Commission Delegated Regulation (EU) 2017/390Show full title

Article 38 Arrangements in order to convert collateral or investment into cash using prearranged and highly reliable funding arrangements

1. For the purposes of point (e) of Article 59(4) of Regulation (EU) No 909/2014 creditworthy financial institutions shall include one of the following:

(a) a credit institution authorised in accordance with Article 8 of Directive 2013/36/EU that the CSD-banking service provider can demonstrate to have low credit risk based on an internal assessment, employing a defined and objective methodology that does not exclusively rely on external opinions;

(b) a third country financial institution that meets all of the following requirements:

(i)

it is subject to and complies with prudential rules considered to be at least as stringent as those set out in Directive 2013/36/EU and Regulation (EU) No 575/2013;

(ii)

it has robust accounting practices, safekeeping procedures, and internal controls;

(iii)

it has low credit risk based on an internal assessment carried out by the CSD-banking service provider, employing a defined and objective methodology that does not exclusively rely on external opinions;

(iv)

it takes into consideration the risks arising from the establishment of that third country financial institution in a particular country.

2. Where a CSD-banking service provider plans to establish a prearranged and highly reliable funding arrangement with a creditworthy financial institution as referred to in paragraph 1, it shall use only those financial institutions that at least have access to credit from the central bank issuing the currency used within the prearranged funding arrangements, either directly or through entities of the same group.

3. After a prearranged and highly reliable funding arrangement has been established with one of the institutions referred to in paragraph 1, the CSD-banking service provider shall monitor the creditworthiness of these financial institutions on an ongoing basis by applying both of the following:

(a) subjecting those institutions to regular and independent assessments of their creditworthiness;

(b) assigning and regularly reviewing internal credit ratings for each financial institution with which the CSD has established a prearranged and highly reliable funding arrangement.

4. The CSD-banking service provider shall closely monitor and control the concentration of its liquidity risk exposure to each financial institution involved in a prearranged and highly reliable funding arrangement, including its parent undertaking and subsidiaries.

5. The CSD-banking service provider's liquidity risk management framework shall include a requirement to establish concentration limits, providing the following:

(a) that the concentration limits are established by currency;

(b) that at least two arrangements for each major currency are put in place;

(c) that the CSD-banking service provider is not overly reliant on any individual financial institution, when all currencies are taken into account.

For the purposes of point (b) major currencies shall be considered to be at least the top 50 % of the most relevant currencies as determined in accordance with Article 36(8). Where a currency has been determined as a major currency, it shall continue to be considered as major for a period of three calendar years from the date of its determination as major currency.

6. A CSD-banking service provider which has access to routine credit at the central bank of issue shall be considered to fulfil the requirements of point (b) in paragraph 5 to the extent it has collateral that is eligible for pledging to the relevant central bank.

7. The CSD-banking service provider shall continuously monitor and control its concentration limits towards its liquidity providers, with the exception of those referred to in paragraph 6, and it shall implement policies and procedures to ensure its overall risk exposure to any individual financial institution remains within the concentration limits determined in accordance with paragraph 5.

8. The CSD-banking service provider shall review its policies and procedures concerning applicable concentration limits towards its liquidity providers, with the exception of those referred to in paragraph 6, at least annually and whenever a material change occurs and affects its risk exposure to any individual financial institution.

9. In the context of its reporting to the relevant competent authority in accordance with Article 39, the CSD-banking service provider shall inform the competent authority of both of the following:

(a) any significant changes to the policies and procedures concerning concentration limits towards its liquidity providers determined in accordance with this Article;

(b) cases where it exceeds a concentration limit towards its liquidity providers set out in its policies and procedures, as referred to in paragraph 5.

10. Where a concentration limit towards its liquidity providers is exceeded, the CSD-banking service provider shall remedy the excess without undue delay following the risk mitigation measures referred to in paragraph 7.

11. The CSD-banking service provider shall ensure that the collateral agreement allows it to have prompt access to its collateral in the event of the default of a client, taking into account at least the nature, size, quality, maturity, and location of the assets provided by the client as collateral.

12. Where assets used as collateral by the CSD-banking service provider are in the securities accounts maintained by another third party entity, the CSD-banking service provider shall ensure that all of the following conditions are met:

(a) it has real-time visibility of the assets identified as collateral;

(b) the collateral is segregated from the other securities of the borrowing participant;

(c) the arrangements with that third party entity prevent any losses of assets to the CSD-banking service provider.

13. The CSD-banking service provider shall take all necessary steps in advance to establish the enforceability of its claim to financial instruments provided as collateral.

14. The CSD-banking service provider shall be capable of accessing and converting non-cash assets referred to in Article 10 and Article 11(1) into cash on a same-day basis through pre-arranged and highly reliable arrangements established in accordance with point (d) of Article 59(4) of Regulation (EU) No 909/2014.