operations of the service provider. Theobjective of such a harmonised regime shouldbe to ensure that each kind of service providedalong the value chain of securities clearing andsettlement is regulated in a substantively similarway throughout the Community, therebyobtaining equivalent conditions of competitionwith respect to the provision of each service.

The challenge in this regard is that the sameservice may currently be provided by entitieswith different kinds of regulatoryauthorisations, subject to different kinds ofregulatory requirements, and with varyingnational institutional arrangements for theirregulation and oversight. Consequently, it mayprove difficult to “segregate out” the variouskinds of services provided from a regulatoryperspective. If such a regulatory segregation ofservices cannot be obtained such that the sameservice may continue to be provided underdifferent kinds of regulatory authorisations, theregulatory requirements relating to that serviceunder each kind of authorisation would need tobe coordinated and harmonised, as was done inthe case of the investment services activities ofbanks and investment firms under the BankingDirective and the Directive on Markets inFinancial Instruments. Any Communityinstrument in this field should also provide forappropriate oversight authority over securitiesclearing and settlement systems by theEuropean System of Central Banks and othernational central banks within the Communityrelating to their monetary policy operations andtheir operation of large-value payment systemsand should take into account existingCommunity instruments relating to clearing and

settlement, such as the Settlement FinalityDirective.33

Consideration of appropriate conditions ofcompetition within the settlement infrastructurewould also need to give due weight to factorsrelating to the proper functioning of markets,which, in some cases, may require thatcompetition in the provision of post-tradeprocessing services be limited or constrained.Any harmonisation of regulatory requirementsin this field would also need to take account ofthe interests of the respective nationalauthorities in the operation of their nationalmarkets, which may, in some areas, justify aderogation from the concept of “home control.”Given these challenges, the development ofsuch a harmonised regime would require a highdegree of dialogue and consultation among theEU institutions, the competent nationalauthorities and the industry regarding theappropriate evolution of the governance andregulation of post-trade processing serviceswithin the Community.

Another approach to developing a harmonisedcorporate governance regime could be to use thetwo existing business entities – the EuropeanCompany Statute and the European EconomicInterest Grouping (EEIG) – that have beencreated at the European level to facilitate cross-border activities. The advantage of these formsis that they are subject to a minimum oftransparent and common corporate governancerules laid down in two European Regulations.In that respect, public authorities shouldpromote the use of the European CompanyStatute introduced by Council Regulation (EC)No 2157/2001 in 2001. The European CompanyStatute is a form of public limited-liabilitycompany with a registered office in the EU. Thenovelty is that the registered office may betransferred to another Member State withoutwinding-up. This company form may be used,in particular, to create a group of CCPs and/orCSDs as a result of a merger or to form a

33 Official Journal L 166, 11.6.1998, p.45.

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holding company. Alternatively, publicauthorities could also encourage the setting-upof a European Economic Interest Groupingintroduced by Council Regulation (EEC) No2137/85 in 1985. This Regulation introduced alegal entity designed to facilitate cooperationamong business enterprises in various MemberStates. The difference from the EuropeanCompany Statute is that the EEIG may onlypromote the business activity of the membersbut may not be formed for the purpose ofmaking profits for itself, as it is subject tocertain restrictions, the most important onesbeing that it cannot hold shares nor exercisemanagement or supervision over its members.This business form could be used to carry outactivities ancillary to those of its members, suchas part of clearing, settlement and other post-trading services in a group composed ofmember CSDs and CCPs.


5 CONCLU S I ON SIn the context of securities clearing andsettlement systems, the nature of governancearrangements acquires a dimension that goesbeyond their traditional function in corporatelaw. They constitute a tool for regulators andcentral banks to achieve their respective policygoals relating to market operation, marketintegrity and systemic stability.

In the light of the foregoing analysis, andpending a further evolution in the regulation ofsecurities clearing and settlement in theCommunity, the following conclusions can bedrawn.

Whatever the model of corporate governanceused in a jurisdiction, securities clearing andsettlement systems should adopt and ensureeffective implementation of high corporategovernance standards or best practicesadopted by or recommended for companies inthe jurisdiction in which they operate, as suchstandards or practices evolve over time.Generally, this would imply that securitiesclearing and settlement systems at a minimumshould adopt and implement the best practicesrecommended for listed companies.Additionally, a securities clearing or settlementsystem should adopt corporate governancemechanisms adequate to address the interestsof customers and the public authorities in theoperation of the system. Such mechanisms mayinclude traditional mechanisms of corporategovernance in the jurisdiction, e.g. theappointment of independent board members andthe use of specialised board committees, such asan audit committee, or may be mechanisms thathave developed specifically in the context ofsecurities settlement systems, e.g. the use ofboard advisory committees or publicconsultation documents. Such mechanismsshould be organised so that the criteria followedto select members of the board or participants inspecialised committees are established ex ante.Board members should also take into accountthe interests of customers and the publicauthorities in board decisions, in particularthose relating to system access criteria, fairpricing, the adequacy of service levels, the

integrity of the risk management system, theneed for innovation and efficiency, and theachievement of the policy objectives ofcompetent authorities.

Securities clearing and settlement systemsshould make adequate disclosures regardingtheir corporate governance arrangements so thatcustomers and the public authorities canascertain the manner in which conflicts ofinterest among owners, the board, customersand the public authorities are prevented,resolved or mitigated. Securities clearing orsettlement systems operated by an entity heldwithin a financial group should disclose thegovernance arrangements in place at the level ofthe system operator as well as any relationshipswithin the financial group that bear on thefinancial condition of the system operator or onthe ability of the system operator to fulfil itsfunctions in the markets which it serves.Disclosure should also include detailedinformation on the selection, composition, rulesand procedures of advisory bodies and theirimpact on management decisions. Furthermore,public authorities should consider theimplications of the formation of these financialgroups within the clearing and settlementinfrastructure and the adequacy of theirgovernance arrangements.

Corporate governance arrangements ofsecurities clearing and settlement systemsshould be subject to adequate regulation andoversight. In this respect, the company statutes,the by-laws, the professional qualifications ofmembers of the boards of directors of systemoperators, shareholdings and changes inshareholdings, the rules of the system, thegeneral system of internal controls, and the riskmanagement programme of the system shouldbe subject to review or oversight by a competentauthority. Regulation, oversight, competitionlaw and governance arrangements shouldensure that services are provided to customersunder fair and equitable conditions of access;that the risk management programmes of systemoperators are effective; that risk managementdecisions are not affected by considerations

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extraneous to the risk management function;and that, to the maximum extent possible,functional service providers compete inequivalent conditions of competition.

Looking forward, the adoption of a harmonisedregulatory regime for securities clearing andsettlement systems should be considered tocomplete the internal market within theCommunity and to better achieve the policygoals identified in this paper relating to thegovernance of those systems.


ANNEX I STANDARDS AND RECOMMENDATIONS RELATINGTO THE CORPORATE GOVERNANCE OF PAYMENTAND SECURITIES SETTLEMENT SYSTEMS

I.1 CPSS CORE PRINCIPLES FOR PAYMENTSYSTEMS, JANUARY 2001

Core Principle X acknowledges the importanceof effective, accountable and transparentgovernance for all central bank-owned,privately-owned and jointly-owned paymentsystems owing to the interdependence amongparticipants that those systems create. Each ofthese types of systems requires a different typeof governance. Sound governance bears on allother recommendations of the report because itshould ensure their implementation. For both tooperate effectively, payment systems andsecurities settlement systems that use eachother’s services or that are operationally linkedmust be governed effectively and in a mannerthat permits an effective operation of the linkedsystems as a whole. Good governance of linkedpayment and securities settlement systemsworks to ensure that standards applicable toeach of them can be implemented in a mannerthat permits the systems to meet the needs of thecommunity they serve.

The CPSS Core Principles identify writtenobjectives, reporting lines, clear lines ofresponsibility, qualified management entrustedwith supervision of operations, riskmanagement and audit functions as the tools ofa sound governance system. Sound governancepresupposes that appropriate resources havebeen devoted to these functions. Accountabilityis achieved through management’s obligation tojustify major decisions and actions to otherparties. The Core Principles identifyrepresentation of owners on the governing bodyof the system and consultation as tools toaddress the concerns of non-shareholderstakeholders. However, these two mechanismsare not intended to be mutually exclusive.Transparency is achieved through the publicdisclosure of certain types of informationregarding management, organisational andgovernance structure, and risk management andcontrol systems.

Central banks should make transparent tocustomers and the public when they are acting

as owners, as a user, and as an overseer relatingto the operation of a payment system. Theyshould take into account the needs of thecustomers in their decision-making processesthrough informal dialogue or consultations withcustomers.

Privately owned systems are generally ownedby their customers, which are usually banks,and are generally organised as a cooperative.Since the board of directors of the cooperativeis appointed by the owners, and often areemployees of owner banks, board members ofprivately owned payment systems may faceconflicts of interest in properly monitoring thesystem and may have a bias towards theinstitution that appointed them. Board membersshould resolve such conflicts of interest bygiving precedence to the needs of all customers,not just their employers.

Jointly owned systems must have corporategovernance mechanisms that address theconcerns identified for both central bank-ownedsystems and privately owned systems identifiedpreviously.

I.2 CPSS-IOSCO RECOMMENDATIONS FOR SSSS,NOVEMBER 2001

CPSS/IOSCO Recommendation 13 definescorporate governance as arrangements that“encompass the relationships betweenmanagement and owners and other interestedparties, including customers and the authoritiesrepresenting the public interest.” It requires thatgovernance arrangements for both centralsecurities depositories and centralcounterparties fulfil public interestrequirements in addition to promoting theobjectives of owners and customers. Thisrecommendation acknowledges that no singleset of corporate governance arrangements isappropriate for all securities settlementsystems, but identifies as key components of acorporate governance structure: the ownershipstructure, the composition of the board, thereporting lines between management and the

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board, and the processes that make managementaccountable for its performance.Recommendation 14 on access also relates togovernance. It requires that participants begiven access to a system according to objectiveand publicly disclosed criteria relating totechnical, business and risk managementexpertise; the legal powers; and the financialresources of the applicant seeking access to thesystem. Recommendation 17 also addressestransparency requirements andRecommendation 18 addresses the need forappropriate regulation and oversight.

I.3 ESCB-CESR STANDARD ON GOVERNANCE,2004

The ESCB-CESR Standards focus on the clarityof rules, laws and procedures applicable tosecurities settlement systems. The Standardsare addressed primarily to securities settlementsystem operators, but also to entities offeringsimilar services, such as custodians with adominant position in a particular market. Thisapproach is consistent with the EuropeanUnion’s functional approach to the regulationof financial services.

ESCB-CESR Standard 13 on governancereflects and is consistent with the CPSS/IOSCORecommendation on governance, but addsenhanced and more specific requirementsrelating to governance. The ESCB-CESRStandard specifically gives system operators animplicit duty to take into account relevant publicpolicy objectives in the present Europeancontext and to ensure the safety and efficiencyof European securities markets. It alsoconcludes that the management of systemoperators should be subject to fitness andproperness requirements consistent with otherregulated financial firms within Europe. Inaddition, it emphasises the need for some formof user input into the decision-making processof the system, such as a formal consultationprocess with customers. Lastly, it requires thatpredefined procedures for identifying andmanaging potential conflicts of interest be

incorporated into system governancearrangements.

I.4 CPSS-IOSCO RECOMMENDATIONS FORCENTRAL COUNTERPARTIES, MARCH 2004

CPSS-IOSCO released for public consultationits report on “Recommendations for CentralCounterparties” in March 2004.Recommendation 12 addresses governance ofcentral counterparties stating that: “Governancearrangements for a CCP should be effective,clear and transparent to fulfil public interestrequirements and to support the objectives ofowners and customers. In particular, theyshould promote the effectiveness of the CCP’srisk management procedures.”

In its discussion of this Recommendation,CPSS-IOSCO focuses on the public interest inthe governance of CCPs, noting that “becausetheir activities are subject to significanteconomies of scale, many are sole providers ofservices to the market they serve. Therefore,their performance is a critical determinant of thesafety and efficiency of those markets, which isa matter of public interest.” Rather thanexpressing a preference for a particular set ofgovernance arrangements, CPSS-IOSCOfocuses on the objectives that should beachieved or accomplished through governancearrangements. A clear emphasis is placed on theneed for transparency relating to the governancearrangements and on the accountability of theboard of directors and senior managers. Aspecial emphasis is placed on governancearrangements relating to the management of therisks undertaken by the CCP, as appropriaterisk management mechanisms are critical to theprevention of systemic risk. Governancearrangements relating to risk management areparticularly important because the interests of aCCP, participants, exchanges and tradingplatform providers, owners and the publicrelated to risk management are different andmay be conflicting. Appropriate governancearrangements for CCPs must therefore includeclear mechanisms to balance the interests and


possible conflicts of the relevant partiesinvolved in risk management and defaultprocedures.

I.5 G30 GLOBAL CLEARING AND SETTLEMENT,A PLAN OF ACTION, JANUARY 2003

The Group of Thirty, a private body that bringstogether representatives of both private sectorand public sector bodies, recently adopted anaction plan for the development of the globalsecurities settlement infrastructure. The G30’saction plan is based on, and builds upon, theCPSS/IOSCO Recommendations. While theCPSS/IOSCO Recommendations represent aninternational standard that all jurisdictions ofthe world should immediately take steps toimplement, the G30’s action plan lays out a planfor the development of the securities settlementinfrastructure in more developed jurisdictionsover a period of five years. The following fourrecommendations of the G30 may be comparedwith the CPSS/IOSCO Recommendation whichinspired their adoption:

– Recommendation 17 imposes a duty of careon each board member of a securitiessettlement system, and on the organisationsappointing them, to balance the conflictinginterests of all stakeholders in the operationof the system.

– Recommendation 18 calls for the granting offair and non-discriminatory access tosecurities settlement systems to qualifiedcustomers and for the removal of existingbarriers, including legal and regulatorybarriers, which do not serve to mitigaterisks, enhance systemic safety or meet publicpolicy objectives. It also calls for boards ofdirectors and public authorities to put inplace procedures and programmes toevaluate on an ongoing basis the safety ofsecurities settlement systems and the risksarising from their operation.

– Recommendation 19 urges securitiessettlement systems to adopt by-laws that

organise appropriate board representation ofdifferent stakeholder interests. The reportstates a preference that customers’ interests,notwithstanding their disparity, also be takeninto account in the governance arrangementsof both user-owned and non-user-ownedsystems.

· Recommendation 20 recommends thatconsistent and transparent regulation andoversight of securities settlement systems beinstituted internationally regarding theoperation of cross-border systems. ThisRecommendation calls for a harmonisationof oversight and supervision standards indeveloped countries, beyond the CPSS-IOSCO Recommendations, based on thefunctions performed by a service providerand not the legal form of the service providerin order to create equivalent conditions ofcompetition. As noted previously, thisRecommendation is related to governance inthat regulation creates the framework withinwhich corporate governance arrangementsare organised.

I.6 CROSS-BORDER CLEARING ANDSETTLEMENT IN THE EUROPEAN UNION(THE GIOVANNINI REPORTS), 2001 AND2003

The “Report on cross-border clearing andsettlement arrangements in the EuropeanUnion” (November 2001; the first GiovanniniReport) noted that each of the 19 CSDs and twoICSDs in Europe have varying governancearrangements. While the first GiovanniniReport did not devote a specific chapter togovernance, the report included governance asone of the areas in which the efficacy ofproposals for the development of the Europeansecurities infrastructure should be assessed. Inthe Giovannini Group’s public consultationquestionnaire, governance issues featureprominently as an area in which public policyobjectives should be developed on a prioritybasis. The questionnaire also raised the issuewhether governance arrangements should differ

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for profit and non-profit organisations and foruser-owned and non-user-owned systems.

The “Second Report on cross-border clearingand settlement arrangements in the EuropeanUnion” (April 2003; second GiovanniniReport) made reference to governance as amechanism to ensure an appropriate level ofinnovation. The report identified thatappropriate governance ensures thatmanagement and owners take into account theneeds of the customers of the system.Governance arrangements are less crucial wherethere is competition among service providers;where there is competition in the provision ofservices, customers have a variety of choices,and system operators have strong incentives tomeet the needs of their existing and potentialcustomers.

In the absence of competition, adequategovernance arrangements become even moresignificant in providing safeguards that theinterests of all customers are properlyaddressed or taken into account by CSDs andCCPs. The report also underscores that, in aconsolidation of CSDs or CCPs, great emphasisshould be placed on the adequacy of thegovernance arrangements of the consolidatedentity. If governance arrangements are notsufficient to remedy the disadvantages arisingfrom the consolidation or from the lack ofcompetition in the market-place, considerationshould be given to separating those functionswhere competition is not important (such asdepository functionalities) from functions forwhich competition is beneficial (such assettlement functionalities). The report stressesfurther the role of appropriate governancearrangements where the same intermediaries areboth customers and owners of non-profit CSDsand CCPs. The report suggests assessingexisting systems against standards, startingwith the CPSS/IOSCO Recommendations.

As a general remark, respondents to the publicconsultation launched by the Giovannini Groupdid not enumerate governance arrangementsamong the fifteen barriers to efficient clearing

and settlement arrangements in the EU. Thesecond Giovannini Report in 2003, however,reiterated the conclusions of the firstGiovannini Report that governance issuesfeature prominently as an area in which publicpolicy objectives should be developed on apriority basis.

I.7 COMMISSION COMMUNICATION ONCLEARING AND SETTLEMENT, 2002 AND2004

The Commission, in its 2002 Communicationon Clearing and Settlement issued following thepublication of the first Giovanni Report, alsofocused on the removal of distortions of andrestraints on competition in the clearing andsettlement infrastructure and announced that itwas conducting an in-depth inquiry into theobservance of competition policy by clearingand settlement service providers.

The 2004 Communication on Clearing andSettlement (COM (2004) 312 final) followingthe publication of the second Giovannini Reportfocused on appropriate governance measureswithout a preference for a particular model. TheCommission has envisaged laying down high-level principles in a framework Directivespecifying that transparent governancearrangements is a major objective for securitiessettlement systems, central counterparties, aswell as intermediaries offering settlementservices. In order to address competitionconcerns, the Commission has envisagedimposing a separation of settlement servicesfrom ancillary banking and other non-coreservices in terms of accounting and pricing.Since July 2004, the Commission has chaired anAdvisory and Monitoring Group on EUClearing and Settlement, called CESAME, thatwill form an interface between the private andpublic sectors, advise the Commission ontechnical issues and liaise with experts andthink-tanks.


I.8 EUROPEAN PARLIAMENT REPORT ONCLEARING AND SETTLEMENT, 2002

Following the first Giovannini Report, in 2002the EU Parliament published a “Report onClearing and Settlement”, which concluded thateffective corporate governance mechanisms arepossible policy tools to address issuesemanating from particular corporate structuresand to enhance the stability of financialmarkets.

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ANNEX 2A NN EX I I E U ROP E AN C S D S AND C C P S

II.1 Organisational information on CSDs in the European Union

Member State CSD Corporate form Ownership structure

Austria OeKB AG Bank User-owned, with the majority being owned by leadingAustrian banks

Belgium Euroclear Bank Bank User-owned group. Euroclear Group. Euroclear plc owned byInternational CSD Euronext, the former shareholders of Sicovam and CrestCo,

and third parties. Euroclear Bank owned by its users.Euronext – CIK Commercial entity Exchange-owned, by Euronext Brussels. Euronext Group is a

public company whose shareholders include the formershareholders of the Paris, Brussels, Porto and AmsterdamExchanges and institutional and retail investors. In February2004, Euroclear Bank acquired the book-entry settlementsystem of CIK

Cyprus CDCR Division of the Cyprus Exchange-owned, by Cyprus Stock Exchange, which is aStock Exchange public limited company

Czech Republic UNIVYC/ Public limited company 100% ownership by the leading Czech IT firm that carriedSecurities Centre out the voucher privatisationRM-SYSTEM/ Public limited company Exchange-owned (Prague Stock Exchange)Securities CentreSKD Not a distinct legal entity NCB-owned (Česká národní banka)

Denmark VP A/S Non-profit commercial User-owned. Owners comprise banks, stockbrokingentity companies, bond-issuing companies, Danmarks Nationalbank,

share issuers and institutional investors

Estonia ECSD Public limited company Exchange-owned (Tallinn Stock Exchange, owned by theHEX Group)

Finland1 APK Commercial entity Group-owned. OM Hex Group, public company.2 Since 31December 2003, OM HEX Group has been owned by:Investor AB (11.3%); Swedish state (6.9%); Nordea (5.7%);Robur Funds (5.5%); Fidelity Funds (5.2%); AMF Pension(3.8%); Förenings Sparbanken (3.2%); Didner & Gergeaktiefond (3.0%); SEB Funds (2.7%); Alecta (2.6%); OlofStenhammar & companies (2.6%); other Swedish owners(25.8%); other non-Swedish owners (21.7%)

France Euroclear France Commercial entity Part of the Euroclear Group (see Belgium)

Germany Clearstream Bank Group-owned by the Deutsche Börse Group, public company.Banking Frankfurt At the time of the initial listing of the parent company,

several German banks held significant stakes, with thebalance floated to the public

Greece3 Central Securities Commercial entity Majority owned by exchanges and their related financialDepositary S.A. groups, including: Athens Exchange S.A.; Hellenic

Exchanges S.A.; banks listed on the ATHEX; portfoliomanagement companies; mutual funds; and brokerage firms

Hungary KELER Public limited company Owned by the Hungarian NCB (50%), Budapest StockExchange (25%) and Budapest Commodities Exchange (25%)

Italy Monte Titoli spa Commercial entity Exchange-owned group, owned by the Gruppo Borsa Italiana,itself owned by the principal Italian banks as well asdomestic and international institutional investors

1) APK also operates the CSDs in Estonia and Latvia.2) The HEX Group merged with OM AB of Sweden in September 2003.3) There are other systems that are not covered in this table.


Member State CSD Corporate form Ownership structure

Ireland4 CRESTCo/ Commercial entity/bank Part of the Euroclear Group. The group is user-ownedEuroclear Bank (see Belgium)

Latvia VNS Not a distinct legal entity NCB-owned (Latvijas Banka)LCD-DENOS Public limited company Exchange-owned (Riga Stock Exchange, which is now owned

by the HEX Group)

Lithuania CSDL Public company Owned by Lietuvos bankas (majority shareholder), theMinistry of Finance and the National Stock Exchange ofLithuania

Luxembourg Clearstream Bank Group-owned by the Deutsche Börse Group, public company.Banking Luxembourg At the time of the initial listing of the parent company,

several German banks held significant stakes, with thebalance floated to the public

Malta CSD Division of the Malta Exchange-owned (Malta Stock Exchange, which isStock Exchange government-owned)

Netherlands Euroclear NL Commercial entity Part of the Euroclear Group (see Belgium)

Poland KDPW Public limited company Owned in equal parts by the State Treasury, Warsaw StockExchange and Narodowy Bank Polski

CRBS-SKARBNET Not a distinct legal entity NCB-owned (Narodowy Bank Polski)

Portugal Interbolsa Commercial entity Exchange-owed within the Euronext Group (see Belgium)

Slovakia NBS-CR Not a distinct legal entity NCB-owned (Národná banka Slovenska)SC State-owned joint Established by the Ministry of Finance as a joint stock

stock company company with a 100% share of the stateBSSE Division of Bratislava Exchange-owned (Bratislava Stock Exchange, a public

Stock Exchange limited company, with private banks as main shareholders)

Slovenia KDD Public limited company User-owned (KDD members: credit institutions and securitiesintermediaries; Banka Slovenije also a minor shareholder)

FEBSS Not a distinct legal entity NCB-owned (Banka Slovenije)

Spain IBERCLEAR Commercial entity Group-owned by Bolsas y Mercados Espańoles (BME), ownedby the former shareholders of the operating companies of theexchanges of Madrid, Barcelona, Valencia and Bilbao, MEFFHoldings (derivatives), AIAF (corporate bonds), Senaf(government bonds), Iberclear, and the citrus exchange

Sweden VPC Commercial entity VPC is owned 98.6% by the four Nordic banks: FöreningsSparbanken, Nordea Bank Sweden, SEB and SvenskaHandelsbanken. 1.4% owned by other securities companies

United Kingdom CRESTCo Commercial entity Part of the Euroclear Group. The group is user-owned(see Belgium)

I I .1 Organisational information on CSDs in the European Union (cont’)

4) For securities issued by Irish entities. There is also the NTMA for the settlement of short-term public debt.

37ECB


ANNEX 2

Instruments andMember State CCP Corporate form Ownership structure products cleared

Austria Wiener Börse Commercial entity Austrian banks and other users Derivatives

Belgium LCH.Clearnet S.A., Bank LCH.Clearnet Group Limited is Equities and bonds; interesta subsidiary of owned: 45.1% by exchanges; 45.1% rate & commodity futuresLCH.Clearnet by former members of LCH; and 9.8% and options; equity & indexGroup Limited by Euroclear. Of the 45.1% owned by futures & options; OTC-

exchanges, Euronext owns 41.5%, but traded bonds and reposits voting rights are limited to 24.9%

Denmark FUTOP Clearing, Commercial entity User-owned, principally by leading Derivativesa division of Danish banks: Danske Bank AS;Copenhagen Stock Nordea AB; Nykredit AS; Sydbank A/S.Exchange No other shareholder owns over 5%

Finland Helsinki Exchanges Commercial entity Group-owned by the OM HEX Group Derivatives(see under APK in the previous table)

France LCH.Clearnet S.A., Bank See Belgium See Belgiuma subsidiary ofLCH.ClearnetGroup Limited

Germany EUREX Commercial entity Public company, owned in equal Equities, derivatives,Clearing AG parts by Deutsche Börse AG and repos and bonds

the Swiss ExchangeClearing Bank Commercial entity Three German banks and one Agricultural and energyHanover Norwegian bank products

Greece ADECH Commercial entity Athens Securities Exchange, Derivatives and reposAthens Derivatives Exchange andinstitutional investors

Hungary KELER Public limited Owned by Magyar Nemzeti Bank Derivatives and cashcompany (50%), Budapest Stock Exchange instruments

(25%) and the Budapest CommoditiesExchange (25%)

Italy Cassa di Commercial entity Since 1999 the Italian Stock Exchange Exchange-tradedCompensazione (72.73%), the remaining 27.27% derivatives and equitiese Garanzia (CC&G) being held by five banks since 2003

Netherlands LCH.Clearnet S.A., Bank See Belgium See Belgiuma subsidiary ofLCH.ClearnetGroup Limited

Poland KDPW Public limited Owned in equal parts by the State Derivatives, treasurycompany Treasury, Warsaw Stock Exchange bonds , equities, and

and Narodowy Bank Polski other securities

Portugal Euronext Lisbon Commercial entity, Euronext NV, a public company Derivativesdivision ofEuronext Lisbon

Spain MEFF Commercial entity, Group-owned by Bolsas y Mercados Derivativesdivision of MEFF Espańoles (BME) (see Iberclear inExchange the previous table)

Sweden Stockholmsbörsen Commercial entity Group-owned by OM HEX DerivativesAB, division of Group (see Finland)OM AB

United Kingdom LCH.Clearnet Ltd, Commercial entity See Belgium Equities, derivatives, reposa subsidiary of and swapsLCH.ClearnetGroup Limited

I I .2 Organisational information on CCPs in the European Union


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42ECBOcca s i ona l Pape r No . 20Augus t 2004

EUROPEAN CENTRAL BANKOCCASIONAL PAPER SERIES

1 “The impact of the euro on money and bond markets” by J. Santillán, M. Bayle andC. Thygesen, July 2000.

2 “The effective exchange rates of the euro” by L. Buldorini, S. Makrydakis and C. Thimann,February 2002.

3 “Estimating the trend of M3 income velocity underlying the reference value for monetarygrowth” by C. Brand, D. Gerdesmeier and B. Roffia, May 2002.

4 “Labour force developments in the euro area since the 1980s” by V. Genre andR. Gómez-Salvador, July 2002.

5 “The evolution of clearing and central counterparty services for exchange-tradedderivatives in the United States and Europe: a comparison” by D. Russo,T. L. Hart and A. Schönenberger, September 2002.

6 “Banking integration in the euro area” by I. Cabral, F. Dierick and J. Vesala,December 2002.

7 “Economic relations with regions neighbouring the euro area in the ‘Euro Time Zone’” byF. Mazzaferro, A. Mehl, M. Sturm, C. Thimann and A. Winkler, December 2002.

8 “An introduction to the ECB’s survey of professional forecasters” by J. A. Garcia,September 2003.

9 “Fiscal adjustment in 1991-2002: stylised facts and policy implications” by M. G. Briotti,February 2004.

10 “The acceding countries’ strategies towards ERM II and the adoption of the euro:an analytical review” by a staff team led by P. Backé and C. Thimann and includingO. Arratibel, O. Calvo-Gonzalez, A. Mehl and C. Nerlich, February 2004.

11 “Official dollarisation/euroisation: motives, features and policy implications of current cases”by A. Winkler, F. Mazzaferro, C. Nerlich and C. Thimann, February 2004.

12 “Understanding the impact of the external dimension on the euro area: trade, capital flows andother international macroeconomic linkages“ by R. Anderton, F. di Mauro and F. Moneta,March 2004.

13 “Fair value accounting and financial stability” by a staff team led by A. Enria and includingL. Cappiello, F. Dierick, S. Grittini, A. Maddaloni, P. Molitor, F. Pires and P. Poloni,April 2004.

14 “Measuring Financial Integration in the Euro Area” by L. Baele, A. Ferrando, P. Hördahl,E. Krylova, C. Monnet, April 2004.

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Occa s i ona l Pape r No . 20Augus t 2004

15 “Quality adjustment of European price statistics and the role for hedonics” by H. Ahnert andG. Kenny, May 2004.

16 “Market dynamics associated with credit ratings: a literature review” by F. Gonzalez, F. Haas,R. Johannes, M. Persson, L. Toledo, R. Violi, M. Wieland and C. Zins, June 2004.

17 “Corporate ‘Excesses’ and financial market dynamics” by A. Maddaloni and D. Pain, July 2004.

18 “The international role of the euro: evidence from bonds issued by non-euro area residents” byA. Geis, A. Mehl and S. Wredenborg, July 2004.

19 “Sectoral specialisation in the EU a macroeconomic perspective” by MPC task force of theESCB, July 2004.

20 “The supervision of mixed financial services groups in Europe” by F. Dierick, August 2004.

21 “Governance of securities clearing and settlement systems” by D. Russo, T. Hart,M. C. Malaguti and C. Papathanassiou, October 2004.

Documents

Governance of securities clearing and settlement systems ...I.5 G30 Global Clearing and Settlement, a Plan of Action, January 2003 32 I.6 Cross-border clearing and settlement in the