Response to consultation on RTS on prudential requirements for central securities depositories (CSDs)
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We see also problems with the proposed cumulative approach, because this approach creates overlaps. For example there are overlaps between business risk and winding-down. A given event (e.g. a substantial and unexpected loss of income) considered for business risk purposes might or might not fall under winding down scenarios, depending on the severity of the problem and whether it poses a threat to the operation of a CSD as a going concern. The same scenario might thus be considered twice, although with different degrees.
We support the use of the Basic Indicator Approach for assessing operational and legal risks, but we think that the 15% ratio used for banks should be recalibrated to 10% to reflect CSDs' lower risk profile and also we recommend to adjust the ratio according to specific insurance arrangements covering operational and legal risks.
Regarding a calculation of capital requirements for business risk we think that the using gross expenses as a reference are inappropriate. Business risk should be primarily covered by net income. This would avoid unnecessarily high capital requirements, e.g. in case of a CSD that would remain profitable after the business risk scenarios described in Annex II have materialised. Equity coverage should only be required in case of net losses, hence there should be no 25% floor.
Q2. Is the level of capital requirements as proposed in these draft RTS adequate to capture all the risks arising from the activities of a CSD? Are they proportionate for all the CSDs’ business models? Please justify your answer.
The proposed calculations often put the focus on risks which are marginal for CSDs (investment, credit and liquidity risks) instead of allowing for a transparent and consistent assessment of operational risks which are at the core of every CSD’s activities.We see also problems with the proposed cumulative approach, because this approach creates overlaps. For example there are overlaps between business risk and winding-down. A given event (e.g. a substantial and unexpected loss of income) considered for business risk purposes might or might not fall under winding down scenarios, depending on the severity of the problem and whether it poses a threat to the operation of a CSD as a going concern. The same scenario might thus be considered twice, although with different degrees.
We support the use of the Basic Indicator Approach for assessing operational and legal risks, but we think that the 15% ratio used for banks should be recalibrated to 10% to reflect CSDs' lower risk profile and also we recommend to adjust the ratio according to specific insurance arrangements covering operational and legal risks.
Regarding a calculation of capital requirements for business risk we think that the using gross expenses as a reference are inappropriate. Business risk should be primarily covered by net income. This would avoid unnecessarily high capital requirements, e.g. in case of a CSD that would remain profitable after the business risk scenarios described in Annex II have materialised. Equity coverage should only be required in case of net losses, hence there should be no 25% floor.