LuxCSD Default Management
1. LuxCSD Default Management Process
The default management process of LuxCSD has been implemented to mitigate the risks arising from a default (as defined in 1.2) of a LuxCSD customer and enables LuxCSD to avoid and/or minimise losses related to a customer default. As such, the non-defaulting customers of LuxCSD 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 LuxCSD customers.
Important note: The process described hereafter is the general approach which is in principle followed to handle a default. It does not override the contractual agreements in place with the customer.
The default management process of LuxCSD 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 non-defaulting customers’ settlement, the transactions of defaulting customers may be suspended from automatic transaction processing and all transactions will then be manually monitored.
According to Regulation (EU) No 909/2014) Article 41 (2), the LuxCSD Default Management presented here is part of the relevant default rules and procedures that should be made available to the public.
1.1 Early warning framework
The early warning framework is an important component of the LuxCSD default management process.
The continuous monitoring of identified indicators and their thresholds across various business areas ensures an early detection of irregularities in customer behaviour, which could ultimately result in the customer’s credit deterioration or default.
1.2 Acknowledgement of a 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 have been taken to verify its occurrence. The communication of the default to LuxCSD 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, LuxCSD customers are requested to notify their default in writing as soon as possible. Following that, LuxCSD would transmit this information along with its source to its competent authority.
1.3 Preliminary measures
In order to minimise outstanding exposures and therefore avoid or mitigate liquidation in case of default, preliminary measures are taken such as monitoring and blocking of accounts.
1.3.1 Consequences of a default on settlement instructions
To the extent permitted by law, and according to the contractual agreements in place between LuxCSD and the customer, LuxCSD 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, liquidation is undertaken with the objective of closing the outstanding exposures.
According to the right of pledge under the GTCs, LuxCSD has the right to select the securities to be liquidated. If difficulties to liquidate any of the selected securities arise, these can be replaced by alternative securities from the customer account.
In accordance with the ESMA guidelines on CSD participants default rules and procedures, LuxCSD will notify as soon as possible its competent authority and the defaulting participant 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 the Default Management Unit and regularly reviewed and approved by the Board of Directors of LuxCSD. In case of a crisis/customer default, the default management process is governed by the Executive Committee and coordinated by the Default Management Unit. The Executive Committee 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.
3. Termination/suspension of services
LuxCSD 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 LuxCSD 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 Executive Committee of LuxCSD 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, the Default Management Unit will inform the relevant stakeholders so that appropriate actions are taken to remove such weaknesses.