Clearstream Default Management
1. Credit limits and exposures
The services that Clearstream Banking S.A. and Clearstream Banking AG (hereafter “Clearstream”) provide to customers for the settlement and custody of securities are complemented by various services for the management of their cash positions.
These services include two alternative financing arrangements available to customers:
- Unconfirmed Funds Facility: An intraday financing facility that is available for settling securities transactions.
- Technical Overdraft Facility (TOF) or Umbrella Credit and Collateral Services Facility (UCCS): A short-term financing facility that is available for settling securities transactions.
These financing arrangements are secured by customer assets pledged to Clearstream as collateral.
Credit exposures resulting from the usage of financing arrangements need to be appropriately managed at all times. This also implies an efficient management of a defaulted customer’s outstanding credit exposures. As part of default management, Clearstream needs to be able to liquidate collateral of the defaulted customer as quickly as possible and with the lowest market impact possible.
2. Clearstream Default Management Process
The default management process of Clearstream has been implemented to mitigate the risks arising from the default (as defined in 2.2) of a Clearstream customer and enables Clearstream to avoid and/or minimise losses related to a customer default. As such, the non-defaulting customers of Clearstream also benefit from the default management process as its purpose is to manage a customer default in a prudent and orderly manner, limiting disruptions to the market and avoiding changes to the normal settlement practices of non-defaulting Clearstream customers.
Important note: The process described hereafter is the general approach, which is in principle undertaken to handle a default. It does not override the contractual agreements (GTCs and/or bilateral agreement(s)) in place with the customer.
The default management process of Clearstream has been implemented in accordance with the Principle 13 CPSS-IOSCO and CSD-Regulation and can be summarised as follows:
In order to ensure protection of settlement for non-defaulting customers, the transactions of defaulting customers may be suspended from automatic transaction processing and all transactions will then be manually monitored.
2.1 Early Warning Framework
The Early Warning Framework is an important component of the Clearstream default management process. The continuous monitoring of identified indicators and their thresholds across various business areas of Clearstream ensures an early detection of irregularities in customer’s behaviour, which could ultimately result in customer’s credit deterioration or default.
2.2 Acknowledgement of customer default
The default rules and procedures are implemented once a customer default (insolvency/bankruptcy, liquidation, reorganisation, or any other proceeding seeking similar relief with respect to the customer or their debts) is identified and all reasonable actions are taken to verify its occurrence. The communication of default to Clearstream may be done by the customer itself, a competent authority, or any other entity with knowledge of the existence of the default. To this end, Clearstream customers are requested to notify Clearstream of their default in writing as soon as possible. Following that, Clearstream would transmit this information along with its source to its competent authority.
2.3 Preliminary measures
In order to mitigate the risks resulting from a customer default, preliminary measures are taken. These could be increasing monitoring of collateral, suspending financing arrangements, monitoring settlement instructions, account blocking etc.
2.3.1 Consequences of a default on settlement instructions
To the extent permitted by law, and according to the contractual agreements in place between Clearstream and the customer, Clearstream may block the processing of settlement instructions. In the specific case of customer insolvency, the handling of pending settlement instructions is in principle performed according to the rules presented in the attached table.
Once a customer default occurs, as per definition in the GTCs or any bilateral agreement, liquidation is undertaken with the objective of closing the outstanding exposures.
2.4.1 Use of cash
Before liquidating securities, positive cash balances held on other customer accounts and positive cash balances in other currencies are considered to offset the exposure.
2.4.2 Collateral selection
The securities foreseen to be liquidated are selected from the collateral pool defined to cover the exposure.
For the purpose of liquidation Clearstream can select collateral from the account(s) pledged under the contractual arrangement(s) and/or according to the GTCs.
2.4.3 Liquidation execution
The objective of the default management process is to liquidate collateral of the defaulted customer(s) as quickly as possible and with the lowest market impact possible.
In accordance with the ESMA guidelines on CSD participants default rules and procedures, Clearstream will notify as soon as possible its competent authorities and the defaulting customer of the actions to be taken or taken following a default (related to the insolvency or similar proceeding of a customer), and will also inform, as soon as possible:
- its relevant authorities;
- its non-defaulting participants;
- the trading venues and CCPs served by the CSD;
- the operator of the common settlement infrastructure used by the CSD;
- the linked CSDs.
The default management process is maintained by Clearstream Default Management unit and regularly reviewed and approved by the respective Executive Board of Clearstream. In case of a crisis/customer default, the default management process is governed by the respective Executive Board and coordinated by the Credit Crisis Management Team and Clearstream Default Management unit. The respective Executive Board may decide to handle the crisis in a flexible way, where necessary, therefore the actions taken in case of default are not automatic but decided on case-by-case basis taking into consideration among other factors the size of outstanding exposures and market risk.
4. Termination/suspension of services
Clearstream may (depending on the circumstances) terminate or suspend the provision of services to the customer, upon the occurrence of an insolvency event affecting the customer.
For the purpose of continuous improvement, the default management process of Clearstream is tested at least annually, involving all relevant stakeholders.
The tests are also performed following any substantive changes to the default rules and procedures or upon request from the regulators.
The results of any relevant test and any significant change to the default rules and procedures are reported to the respective Executive Board of Clearstream, the risk committee and the competent authorities.
A summary of the results and contemplated changes to the default rules and procedures are also communicated to the customers.
Should a test highlight any weaknesses in the default rules and procedures or in their implementation, Clearstream Default Management unit will inform the relevant stakeholders for the purpose of taking appropriate actions to remove such weaknesses.