Financial Stability Standards for Securities Settlement Facilities – December 2012 Standard 15: Access and Participation Requirements

Guidance

Access refers to the ability to use a securities settlement facility's services and includes the direct use of the securities settlement facility's services by participants, including other market infrastructures (for example, trading platforms) and, where relevant, service providers (for example, matching and portfolio compression service providers). In some cases, this includes the rules governing indirect participation. A securities settlement facility should allow for fair and open access to its services. It should control the risks to which it is exposed by its participants by setting reasonable risk-related requirements for participation in its services. A securities settlement facility should ensure that its participants and any linked FMIs have the requisite operational capacity, financial resources, legal powers and risk management expertise to prevent unacceptable risk exposure for the securities settlement facility and other participants. A securities settlement facility's participation requirements should be clearly stated and publicly disclosed so as to eliminate ambiguity and promote transparency.

15.1.1 Restrictions on access can result in highly tiered settlement arrangements and potentially give rise to concentration risks (see SSF Standard 16 on tiered participation arrangements). Care should therefore be taken that participation requirements do not arbitrarily limit access to a securities settlement facility's services.

15.1.2 While pursuing the benefits of fair and open access, however, a securities settlement facility's participation requirements should not compromise its risk-based controls or conflict with directors' statutory duties. Indeed, a securities settlement facility should always consider the risks that an actual or prospective participant may pose, both to the securities settlement facility and to other participants. This will typically entail risk-related participation requirements adequate to ensure that its participants meet appropriate operational, financial and legal standards consistent with timely fulfilment of their obligations to the securities settlement facility and other participants.

15.2.1 A securities settlement facility's participation requirements should be justified in terms of the safety of the securities settlement facility and the markets it serves, be tailored to the securities settlement facility's specific risks, be imposed in a manner commensurate with such risks, and be set out in the securities settlement facility's rules and publicly disclosed. The requirements should be objective and should not unnecessarily discriminate against particular classes of participants or introduce competitive distortions.^[40] Operational requirements may include reasonable criteria relating to the participant's ability and readiness (for example, its information technology capabilities) to use a securities settlement facility's services. Financial requirements may include reasonable risk-related capital requirements, other evidence of financial strength and creditworthiness, and collateralisation of exposures. Legal requirements may include appropriate licences and authorisations to conduct relevant activities as well as legal opinions or other arrangements that demonstrate that possible conflicts of law would not impede the ability of an applicant (for example, a foreign entity) to meet its obligations to the securities settlement facility. A securities settlement facility also may require participants to have appropriate risk management expertise. If a securities settlement facility admits non-regulated entities, it should take into account any additional risks that may arise from their participation and design its participation requirements and risk management controls accordingly.

15.2.2 To help address the balance between open access and risk, a securities settlement facility should set participation requirements and manage its participant-related risks through the use of real-time binding risk management controls and other operational arrangements that have the least restrictive impact on access that circumstances permit. For example, where a securities settlement facility assumes credit risk as principal, it can manage participant-related risks by using real-time binding credit limits or collateral requirements. The permitted level of participation may be different for participants maintaining different levels of capital. Where other factors are equal, participants holding higher levels of capital may be permitted less restrictive risk limits or be able to participate in more functions within the securities settlement facility. Such risk management controls may mitigate the need for a securities settlement facility to impose onerous participation requirements that limit access. A securities settlement facility could also differentiate its services to provide different levels of access at varying levels of cost and complexity. For example, a securities settlement facility may wish to limit full direct participation to certain types of entities, and to apply limits to the activities of, or provide indirect access to, others. Participation requirements (and other risk controls) can be tailored to each class or tier of participants based on the risks each class or tier poses to the securities settlement facility and its participants.

15.2.3 When settling on behalf of other market participants, a direct participant assumes responsibility for the risks those market participants bring to the securities settlement facility and its participants. It is therefore important that the direct participant has appropriate financial and operational resources and risk management arrangements to fulfil its obligations to the securities settlement facility and other participants arising from this activity. In some markets, there may be relatively few direct participants with the financial and operational resources to fulfil this role, and therefore the potential concentration of risks in a small number of direct participants may argue for closer monitoring and perhaps more stringent participation requirements for direct participants that provide settlement services to other market participants (see also SSF Standard 17 on tiered participation arrangements). Where tiering exists, each class of participation should be clearly defined and the participation requirements should be the same for all applicants of the same class.

15.3.1 A securities settlement facility should monitor compliance with its participation requirements on an ongoing basis through the receipt of timely and accurate information. Participants should be obliged to report any developments that may affect their ability to comply with a securities settlement facility's participation requirements. A securities settlement facility should have the authority to impose additional risk controls on a participant in situations where the securities settlement facility determines the participant poses heightened risk to the securities settlement facility. For example, if a participant's credit standing comes into doubt, the securities settlement facility may require the participant to provide additional collateral or may place restrictions on the level or types of activities that the participant can undertake (see SSF Standard 4 on credit risk). A securities settlement facility should consider additional reporting requirements for non-regulated institutions. A securities settlement facility should also have clearly defined and publicly disclosed procedures for, in extreme cases, facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements of the securities settlement facility (see SSF Standard 4 on credit risk and SSF Standard 11 on participant default rules and procedures).

15.3.2 If a securities settlement facility has an appeals process for suspending or cancelling participation in the facility, the appeals process should not detract from the securities settlement facility's ability to suspend or cancel participation. For serious breaches, the preferable approach would be for the suspension or cancellation to persist during an appeal, with reinstatement upon a successful appeal, rather than the suspension or cancellation being put on hold until an appeal is heard.