Spain
Financial Sector Assessment Program: Detailed Assessment of the CPSS-IOSCO Recommendations for the Securities Settlement Systems

This report describes the assessment of the securities clearance and settlement system in Spain, based on the Committee on Payment and Settlement Systems (CPSS)-International Organization of Securities Commissions’ (IOSCO) Recommendations for Securities Settlement Systems. It is performed using the CPSS/IOSCO assessment methodology, and assesses the Management Company for Securities Registry, Clearance and Settlement, which operates under the commercial name of Iberclear, a corporation of the Securities Clearance and Settlement Service, SCLV, and the Central Public Registry.

Abstract

This report describes the assessment of the securities clearance and settlement system in Spain, based on the Committee on Payment and Settlement Systems (CPSS)-International Organization of Securities Commissions’ (IOSCO) Recommendations for Securities Settlement Systems. It is performed using the CPSS/IOSCO assessment methodology, and assesses the Management Company for Securities Registry, Clearance and Settlement, which operates under the commercial name of Iberclear, a corporation of the Securities Clearance and Settlement Service, SCLV, and the Central Public Registry.

I. CPSS-IOSCO Recommendations for Securities Settlement Systems

A. General

1. This report describes the assessment of the securities clearance and settlement system in Spain.1 The assessment is based on the Committee on Payment and Settlement Systems (CPSS)/International Organization of Securities Commissions’ (IOSCO) Recommendations for Securities Settlement Systems (2001), and performed using the CPSS/IOSCO assessment methodology for Recommendations for Securities Settlement Systems, (2002). The system assessed is the Registradora Central de Valores (Central Securities Depository, or RCV) that Spain maintains at the national level, known as the Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, SA (Management Company for Securities Registry, Clearance and Settlement), which operates under the commercial name of Iberclear.

2. Iberclear was constituted on April 1, 2003, and is the product of the merger into a single corporation of the Servicio de Compensación y Liquidación de Valores SA (Securities Clearance and Settlement Service, SCLV) and the Central de Anotaciones de Deuda del Estado (CADE). The SCLV platform performs the functions necessary for registration, clearance and settlement relating to the transactions in the securities described below (other than public debt), and the CADE platform performs these functions for the Mercado de Deuda Pública en Anotaciones (Book-Entry Public Debt Market).

B. Scope of the Assessment

3. The securities covered by this assessment are:

  • Shares and rights accepted for trading on more than one stock exchange, or solely on the Madrid Stock Exchange, both those traded by open outcry and those using the electronic continuous trading system, Sistema de Interconexión Bursátil Español (SIBE).

  • Securities issued for negotiation on the Latibex market (i.e., Latin American securities traded on the Madrid Stock Exchange).

  • Warrants and certificates accepted for trading in the Warrants, Certificates and Other Products Module of the SIBE.

  • Private fixed-income securities accepted for trading on the Electronic Fixed Income Market, on two or more open-outcry stock exchanges or on the Asociación de Intermediarios de Activos Financieros (AIAF) Fixed Income Market.

  • Public debt issued by the central government, by the Autonomous Communities, with the exception of the Autonomous Communities of Cataluña, País Vasco and Valencia, and by local corporations.

4. The institutions that perform critical functions in terms of registration, clearance and settlement for these securities are the following:

  • Iberclear. This is the institution responsible, together with its participating entities, for the registration of book entries (anotaciones en cuenta), which are constituted as such at the time of registration/issuance, and for keeping this registry of book entries for the securities referred to above. It maintains full details on the securities owned by its participating entities, as well as the overall balance of the securities they hold on behalf of their customers (third parties).

  • Entities participating in Iberclear. A number of entities participate in Iberclear, depending on the platform on which they are operating. The entities belonging to the former SCLV are responsible for registering the securities of those natural or legal persons who are not participants in Iberclear-SCLV (customers or third parties). In the case of the CADE platform, the so-called Entidades Gestoras (Managing Entities) are responsible for registering the securities of those entities that are not account holders, i.e., that cannot directly maintain accounts in their name in Iberclear-CADE; this is known as the registro de terceros (third party or customer registry).

5. In addition to Iberclear, there are local securities settlement systems (SSSs) in Barcelona, Bilbao, and Valencia.

6. The local SSSs process transactions involving securities that are listed only on the corresponding stock exchange, i.e., exclusively on the stock exchange of Barcelona, Bilbao or Valencia. Although there are different types of securities registered in these three local SSSs, such as shares or private fixed-income securities, the most important ones in terms of actual volume traded are those issued by the autonomous communities of Cataluña, País Vasco, and Valencia.

7. The local SSS’s systems and procedures for clearance and settlement are very similar to those of Iberclear. They are supervised not by the Comisión Nacional del Mercado de Valores (CNMV), but by the corresponding Autonomous Community governments.

8. Local SSSs have been excluded from the present assessment, because the transactions and volumes they process are insignificant in comparison with Iberclear’s activity. In the aggregate, the regional clearance and settlement systems processed only a tiny fraction of the total value of securities processed in Spain in 2004. Iberclear settled a total of €3,457,319 million in value, while the regional settlement organizations processed €83 million by value. The majority of this was the processing of the Autonomous Communities’ debt, of which these settlement organizations accounted for 3.5 percent of the total value of government debt processed. They processed 0.04 percent of corporate bonds by value and 0.24 percent of equities by value.

9. This assessment does not cover MEFFClear, although its principal characteristics are referred to in Recommendation 4 below. This is a Central Counterparty (CCP) belonging to MEFF Renta Fija in which transactions negotiated bilaterally or originating from Sistema Electrónico de Negociación de Activos Financieros (Financial Asset Electronic Trading System—SENAF) can be recorded simultaneously. Therefore, this CCP is not part of the Iberclear systems. The number of transactions processed daily is low. In 2004, MEFFclear processed a daily average of 13 operations and €1.340 million in value (representing less than 1 percent of the total settlement in the public debt market). An assessment of MEFFClear is planned by the CNMV in accordance with the CPSS/IOSCO Recommendations for Central Counterparties (2004).

C. Institutional and Market Structure

10. There are four stock exchanges (Bolsas de Valores) in Spain: the Madrid Stock Exchange, the Barcelona Stock Exchange, the Bilbao Stock Exchange, and the Valencia Stock Exchange.

11. Bolsas y Mercados Españoles (BME) is the holding company for the different corporations that run and manage the securities markets and financial systems. It combines the markets for variable-income and fixed-income securities, derivatives, and clearance and settlement systems into a single entity for action, decision and coordination. The BME group consists of Bolsa de Madrid, Bolsa de Barcelona, Bolsa de Bilbao, Bolsa de Valencia, Latibex, MEFF, AIAF, SENAF, and Iberclear.

12. Pursuant to Article 46 of Law 24/1988, the Securities Market Act (SMA), equities (shares, securities conveying the right of acquisition or subscription for shares, and securities convertible into shares) are traded exclusively on the stock markets. Those securities may be admitted for trading on one or more of the four stock exchanges in Spain.

13. There are two trading systems for variable-income securities (i.e., equities), both of them order-driven:

  • The mercados de corros (trading pits) in each of the four exchanges. These are conventional call (open outcry) markets.

  • The Sistema de Interconexión Bursátil Español (SIBE). The four Spanish exchanges have constituted the Sociedad de Bolsas which is responsible for technical management of the electronically interconnected continuous trading system. The SIBE is used for trading securities approved by the CNMV from among those previously listed on at least two stock exchanges. Securities admitted for the SIBE are traded through an electronic system that allows for real-time execution of orders, from 9:00 a.m. to 5:35 p.m.

14. Thus, some variable-income instruments are being traded on the conventional call markets of one or more of the four stock exchanges, and others are being traded through the SIBE.

15. The SIBE technical platform is also used for Latibex trading. Latibex is a Multilateral Trading Facility (MTF) on which euro-denominated Latin American securities are traded.

16. Warrants and certificates are traded on a special SIBE segment for warrants, certificates and other products.

17. Private fixed-income instruments are also traded on the stock exchanges, although not exclusively. There are two types of fixed-income markets:

  • The Electronic Fixed-Income Market trades private fixed-income instruments, as well as debt instruments of the central government and the Autonomous Communities.

  • The call markets of the Barcelona, Bilbao, and Valencia Exchanges deal essentially in fixed-income securities issued by the corresponding Autonomous Communities.

18. Market participants may be members of more than one exchange. Members conduct their trades on the exchange, which communicates them to the corresponding settlement system.

19. The registry, clearance and settlement system which is Iberclear’s SCLV platform is used for securities traded through SIBE, the Madrid call market, the call markets of more than one stock exchange, and the Electronic Fixed-Income Market. The exceptions are public debt traded on the stock exchanges, which is settled via Iberclear’s CADE platform, and transactions on the Book-Entry Public Debt Market. For variable-income instruments traded exclusively on one of the stock exchanges of Barcelona, Bilbao, or Valencia, transactions are settled through the settlement system of the exchange concerned.

20. Using the means established for this purpose, stock exchange members must report to Iberclear-SCLV the details of every transaction, together with the participating entity that will be responsible for settlement. Thus, the exchange member and the participant responsible for settlement may be different.

21. Although, as noted above, there are private fixed-income instruments listed on the stock exchanges, the AIAF fixed-income market is the principal market for this type of instrument, and most of the volume of private fixed-income securities (more than 99 percent) is traded on this market. This is a telephone market, decentralized and price-driven, in which members negotiate transactions bilaterally and report them subsequently for publication.

22. Public debt is traded on the Book-Entry Public Debt Market. There are two types of trading:

  • Trading conducted between members. This may be done through one of the two electronic trading platforms, SENAF and the Multilateral Trading System MTS España, through one of the European platforms (EuroMTS or Brokertec), or directly between participants, in the so-called second tier.

  • Trading with third parties. Bilateral transactions negotiated between a member and a third party, or between two third parties. These transactions must be registered with the managing entities, which are authorized to register transactions and ownership by natural or legal persons who do not have or are precluded from holding open securities accounts in the system.

23. All public debt is also admitted for trading on the Electronic Fixed-Income Market, described above, although the volume traded, in terms of number of transactions and value, is insignificant.

24. For transactions conducted on the AIAF market and on the Public Debt Market, the system for registry, clearance and settlement is the CADE platform of Iberclear. In bilateral trading between members, the two parties report directly to Iberclear-CADE, which conducts the settlement.

25. The securities accounts of both registration and clearance systems, SCLV and CADE, are organized in a two-tier system, in which Iberclear, as the central depository, records for each class of instrument the balance of securities that each participant holds for its own account, and is held for customers. In turn, each participant authorized to hold customers’ securities is responsible for maintaining a detailed registry showing the owners of the securities recorded in the omnibus customer account that is kept in Iberclear’s central registry.

26. Iberclear is supervised by the CNMV, while the powers of supervision and regulation for the settlement systems of the Barcelona, Bilbao and Valencia stock exchanges lie with the respective Autonomous Communities.

27. With respect to derivatives contracts, there are two markets, one dedicated to financial derivatives and the other to raw materials derivatives. MEFF is the Spanish market for futures and options on bonds, interest rates, market indices (IBEX-35) and equities. MEFF settles its contracts through its own clearing house, which is organized as a department of the market. In September 2003 MEFF established a Central Counterparty known as MEFFClear, which allows for registration of simultaneous public debt transactions contracted in SENAF or negotiated bilaterally by members of the public debt market. MFAO is the futures market for olive oil.

Description of the Spanish clearance and settlement process

28. The Spanish clearance and settlement system contains some unique features (such as the registration process); therefore, a description is useful background.

Iberclear SCLV platform (principally exchange-traded equity securities)

29. Once transactions have been executed on the market (trade date T) members report to Iberclear on T using the electronic means provided by the stock exchanges, covering the amounts, prices and number of securities for each transaction. Transactions subject to special rules or trading hours must be reported in the same way as other market transactions, but in an appropriately differentiated form. Each contract is assigned a unique reference number that is used to track the transaction from execution through settlement. Iberclear maintains the registry of these reference numbers.

30. Market members must communicate to Iberclear the details on the allocation (asignación) of their transactions. This process is called desglose in the Spanish systems, and involves a detailed itemization. Each allocation must refer to a single order placer and must contain the following information: type of instrument, amount, and identification of the Iberclear participant appointed to settle the transaction. That entity may be different from the one that executed the transaction.

31. The contract may be allocated at any moment from the time the transaction takes place until the afternoon of the following day. Thus, for a trade that took place on day T, the details of the allocation must be communicated at latest by the afternoon of T+1. Pre-settlement processes for buyers and sellers are done separately.

32. Upon receipt of this information, Iberclear provides it to the participating entity appointed for settlement. That entity must either accept or reject the transaction by the following communication period (or “window”). Thus, an allocation received on the morning of T must be accepted before the end of the afternoon of T, and one received in the afternoon of T must be accepted before the morning of T+1. The final communication of acceptance or rejection must take place on the morning of T+2.

33. Confirmation by the participating entity may be given expressly or tacitly, meaning that any transaction that has not been expressly rejected is understood to be confirmed. Rejected transactions are reported to the member that conducted them on the same day they are rejected, so that another settlement entity can be appointed. Ultimately, it is the exchange member that conducted the transaction that will be responsible for its settlement. Similarly, any transaction that has not been allocated before the close of T+1 will be attributed to the market member that executed it.

34. In addition to the foregoing, the entities responsible for settling sales must perform the process known as justification, as a step prior to settlement of those sales. Justification may be done from T until 3 p.m. on T+3. It consists of identifying to the system the securities that will be delivered in settlement of those sales transactions.

35. Settlement of purchase and sale transactions takes place three days after the contract (T+3), in line with the Bank for International Settlements (BIS) model 2 for delivery versus payment (DVP), i.e., gross settlement of securities and net settlement of funds. Currently there are two daily multilateral settlement batches (cycles) for purchase and sale transactions, one at 9:30 a.m. and the other at 3:30 p.m.

36. Securities held in the central depository of the Iberclear-SCLV platform at the end of 2004 had a nominal value of €92.9 billion (€95.2 billion at the end of 2003).

37. In 2004, the daily average of transactions processed was 60,820 (73,617 in 2003), for a value of €5.9 billion (€6.5 billion in 2003). The largest daily volume of transactions processed was 429,231 in 2004, while the smallest was 22,729. The system is thus robust to periods of peak demand.

Iberclear-CADE platform for AIAF and Public Debt market instruments

38. Two types of transactions are distinguished in the AIAF and Public Debt markets: those conducted between participating entities, and those contracted bilaterally by a third party with a managing entity or with another participating entity, or another third party.

39. For transactions contracted between two participating entities, both must report them electronically to Iberclear at the time of the contract. Among the transaction data to be reported, the entities must include a reference number for the transaction, for purposes of relating purchases and sales. Iberclear checks the information received, rejecting any transactions that lack the required data. If the check shows the purchase and sale data to be correct, the transaction is considered casada (matched) and it cannot be modified thereafter. If there are discrepancies, the transaction is marked as mismatched. The status of the transaction is communicated electronically to the participating entities. Transactions that have not been matched by the end of the reporting date will be deleted by the system.

40. When the transaction is contracted on an electronic trading platform, MTS España, SENAF, Brokertec or EuroMTS, it is this platform that will report it to Iberclear, without the need for subsequent intervention by the participating entities. Public debt transactions contracted on the Madrid Stock Exchange are communicated by it to Iberclear, in a manner analogous to the electronic platforms.

41. All transactions involving a third party must be entered in the Customer Registry of a managing entity of which that party is a customer. When the sale is conducted bilaterally between a managing entity and one of its customers, or between two customers of the same entity, the transaction will be entered in the Customer Registry of that entity. When the third party conducting the sale is not included in the registry of that entity, but in another one designated by the customer, or the transaction is conducted bilaterally between two customers of different entities, the two entities will exchange the necessary information, giving rise to a transfer of securities between them.

42. When transactions with third parties are contracted prior to settlement date, the entities must reflect them through a change in the balance of their omnibus customer account, which they must communicate to Iberclear on the afternoon of the business day prior to that date. Variations in the omnibus account from transactions contracted on the day of their settlement may be communicated electronically, using the real-time settlement system. At the close of each daily session, the managing entities will send Iberclear-CADE a file with details, for each security, of the book entries made in their Customer Registry. Iberclear-CADE conducts a daily test of this information, to check the required consistency between the overall balance determined from the detailed information and that resulting from the daily settlement processes.

43. The process of settlement and book entry for transactions is divided into three phases: (a) settlement batch (for transactions reported during the previous night), (b) real-time settlement (from 7 a.m. to 4 p.m.), and (c) end-of-day batch (at 5 p.m.). The settlement follows BIS DVP Model 1, i.e., gross settlement of securities and funds, individually, trade by trade. The central settlement system also treats as individual transactions those communicated daily to Iberclear in the first settlement batch by the managing entities reporting the change produced in their omnibus customer account balances by the book entries they have made in their records as a consequence of the additions and deletions that they have entered for transactions with their customers.

44. AIAF securities held in the Iberclear-CADE central depository at the end of 2004 had a nominal value of €315.3 billion (€204.6 billion at the end of 2003). Public Debt securities held in the Iberclear-CADE central depository at the end of 2004 had a nominal value of €322.8 billion (€313.8 billion at the end of 2003).

45. In 2004, the daily average of AIAF transactions settled was 6,938 (5,980 in 2003), for a cash value of €19.5 billion (€13.6 billion in 2003). The daily average of public debt transactions settled in 2004 was 33,456 (38,510 in 2003), for a cash value of €313.9 billion (€317.7 billion in 2003)

D. Description of Regulatory Structure and Practices

Regulatory framework

46. All activities relating to securities markets, including clearance and settlement and the institutions that conduct them, are regulated by Law 24/1988, the Securities Market Act. Subsequently, that law was amended by the following laws: 37/1998, 14/2000, 24/2001, 44/2002, 53/2002, 22/2003, and 62/2003.

47. Regulations of lower legal rank have since been issued for the law: Royal Decrees approved by the government, orders from the Minister of Economy, and circulars and technical standards from the CNMV.

48. In 1999, with approval of Law 41/1999, on payment and securities settlement systems, known as the Ley de Firmeza (Finality Act), European Directive 98/26/EC was transposed into Spanish law.

49. Chief among lower-ranking provisions affecting the securities settlement system are the following two decrees:

  • Royal Decree 116/1992 on the representation of securities by book entries and clearance and settlement of stock exchange transactions, amended by Royal Decrees 2590/1998 and 705/2002.

  • Royal Decree 505/1987, creating a system of book entries for government debt.

50. Together with this legislation, Iberclear has its own internal bylaws:

  • In the first place there is the Reglamento de la Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores (Regulations of the Management Company for the Securities Registration, Clearance and Settlement Systems), approved by Order ECO/689/2003, published in the Official Gazette of March 28, 2003. These regulations retain in force the Reglamento de Organización y Funcionamiento del Servicio de Compensación y Liquidación de Valores (Organization and Operating Bylaws of the Securities Clearance and Settlement Service, hereafter the SCLV Bylaws) with certain additions and amendments, and the rules that until that time governed registration, clearance and settlement on the public debt market, with the regulatory adjustments established in the fifth section of the first transitional provision of Law 44/2002, the Financial System Reform Measures Act.

  • Circulars and Operating Instructions. These rules are prepared and approved by the Iberclear Board of Directors and must carry the consent of the CNMV before they are effective. Once approved, they are published in the official quotations bulletin (Boletín Oficial de Cotización) of the four stock exchanges and are sent out individually to each participant.

Oversight, regulatory, and supervisory bodies

51. SMA Article 84 makes the CNMV responsible for supervision of Iberclear.

52. Until April 1, 2003, the Bank of Spain (BE) was responsible for supervision and oversight of CADE, the former central agency for registration, clearance and settlement of public debt market securities, which was merged with the SCLV, under the supervision of the CNMV, to constitute Iberclear.

53. Iberclear is supervised and controlled at two levels:

  • First level. The CNMV exercises direct supervision and control over Iberclear and over its participants. This includes oversight of their processes and activities, and supervision of Iberclear and authorization of its by-laws.

  • Second level. Iberclear supervises and controls the activities of system participants. The rules provide for the necessary coordination between the supervisory bodies. If Iberclear detects any circumstance or action that could indicate a violation of rules or a deviation from the principles underlying securities market regulation, it will bring this immediately to the attention of the CNMV.

E. Information and Methodology Used for Assessment

54. This assessment was performed using the CPSS/IOSCO Assessment Methodology for Recommendations for Securities Settlement Systems (2002).

55. The principal sources of information used included:

  • General Regulations: Law 24/1988 and Law 41/1999, Royal Decrees 505/1987 and 116/1992, Ministerial Orders, CNMV Circulars, and other regulations.

  • Detailed regulations from Iberclear: Iberclear Bylaws, Circulars and Operating Instructions

  • Iberclear’s responses to the questionnaire included in the CPSS/IOSCO Disclosure Framework, for both the SCLV and the CADE platforms.

  • Annual reports of CNMV, Iberclear, and BME.

  • Interviews with staff of CNMV, Iberclear, BE, BME, and others.

Table 1.

Detailed Assessment of Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems—Iberclear

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Table 2.

Summary Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems—Iberclear

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Table 3.

Recommended Actions to Improve Iberclear’s Observance of CPSS-IOSCO—Recommendations for Securities Settlement Systems

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F. Authorities’ Response

56. The Spanish authorities thank the assessor for his analysis and concur with his evaluation, but wish to make the following comments:

Recommentation 9

57. The rules of the clearing and settlement system prohibit participants from having debit balances and no participant has ever had a net overdraft. Bearing that in mind, possible, exceptional short positions that are temporarily held by private customers should not be confused with debit balances on the accounts of participants (namely, institutions participating in Iberclear), which are prohibited. In addition, it should be noted that the system does not recognize securities with economic and political rights in excess of the recorded totals for each issue.

58. Regarding the actions recommended for eliminating possible debit balances, it should be noted that the rules prohibit such balances on participants’ accounts. With respect to temporary short customer positions, the Iberclear Strategic Plan includes the T+3 repurchase mechanism, anticipated for the second quarter of 2006, which will totally eliminate these positions.

Recommendation 15

59. The composition of the TAC and its regular meetings guarantee that all direct participants have detailed information on Iberclear activities and projects. With respect to the customers of these participants, Iberclear is beginning to engage in more dissemination activity, in addition to the existing customer care procedures, whereby, on an ongoing basis, the different departments respond to inquiries by phone or through the mailbox on their website.

Recommendation 16

60. Since the IMF FSAP mission to Spain, there have been developments in at least partial compliance with the recommended actions. The “Unified Matching System” (SUC)—Transfers (03/07/05) and SUC—Loans (November 21, 2005), which use SWIFT communications based on ISO standard 15022, are already on stream. In addition, the third part of this project (SUC—Fixed Income), which is structured in three stages (the first of which was published on February 8, 2006), is scheduled to take effect over the first semester of 2006. Therefore, the requirement for using international communication standards is already over 75 percent implemented.

Recommendation 18

61. Since the IMF FSAP mission to Spain, there have been developments in at least partial compliance with the recommended actions. On September 22, 2005, the CNMV Executive Committee approved the work plan for conducting an on-site supervision mission to Iberclear, which began on October 19, 2005, with the collaboration of Banco de España. The basic purpose is to verify compliance with the functions assigned to Iberclear in the standards, including its supervisory functions.

62. Regarding the maintenance of the Registry for Emission Rights for Greenhouse Gases, clearing and settlement are not the only core activities of Iberclear. These activities also encompass the registration of rights represented by annotations to the accounts. Therefore, the keeping of the registry is indeed one of Iberclear’s natural activities. Regarding the management risk associated with the maintenance of this new registry, the CNMV’s report was in favor of Iberclear assuming these functions, having considered whether the resources used on that activity could undermine Iberclear’s efficiency in the area of securities. Furthermore, the inspections that have just begun are reviewing the maintenance of this new registry and how it impacts on Iberclear’s other functions.

1

This assessment was carried out by Larry E. Bergmann (U.S. Exchange and Securities Commission). The assessment took place from June 22 to July 1, 2005.