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of payment and securities settlement systems

Photo shows a telescope [+] The following pages contain further information about the Bundesbank's tasks relating to the oversight of payment and securities settlement systems.

Central counterparties

Central counterparties (CCPs) are financial market infrastructures that interpose themselves between the original counterparties of a financial market transaction in securities, derivatives or goods etc. In doing so, a CCP substitutes the original transaction between these two counterparties with two separate transactions between the CCP and the respective counterparty. This makes the CCP the buyer to every seller and the seller to every buyer of financial market instruments. The CCP therefore also bears the settlement risk of the given transactions. A distinction is generally made between the concept of open offers, whereby CCPs are automatically interposed between the two counterparties at the time an exchange-based trade is executed, and the concept of novation for over-the-counter (OTC) transactions, whereby the original transaction is placed with the CCP either directly or via a third party and then accepted for clearing by the CCP.

By entering into a transaction, CCPs assume the risk of default between the two counterparties and therefore make a key contribution to the risk management of the financial market participants involved. In addition, the central settlement of all open positions by a CCP increases post-trade efficiency. Multilateral netting can contribute to a substantial reduction in both risk and the number of instructions that need to be processed.

Example of increased post-trading efficiency resulting from multilateral netting © European Central Bank [+] Example of increased post-trading efficiency resulting from multilateral netting.

CCPs need to robustly manage their financial risk if they are to successfully pool and limit default risks for their participants. They hedge potential risks, particularly credit and liquidity risks, in order to be able to reliably contain the negative effects for the settlement of financial transactions that a default of individual participants would entail. In doing so, they usually employ the following measures.

  • CCPs usually set high credit quality standards for their participants and only allow market participants with good credit ratings to access their systems.
  • CCPs require their participants to provide collateral, known as margins, to cover the value of potential risk from their participants' outstanding transactions. This potential risk is calculated on as up-to-date a basis as possible. Eligible collateral usually entails low credit and liquidity risk.
  • CCPs maintain ring-fenced provisions to cover some of the losses if the margins provided by the defaulting participant prove insufficient. They also have an institutionalised joint liability arrangement in the form of a default fund which kicks in once the collateral provided by the defaulting participant has been exhausted. When this occurs, the collateral provided to the fund by the remaining participants is used. If these amounts are still insufficient, participants may potentially also be asked to make supplemental default fund contributions.
  • As a last resort, the CCP's own capital may also be drawn upon.

CCPs played a stabilising role during the global financial crisis and were by and large able to carry out their duties successfully. By contrast, bilaterally cleared derivatives contracts were seen to be a major source of uncertainty during the crisis. This is why the G20 countries have since required market participants to settle all sufficiently standardised OTC derivatives transactions via CCPs. This G20 provision has been implemented in the EU via EMIR (European Market Infrastructure Regulation) as well as supplemental legal acts.

Entities subject to oversight

Eurex Clearing AG (ECAG) acts as the CCP within the Deutsche Börse group. For the cash, repo and derivatives markets of the Deutsche Börse group, ECAG normally performs CCP tasks via the open offer procedure. For OTC derivatives contracts, counterparties can use ECAG as a CCP via the novation procedure.

ECAG has been fully owned by the Deutsche Börse group since 2012. Prior to this it was a joint venture between the Deutsche Börse group and SWX Swiss Exchange (resulting from the merger of the German Financial Futures Exchange and its Swiss equivalent, SOFFEX, in 1998). ECAG nevertheless continues to carry out its CCP activities in Switzerland. ECAG is also the CCP for transactions on the Irish Stock Exchange.

In accordance with legal requirements in Germany, ECAG has a banking licence pursuant to the German Banking Act (Kreditwesengesetz). ECAG's participation requirements stipulate that supervised credit institutions that fulfil minimum capital requirements may take part in the clearing process. ECAG monitors the risk positions of its participants in real time and makes same-day and intraday margin calls. If a cash margin is provided, these payments are mainly made in safe central bank money via TARGET2 or the SIC payment system operated on behalf of the Swiss National Bank. In order to cover losses that exceed the collateral provided by a defaulting participant, ECAG also maintains a joint default fund (in addition to its own ring-fenced funds) which all participants contribute to and to which they may be asked to make supplemental contributions.

If financial market transactions such as repo or cash market transactions in equities fall due, the delivery and payment of securities under transactions settled via ECAG are made via the central securities depositories Clearstream Banking AG, Frankfurt, Clearstream Banking S.A., Luxembourg, SIX SIS AG, Zurich, Euroclear UK & Ireland or Euroclear Bank, Brussels, depending on the transaction type.

European Commodity Clearing AG (ECC) is the CCP of the Leipzig-based European Energy Exchange. Until 2006, CCP services were provided by the exchange itself. Since the outsourcing of CCP services, ECC has been operating as a stand-alone CCP for spot and derivatives transactions in power and gas as well as trading in emissions allowances. In addition to transactions on the German energy exchange, ECC also offers CCP services to energy trading venues in the Netherlands, France, Hungary, Austria and the United Kingdom.

In accordance with legal requirements in Germany, ECC has a banking licence pursuant to the German Banking Act. Only supervised credit institutions that fulfil minimum capital requirements may participate in ECC.

In order to absorb the default of individual counterparties, ECC requires margins to be provided that cover the risk positions of the respective participant. These risk positions can be adjusted on a same-day basis and margin calls may be made. Margins provided in cash are settled in TARGET2. In addition, participants in ECC contribute to a joint default fund.

SwapClear of LCH.Clearnet Ltd and CDS Clearing Service of ICE Clear Europe are specific offerings of these two foreign CCPS in the area of OTC derivatives. The Bundesbank takes part in the oversight of these services through cooperative arrangements pursuant to Responsibility E of the CPSS/IOSCO Principles for Financial Market Infrastructures (PFMIs). Cooperative oversight is to be extended over the course of 2014 to cover all business activities of these two CCPs. Primary responsibility for the supervision and oversight of these London-based CCPs lies with the Bank of England. The Bundesbank has a stake in the oversight process since German commercial banks are major clients of both of these CCPs.


The monitoring of CCPs by central banks reflects the fact that CCPs, as financial market infrastructures, make a major contribution to the stability of the financial system as a whole. Owing to interdependencies with other infrastructures and the magnitude of clearing volumes, this contribution is not limited solely to the securities and derivatives business, but extends to the entire financial system. For example, downtimes in the clearing and settlement business can have negative repercussions on the availability of liquidity for the affected participants and lead to serious disruptions to financial market transactions. Due to their central position in the financial system, CCPs were recognised early on as potential sources of systemic risk. This led to increasingly strict requirements with regard to the robustness of their settlement processes and risk management.

To date, the Bundesbank has conducted its oversight of CCPs, which is in addition to its banking supervision activities done pursuant to the German Banking Act, on the basis of the CPSS and IOSCO recommendations for central counterparties finalised in 2004. These were adapted to suit European standards by the ESCB and CESR (Committee of European Securities Regulators) in 2009 ("ESCB/CESR recommendations for central counterparties"). As part of this oversight, the CCPs are evaluated on the basis of 15 pre-defined recommendations and, where necessary, encouraged to eliminate any weaknesses.

CPSS and IOSCO published Principles for Financial Market Infrastructures in April 2012, which are addressed to systemically important payment systems, central securities depositories (CSDs), securities settlement systems (SSSs), central counterparties (CCPs) and trade repositories (TRs). This previously non-binding oversight framework for CCPs was transformed into a legally binding regime at the European level through EMIR, which sets out the substantive requirements for CCPs contained in the PFMIs.

The PFMIs contain five responsibilities for central banks and market regulators (A to E). Responsibility E provides that central banks and authorities charged with supervising and overseeing financial market infrastructures cooperate with each other domestically and internationally in order to promote the safety and efficiency of financial market infrastructures and to provide mutual support in carrying out their respective mandates. Such cooperation is called for in normal circumstances as well as in in crisis situations and during any potential recovery, wind-down or resolution of financial market infrastructures.

The Bundesbank's oversight function meets this commitment by participating in cooperative arrangements on the oversight of globally operating CCPs and by carrying out the activities it is responsible for as a member of the supervisory colleges for German CCPs. In accordance with EMIR, the Federal Financial Supervisory Authority (BaFin) has set up colleges for German CCPs which incorporate, among other things, the oversight function of central banks. This way, central bank oversight is incorporated into decisions concerning the authorisation of CCPs pursuant to EMIR, the extension of a CCP's activities and services, the risk management models used by CCPs and the authorisation of interoperability arrangements with other CCPs. Furthermore, oversight is also exercised with regard to the procedures and contingency plans for emergency situations relating to the supervised CCPs. These procedures and plans are also agreed within the colleges.