Events of default are among the most difficult and stressful occurrences that market participants and SSSs may experience. The IOSCO Report underscores the need for transparency in the area of default procedures on the grounds that it will provide more certainty in the operation of critical market mechanism during these stressful events, and thereby reduce the risk that a single default will cause further disruptions.
Because the definition of a default event may differ across systems, the IOSCO Report recommends disclosure with regard to the circumstances in which action may be taken, as well as who may take it, and the scope of the actions that may be taken. In some cases, the term
„default” may not be used by the SSS in its rules and procedures or in contracts with its participants. In these instances, SSSs should attempt to spell out for their participants both how they would address the insolvency of a participant and any other circumstances in which they would initiate exceptional measures to fulfil settlement or other obligations to their participants.
In this regard, this section attempts to lay out in one place the available resources of the SSS with respect to meeting obligations in the event of a default or other events that would trigger exceptional measures. It is important for participants to understand that these resources are as well as the order in which they will be accessed. The questions also address the possibility that securities or funds transfers will be unwound by the SSS. Because unwinds are a way to reallocate liquidity pressures and credit losses, it is vital that participants understand all the possible circumstances in which an unwind can occur.
A. Please discuss the events or circumstances that would constitute default of a participant under the rules and procedures of the SSS or that would lead the SSS to make use of exceptional settlement arrangements or unwind procedures.
1. Failure by a participant to meet a test of its solvency under the applicable laws of its jurisdiction?
2. Failure to make payments or deliveries of securities within the time specified?
3. To the extent that the rules and procedures grant discretion in the determination of the use of default or other exceptional procedures, please discuss where the authority to exercise such discretion resides and the circumstances in which this authority would be used.
According to Depozitarul Central’s regulations, there are some criteria for suspending participants, as follows:
• upon the request of the Participant to the clearing-settlement and registry system;
• following a sanction applied by Depozitarul Central;
• when a participant does not complied with the requirements for maintaining the quality of participant;
• following a sanction given by the FSA, National of Bank of Romania or the competent authorities of other member states/competent authorities from the origin states;
• as a result of the initiation of the insolvency procedure.
Depozitarul Central’s Rulebook and also the contracts between Depozitarul Central and participants have provisions regarding the obligations of participants if insolvency proceedings were opened against a participant.
The Rulebook of Depozitarul Central states that the time on which the transfer orders are considered introduced in Depozitarul Central’s clearing-settlement system, namely they are valid/irrevocable and opposable to third parties producing legal effects between the Participants to the clearing-settlement and registry system is the time on which the transaction is registered in the Depozitarul Central’s system according.
The transfer orders registered in the system cannot be revoked by a participant to Depozitarul Central’s system or by a third party, as they are protected according to the provisions of Law 253/2004 regarding the permanent nature of settlement in the payment systems and the settlement systems of operations with securities and Law 297/2004, even in case a Participant to the clearing-settlement and registry system is subject to a winding-up procedure.
In case of stock exchange settlements, a failure to deliver securities or make payment on time would trigger default procedures according to the Rulebook of Depozitarul Central (risk management procedures).
B. What procedures are followed by the SSS once it has determined that a default event has occurred or that exceptional settlement arrangements are to be employed?
Securities default
Special Buy-in procedure
• If a participant does not have the necessary securities to settle the trade, then it has the obligation to request the trading system to carry out special buy-in transactions.
In case a custodian agent does not have enough securities to settle the trade, it may request the Depozitarul Central to use the special buy-in procedure in its name, in order to obtain the
securities needed for the settlement. Depozitarul Central will inform the trading system regarding the request of the custodian agent and the trading system will place the special buy-in transaction in its own system, according to Depozitarul Central’s notice.
The special buy-in transaction may be carried out before or on the settlement date of the initial buy-in transactions the latest and must cover the entire quantity of securities contained in the initial sell-out transaction.
These trades can be done no later than SD at 2:30pm For this trade, the Depozitarul Central imposes a penalty of 0.03% or 0.3%, depending on the date when this procedure is performed;
Imposed Buy-in procedure
• If the necessary securities could not been purchased, then Depozitarul Central initiates the imposed buy-in procedure. The imposed buy-in procedure starts on on SD+1.
For imposed buy-in trades, Depozitarul Central imposes a penalty of 3%. The transactions resulted from the application of the imposed buy-in procedure are settled on T+2 the latest, on a net or gross basis
• If the necessary amount of securities is not covered through the imposed buy-in, a new imposed buy-in trade is input in the following day by the BSE. If there are no sufficient securities in the broker’s account after this, the initial trade will be cancelled, as well as all related trades.
In this case the broker is suspended from trading for a period ranging between 5 and 30 business days;
• If the penalties are not paid within one business day from the execution of the buy-in or special buy-in, additional penalties of 1% are calculated for each day of delay, during the following 30 days.
The costs are never imposed directly on the investor, only on the local broker. The way these costs can be passed further to the investor is subject to the brokerage agreement provisions.
Cash default
The cash settlement is performed by NBR, using directly the accounts of the settlement banks opened in RTGS. There are guarantee funds available for settlement fails and, taking into consideration that Depozitarul Central not acting as CCP, Depozitarul Central’s resources are not exposed. The risk failure of the settlement bank is reduced by the NBR through specific procedures and NBR Regulation No. 16/2011 regarding the facilities granted by the National Bank of Romania for smooth settlement in the ReGIS system.
Risk management is organised on two levels:
At the settlement banks level, the risk management is performed by NBR. There are two risk management procedures in order to ensure the existence of the money on settlement day in the accounts opened by settlement banks with NBR.
Settlement banks are required to have in place cash and other financial instruments in an amount exceeding the net positions on a daily basis.
Depozitarul Central performs risk management at the broker and custodian level. Depozitarul Central establishes a settlement limit for each participant of the clearing, settlement and registry system except for custodian agents in order to mitigate the risk of non-payment of the obligations resulted from the transactions concluded by the trading systems and registered with the Depozitarul Central.
Each member (broker or custodian) makes initial and periodic contributions to the Guarantee Fund that is administered by Depozitarul Central. If on settlement day a broker does not have enough money in his settlement account he must try to get a credit from his settlement bank or from other credit institution.,. If the credit is not enough or the settlement bank does not agree to grant him the credit, then the participant may initiate the special sell-out procedure.
On SD, if the cash position is not covered, the Depozitarul Central will take into consideration the following financial resources:
a) the corresponding margin of the respective participant of the clearing, settlement and registry system;
b) the contribution of the respective participant of the clearing, settlement and registry system to the Guarantee Fund;
c) the Guarantee Fund constituted by other participants of the clearing, settlement and registry system;
d) The initial margins collected from the other participants of the clearing, settlement and registry system.
The participant at fault must repay the Guarantee Fund and margins the following day.
In the settlement process, if the participant cash settlement position has not been covered, his position is adjusted by excluding those trades from netting and postponing them. In case of the postponed trades Depozitarul Central will apply the imposed sell-out procedure in the next days.
1. How and at what point are participants notified that this has occurred?
See above.
2. Would the SSS be expected to continue to meet all its obligations to participants under these circumstances? Please discuss the resources in place to ensure that this would occur (e.g. collateral, participants’ fund, insurance, loss-sharing arrangements etc.) See above.
3. Please describe and provide a time line indicating the order in which these resources would be used as well as the timing of participant notifications and important deadlines (e.g. when the SSS’s obligations to participants would be met, when participants would need to cover their loss-sharing obligations).
See above.
4. Please describe all conditions under which provisional transfers of securities or funds could be unwound by the SSS.
There are no provisional transfers of securities or funds in Depozitarul Central, thus no unwind procedures available.
(a) How and on what authority would a decision to unwind securities or funds transfers be made by the SSS?
Not applicable.
(b) When and how would participants be notified of a decision to unwind provisional securities or funds transfers?
Not applicable.
(c) How long would participants have to cover any debit positions in their own securities or funds accounts resulting from an unwind?
Not applicable.
(d) In the event of an unwind, would all transfers be unwound or would only a subset of transfers (e.g. only securities purchases or only those of a subset of participants) be unwound?
Not applicable.
(e) If only a subset of transfers, what procedure would be followed to determine which transfers and in what order?
Not applicable.
5. Can bankruptcy or insolvency be declared retrospectively in the SSS’s jurisdiction (e.g.
under a "zero-hour" rule), and could this cause provisional securities or funds transfers to be unwound?
Neither bankruptcy nor insolvency can be declared retrospectively in Romanian jurisdiction.
There is no “zero hour rule” in Romania.
Provisional securities or funds transfers are not applicable in Depozitarul Central’s system.
6. Please describe any circumstances in which transfers of securities or funds that were defined as final in response to question V.E.2 above would ever be unwound.
There can be no such circumstances.
C. Has a participant in the SSS ever been declared in default or become insolvent?
Yes, two participants have been declared in default from the beginning of Depozitarul Central’s activity until now.
1. Have loss-sharing procedures been invoked?
No.
2. Please describe whether any of these defaults or insolvency resulted in losses for the SSS or its participants and how they were absorbed.
The mentioned participants default did not resulted in losses for Depozitarul Central or its participants.