Overview of Financial Market Infrastructures in Switzerland

5. Three Swiss-domiciled FMIs have been designated as systemically important in Switzerland by the SNB, each operated by SIX Group AG:

• SIC, a RTGS PS. SIC is operated on behalf of the SNB by SIX Interbank Clearing AG, which is 75 percent owned by SIX Group and 25 percent owned by PostFinance AG.⁴ The SNB is the system manager for SIC.⁵ As well as facilitating interbank payments in Swiss francs (CHF), SIC settles a significant share of retail payments (by volume 96 percent of SIC transactions are retail payments) and plays an important role in the implementation of monetary policy in Switzerland.

• SIX SIS, a CSD and SSS operated by SIX SIS AG, a wholly owned subsidiary of SIX Group. SIX SIS provides for the custody and settlement of tradable financial instruments, including securities traded on the SIX Swiss Exchange, a Swiss-domiciled stock exchange owned by SIX Group. SIX SIS also provides collateral management services related to repo market transactions including SNB repo and interbank repo transactions concluded at the SIX repo MTF. SIX SIS maintains links with a number of other CSDs, including through TARGET2-Securities (T2S). It is currently applying to the European Securities and Markets Authority (ESMA) for equivalence with the Central Securities Depository Regulation (CSDR).

• SIX x-clear, a CCP operated by SIX x-clear AG, also a subsidiary of SIX Group. SIX x-clear provides CCP services for equities traded on SIX Swiss Exchange, London Stock Exchange, Oslo Bors and Nasdaq Nordic Exchanges, as well as several MTFs. It also clears derivatives traded on Oslo Bors, exchange traded funds (ETFs) and bonds traded on SIX Swiss Exchange, and Norwegian securities lending transactions. SIX x-clear is interoperable with two other CCPs, LCH Ltd and EuroCCP NV, for cash equities, ETFs and (with LCH Ltd only) derivatives. SIX x-clear is recognized as a third-country CCP by ESMA, allowing it to provide services to the EU market. The CCP operates a branch in Norway; SIX Group acquired Oslo Clearing, a Norwegian CCP, in 2014 and the business was legally integrated with SIX x-clear AG in 2015. Following the adoption of the European Market Infrastructure Regulation (EMIR) in Norway, SIX x-clear does not need to be formally licensed by the Norwegian authorities. The payments and securities transfer system of SIX x-clear has been designated under the Settlement Finality Regulations by the Bank of England.

6. There is also one TR domiciled in Switzerland, SIX Trade Repository, which is also operated by SIX Group. TRs may not be designated as systemically important under the Swiss regulatory framework for FMIs.

7. In addition, the euroSIC system facilitates RTGS settlement in euro (EUR) for Swiss financial institutions (and some foreign banks). This system is managed by Swiss Euro Clearing Bank (a subsidiary of SIX Group, UBS, Credit Suisse and PostFinance, that is licensed as a bank in Germany) and operated by SIC AG.⁶ The SNB has assessed that system is not systemically important with respect to financial stability considerations in Switzerland at this stage.

8. SIX Group AG is an unlisted public limited company, based in Zurich. It is owned by about 130 domestic and international financial institutions, which are also the main users of its services. The shares are distributed in a way that mirrors shareholders’ utilization of SIX and so that no category of owner holds an absolute majority.⁷ The composition of the Board of Directors reflects the ownership structure. In addition to operating the Swiss-domiciled FMIs and SIX Swiss Exchange, SIX Group also provides retail payment services, financial data services and cards services. Per end of November 2018, SIX Group sold its card acquiring business to French company Worldline, in return for a 27 percent stake in Worldline and two seats on its board of directors. SIX retains its business of issuing domestic debit cards for Swiss banks.

9. Three foreign FMIs have been designated as systemically important to Switzerland:

• Continuous Linked Settlement (CLS), a U.S.-based international system for foreign exchange settlement.

• LCH Ltd, a U.K.-based CCP. LCH Ltd clears (among other products) equities and ETF transactions entered into on SIX Swiss Exchange; it interoperates with SIX x-clear for clearing of these products. It also clears over-the-counter (OTC) interest rate derivatives, including transactions denominated in Swiss francs.

• Eurex Clearing AG, a German-based CCP. Eurex Clearing AG provides CCP services for, among others, Eurex Stock Exchange which is used (among other things) for trading derivatives based on underlying Swiss assets. Eurex Clearing also clears OTC interest rate derivatives.

10. Other foreign FMIs also provide services in Switzerland. A number of foreign CCPs have been recognized by the Swiss authorities, permitting them to provide services to Swiss firms. With the exception of LCH Ltd and Eurex Clearing, these CCPs are not considered systemically important to the Swiss financial system. REGIS-TR, a TR domiciled in Luxembourg, has also been recognized by the Swiss authorities.⁸ The landscape of systemically important FMIs in Switzerland is illustrated in Appendix III and basic statistics about the activities of the SIX Group FMIs are provided in Appendix IV.

Overview of the Supervisory and Oversight Framework

11. A revised legislative framework for regulation and supervision of FMIs came into effect in Switzerland in January 2016. This legislation, the FMIA,⁹ also establishes an insolvency and resolution framework for FMIs, as well as a framework for regulation of OTC derivatives. The FMIA is principles-based, and is supported by the FMIO,¹⁰ which sets out more detailed requirements. Prior to the introduction of the FMIA, SIX x-clear and SIX SIS were authorized by FINMA as banks; these FMIs have now been re-authorized under the FMIA. Key legislation relevant to regulation of FMIs in Switzerland is summarized in Appendix V.

12. Supervision and oversight of FMIs is conducted, respectively, by FINMA and the SNB. The FMIA gives FINMA responsibility for authorizing and supervising FMIs (except those operated by or on behalf of the SNB).¹¹ PSs require authorisation from FINMA only if this is necessary for the proper functioning of the financial market or the protection of financial market participants, and if the PS is not operated by a bank, or by the SNB or on its behalf. The FMIA also gives FINMA powers for consolidated supervision for FMIs that are part of a financial group. In addition, the FMIA establishes FINMA as the resolution authority for FMIs. The SNB has oversight responsibilities for systemically important CCPs, CSDs and PSs. These responsibilities are set out in the NBA,¹² as well as in the FMIA. The SNB also has responsibility for (after consulting with FINMA) designating FMIs as systemically important, designating the systemically important business processes of those FMIs (see Paragraph 58) and imposing special requirements on systemically important FMIs. Swiss legislation does not provide for TRs to be designated as systemically important and consequently TRs are not subject to SNB oversight. FINMA and the SNB’s current supervision and oversight responsibilities for systemically important FMIs are summarized in Table 2.

Table 2.

Switzerland: Supervision and Oversight of Systemically Important FMIs

¹* LCH Ltd and Eurex Clearing AG are recognized by FINMA but not subject to its supervision.

Table 2.

Switzerland: Supervision and Oversight of Systemically Important FMIs

Category	FINMA	SNB
Domestic payment system	-	SIC AG
Foreign payment system	-	CLS
Domestic CCP	SIX x-clear AG	SIX x-clear AG
Foreign CCP1*	LCH Ltd Eurex Clearing AG	LCH Ltd Eurex Clearing AG
Domestic SSS and CSD	SIX SIS AG	SIX SIS AG

¹* LCH Ltd and Eurex Clearing AG are recognized by FINMA but not subject to its supervision.

View Table

Table 2.

Switzerland: Supervision and Oversight of Systemically Important FMIs

Category	FINMA	SNB
Domestic payment system	-	SIC AG
Foreign payment system	-	CLS
Domestic CCP	SIX x-clear AG	SIX x-clear AG
Foreign CCP1*	LCH Ltd Eurex Clearing AG	LCH Ltd Eurex Clearing AG
Domestic SSS and CSD	SIX SIS AG	SIX SIS AG

¹* LCH Ltd and Eurex Clearing AG are recognized by FINMA but not subject to its supervision.

13. Foreign CCPs and TRs must be recognized by FINMA before they can provide services to Swiss participants or other Swiss FMIs. Recognized CCPs and TRs must comply with information and reporting requirements established by FINMA. The SNB’s oversight of systemically important FMIs extends to FMIs domiciled overseas if those FMIs: have substantial parts of their operation or leading participants in Switzerland, or clear or settle significant transaction volumes in Swiss francs.

14. There is overlap in the responsibilities and objectives of FINMA and the SNB. The FMIA requires FINMA and the SNB to jointly carry out their activities regarding systemically important FMIs, to regularly exchange information and to avoid overlaps in execution of tasks. The authorities cooperate closely in practice.

15. The FMIA and FMIO provide the Swiss legislative framework for regulation of OTC derivatives. FINMA has primary regulatory responsibility in this area, and provides further details on the regulatory regime in the FMIO-FINMA.¹³ The first phase of obligations to report OTC derivatives transactions to TRs came into effect in October 2017. Requirements regarding mandatory clearing of OTC derivatives came into effect in Switzerland in September 2018, covering standardized interest rate and credit derivatives; these requirements are subject to transition periods and so will begin to take effect from March 2019. Transactions must be cleared on a CCP that is authorized or recognized by FINMA; at present no Swiss CCP clears the products subject to the mandates and so Swiss market participants must use a recognized foreign CCP.

16. There is some uncertainty in the FMI regulatory landscape associated with ongoing EU-Swiss framework discussions and the exit of the United Kingdom (U.K.) from the EU. SIX Swiss Exchange and BX Swiss Exchange (a Zurich-based stock exchange) have been granted a one-year equivalence by the European Commission, ending in December 2018, with extension tied to the progress of the EU-Swiss framework negotiations.¹⁴ Decisions by the European Commission regarding the extension of this equivalence could have potentially significant implications for SIX Swiss Exchange, with possible flow-on effects to CCP and CSD.¹⁵ SIX Group has undertaken impact analysis for different scenarios. Brexit also has implications for the SIX Group FMIs, in particular for the CCP which interoperates with the U.K.-domiciled LCH Ltd (and also EuroCCP), and provides clearing services for several U.K.-based trading venues. More broadly, the outcomes of Brexit could have implications for the location of OTC derivatives clearing by Swiss financial institutions.

Regulation, Supervision and Transparency (Responsibilities A, C, and D)

Approach to Oversight and Supervision

22. The roles, objectives and regulations of FINMA and the SNB are clearly defined and disclosed. FINMA’s broad objectives, established under the Federal Act on the Swiss Financial Market Supervisory Authority, are to protect creditors, investors, and insured persons, as well as to ensure the proper functioning of the financial market—thus contributing to sustaining the reputation and competitiveness of the Swiss financial center. In its supervision of FMIs, FINMA focusses on the functioning of markets; the objective of sustaining the ‘competitiveness of the Swiss financial center’ is viewed as secondary objective that is an outcome of the primary focus. The NBA defines the SNB’s mandate in its oversight of FMIs as contributing to the stability of the financial system.

23. FINMA and the SNB publicly disclose certain information about their approach to supervision and oversight. Both authorities also discuss their supervision or oversight activities at a high level in their annual reports.

24. FINMA and the SNB take a risk-based approach to supervision and oversight. The intensity of FINMA’s supervision is based on a categorization of the FMI (based on its relevance, size, complexity and risk structure), as well as a rating based on an assessment of the FMI’s observance of regulatory requirements and potential emerging risk and issues. SIX x-clear and SIX SIS are subject to the most intense level of supervision, including an annual assessment of their observance of the requirements in the FMIA. The SNB concentrates its activities on aspects of an FMI’s operations that have the largest residual risks, in accordance with the FMI’s current risk profile. The SNB conducts an annual assessment of domestic systemically important FMIs (including SIC) against the special requirements in the NBO. Both FINMA and the SNB communicate their expectations of the FMIs and their priorities for the coming year in annual assessment letters.

25. FINMA should finalize its work to refine its supervisory approach for FMIs, in particular its approach to consolidated group supervision. The FMIA gives FINMA powers for consolidated supervision of FMIs that are part of a financial group. FINMA intends to set quantitative and qualitative requirements regarding potential financial and operational risks at a group level (which will also cover non-regulated companies that are part of the group). This work will be important given the integrated nature of SIX Group. FINMA is also developing its approach for supervision of TRs. TRs were established as a category of FMI within Swiss legislation with the introduction of FMIA. At present the only Swiss-domiciled TR is SIX TR, and FINMA’s supervision of the other FMIs within SIX Group covers certain elements of the TR’s operations (e.g., IT and cyber risks, which are managed across the Group).

26. The Swiss authorities have regular meetings with SIX Group. Meetings are held with a range of staff at SIX Group and different levels of seniority. FINMA also conducts on-site visits on specific topics. The authorities also require the FMIs to provide certain data and documentation, including relevant policies, procedures and contractual frameworks.

27. The authorities should consider introducing regular discussions with FMI participants and/or market participants more broadly. Supplementing existing arrangements for engagement with market participants with periodic direct engagement on FMI matters could provide useful insights for the authorities.

28. FINMA uses external supervisory audits as part of its supervision. This approach, which is used across the range of FINMA’s supervisory responsibilities, acts to extend the reach of FINMA’s resources (see Paragraph 34). The annual supervisory audit is conducted by an external audit firm selected and paid for by the FMI, although the FMI’s choice of auditor is subject to veto by FINMA. The scope of the audit is agreed with FINMA and, at least in the case of systemically important FMIs, differs year-to-year. The SNB receives the results of the audits for these FMIs and may request that certain items be included in the scope. For SIX Group, a single supervisory audit is conducted across the SIX FMIs. For the systemically important SIX Group FMIs, SIX x-clear and SIX SIS, FINMA uses the supervisory audit as a confirmation tool, rather than a primary source of information.

29. The SNB requires a detailed annual audit of SIX Group covering IT and operational risk and security matters. The focus of the audit, which is determined by the SNB in consultation with FINMA and SIX Group, changes year-to-year. This audit is conducted by a specialized audit firm with expertise in IT and operational risk matters. As with FINMA’s supervisory audit, the audit firm is chosen and paid for the FMI, and the SNB may veto the choice of auditor.

30. Authorized FMIs must obtain prior approval or authorization from FINMA for material changes to their operations. For systemically important FMIs, FINMA must consult with the SNB prior to giving approval or authorization. Such changes include, among other things, the outsourcing of ‘essential services’ and substantial changes to risk management models.¹⁹ The FMIO establishes requirements that FMIs must address in their agreement with outsourcing providers, and the Swiss authorities assess the FMIs’ approach to meet these requirements. The authorities also have the power to audit an FMI’s outsourcing provider directly. With respect to validation of model changes, FINMA and the SNB make use of risk validations from the FMI, may require additional external audits to validate the model, and can also draw on internal specialists from other teams.

31. For supervision and oversight of recognized foreign FMIs, FINMA and the SNB largely rely on the activities of the home authorities of the FMI. FINMA and the SNB engage more closely with foreign authorities relevant for CCP interoperability; in these cases the relevant authorities have previously jointly communicated expectations to the interoperating CCPs. The SNB also considers in more detail the payment, settlement and liquidity arrangements of foreign FMIs for transactions cleared or settled in Swiss francs, and discusses these with the primary regulator of the FMI. In addition, FINMA requires recognized TRs to provide a periodic audit covering their policies and procedures regarding confidentiality, receipt and administration of data. The authorities’ arrangements for cooperation with overseas authorities are described in Paragraph 39.

Powers and Resources (Responsibility B)

Cooperation in Normal and Stressed Circumstances (Responsibility E)

38. FINMA and the SNB cooperate closely in their supervision and oversight of FMIs. Legislation permits, and in some cases requires, FINMA and the SNB to cooperate with each other, including by sharing information. This cooperation is also supported by an exchange of letters, which covers the split of responsibilities between the two authorities. FINMA and the SNB cooperate in practice, including by meeting jointly with SIX Group regarding matters that concern both authorities, holding regular coordination meetings, coordination of the annual supervisory audit, and by sharing the results of their assessments and coordinating regulatory priorities.

39. The Swiss authorities also cooperate with foreign authorities, with regards to Swiss and foreign FMIs. This cooperation is supported by legislation, which permits information sharing with foreign authorities subject to certain conditions. FINMA and the SNB have established bilateral and multilateral cooperative arrangement with foreign authorities with respect to SIX x-clear which, as discussed in Paragraph 5, provides services in multiple jurisdictions. FINMA has also recently established a CMG for SIX x-clear, to support recovery and resolution planning for the CCP; FINMA is currently developing the cooperation agreement for the group. The Swiss authorities also participate in several cooperative arrangements and CMGs for foreign FMIs that are recognized in Switzerland. These cooperative arrangements are summarized in Appendix VI. Access by foreign authorities to data held in FINMA-authorized TRs is addressed in the FMIA.

40. FINMA and the SNB should finalize their ongoing work to develop crisis management cooperation plans. FINMA and the SNB are currently mapping the cooperation required across a wide range of potential FMI crisis events. The project, which is currently expected to run into early 2019, will cover cooperation between Swiss authorities and with foreign authorities. This work is important as FINMA and the SNB do not currently have detailed documented crisis management plans to support cooperation between the two authorities in the event of a financial or operational crisis involving a systemically important FMI. It was recently decided that the Swiss Financial Crisis Committee (comprising senior executives from the Department of Finance, FINMA and the SNB) will be responsible for coordination among the authorities in the event of an extreme crisis affecting a Swiss FMI. The ongoing FINMA-SNB project could usefully provide the relevant planning and documentation to support the work of this Committee on FMI matters, in addition to covering cooperation arrangements for crises that may not require the involvement of the Committee. Given the range of cooperative agreements with overseas authorities in place to support oversight of SIX x-clear, mapping crisis coordination plans and making those plans appropriately transparent to the relevant foreign authorities will also be important. Once the project has been finalized, the crisis management coordination arrangements should also be regularly tested.

A. Governance of SIX Group FMIs and SIX Organizational Structure

41. Strong governance arrangements are essential to ensure effective risk management at FMIs. SIX Group is a user-owned, for-profit group (with the exception of SIC AG, which operates according to a non-profit, cost-recovery model which includes a certain return to equity holders). The Securities & Exchanges business unit applies a “target profit” model, under which it provides services on a cost-recovery basis plus mark-up. The Group operates in a highly competitive environment, particularly in the exchange, clearing and CSD spaces. SIX Group has interests in a range of businesses, covering payments and data services, as well as a strong focus on fintech and innovation and, given the integrated business structure, it is essential that incentives always align to prioritize strong risk management at the FMIs (for SIC AG, oversight of the risk management function—including definition of the risk appetite—lies with its independent Board).

42. SIX x-clear and SIX SIS should ensure that the independence of their governance arrangements support sound risk management. FMI risk management decisions should be taken without undue influence from business decisions, including those of the SIX Group more broadly. Governance arrangements should also be structured so that sufficient attention can be given to FMI risk matters by the appropriate board of directors. The current structure of SIX Group and the governance arrangements for SIX x-clear and SIX SIS are summarized in Appendix VII. The SIX Group Board of Directors has responsibility for determining the risk appetite of the Group and its high-level policy framework, while FMI-specific issues are the responsibility of the Board of Directors of the SIX x-clear and SIX SIS (FMI Boards). SIC is discussed separately below.

43. It is unclear whether the composition of the Boards of Directors of SIX x-clear and SIX SIS supports a strong and independent focus on FMI risk management, or the placement of a high priority on stability and public interest considerations. Membership of the Board of SIX x-clear and SIX SIS is identical. Two of the five members of these Boards are independent. The other three members sit on the Executive Board, and include the Head of the Securities & Exchanges Division, who has responsibilities for a broad range of financial infrastructures, including exchanges and MTFs. A CPMI-IOSCO PFMI Assessment in January 2019 found that for CCPs and CSDs the content of the legal, regulatory, and oversight frameworks in Switzerland is broadly consistent with PFMI Principle 2 (Governance), with only minor gaps in some areas; however, it is unclear whether in practice said Board composition provides sufficient independence from business decisions, including the Group’s broader business decisions.²¹ Greater independence could be achieved by amending the composition of the Boards and taking steps to clarify their roles and responsibilities:

• Composition: Changes to composition to improve independence could include increasing the number of independent members so that they comprise a majority, and reviewing the current membership of SIX Group executives. An alternative may be to increase the influence of the independent board members within the current structure of the FMI Boards—and decrease the influence of executives—on risk management decisions; such arrangements would need to be carefully structured and implemented, clearly documented, and regularly reviewed by both SIX Group and the Swiss authorities to assess their effectiveness. SIX should also consider differentiating, at least to some extent, the membership of the Board of Directors of SIX SIS and the Board of Directors of SIX x-clear. FINMA and the SNB should meet regularly with the independent members of the FMI Board, and should consider meeting periodically with the SIX x-clear Risk Advisory Committee.

• Roles and responsibilities: It is important that the Group Board continues to have sight of the systemically important infrastructures that the Group operates (in part reflecting that resource allocation decisions are taken at the Group level). However, the responsibilities of the FMI Boards and the Group Boards should be clearly demarked, so that FMI risk matters are clearly the responsibility of the FMI Boards. SIX should consider establishing specific objectives for the FMI Boards that place a high priority on the safety and soundness of the FMIs and explicitly support financial stability and other relevant public interest considerations. SIX could also consider establishing separate Board risk committees for the FMIs.

44. At a management and staff level, SIX Group has made some improvements to its risk governance arrangements since the 2014 FSAP. Risk management functions have been separated from the business units and a separate Group-wide risk management unit has been created, headed by the Group CRO. The Group CRO, who previously reported to the Group CFO, is now a member of the Executive Board. The Group risk management unit has a wide remit (including financial risk, operational risk, project risks, legal, compliance, physical and information security and business continuity). The unit’s responsibilities include providing second line functions in FMI risk management—risk management is operationally conducted within the business unit (e.g., monitoring of credit lines, reviewing daily risk situations), while the centralized unit has responsibility for proposing methodology and parameters (subject to FMI Board approval). A new remuneration scheme has been introduced so that members of control functions are not subject to profit-related performance indicators.

45. SIX implemented changes to its organizational structure in 2018. Notable changes included: merging SIX Group’s securities post-trading business (which operated SIX x-clear and SIX SIS) and its exchange business into a single Securities & Exchanges business unit; re-organization of the banking services (payments) business line; establishing a dedicated innovation unit; and the sale of the international cards business. The merger of the post-trading and exchange business lines brings all SIX Group entities that are regulated under FMIA within a single business unit, under one SIX Group executive. Given the different objectives and issues that arise for trading venues and FMIs, the merger further heightens the importance of independent governance arrangements for the systemically important FMIs, SIX x-clear and SIX SIS.

46. The SNB should monitor the effectiveness of SIC governance arrangements, which have been revised as a result of the restructure of SIX Group. The recent restructure resulted in greater integration of SIC AG (with respect to its operations, as well as aspects relating to governance and services) within SIX’s Banking Services business line (which also covers broader payments issues including retail product innovation). SIC AG continues to have its own Board of Directors, comprising representatives of system participants, of SIX Group and of the SNB. The restructure has shifted some matters that were not directly related to the operation of SIC outside the governance responsibilities of the SIC AG Board. However, some senior staff members within SIC now have dual-hat positions, working for both SIC AG and within the broader banking services business line. Steps have been taken to mitigate potential risks associated with this, including to ensure that those staff have contracts directly with SIC AG. SIC AG continues to have its own IT management and operations teams. Certain compliance and risk functions are performed by the SIX Group risk function; the statutes of SIC AG and SIX acknowledge that the SIC AG Board has responsibility for these matters as they pertain to SIC; it will be important to ensure that the SIC AG Board has appropriate oversight of these functions.

47. As part of its resolution planning responsibilities, FINMA will need to consider whether the organizational structure of SIX Group appropriately allows for resolution of the systemically important FMIs. In addition to the issues discussed above, the SIX FMIs have a number of interdependencies with SIX Group: staff and IT services (including data center management) are provided by separate subsidiaries within SIX Group; and there are financial dependencies such as the provision of liquidity and settlement services by SIX SIS to SIX x-clear, and the provision by SIX Group of a credit line to SIX x-clear and SIX SIS. These dependencies are managed on a ‘business as usual’ basis through formal contractual arrangements, service level agreements, and joint liquidity and default management testing across SIX x-clear and SIX SIS. However, they may present additional challenges in resolution. The Swiss FMI resolution framework is discussed in Paragraph 62. With respect to SIC, the SNB Banking Operations Unit is beginning work to formalize the severability of SIC AG on a firm level from the rest of the SIX Group. On a technological and operational level, the SIC system is already separable and a roadmap for such a project has been drawn up.

B. Selected Topics in SIX Group FMI Risk Management

48. The Swiss authorities have conducted a program of work over several years to assess and enhance the SIX Group FMI’s observance of the PFMI. The SIX Group FMIs have made changes to enhance their observance in several areas including, for instance recovery planning, liquidity risk management, and disclosures; in some areas the authorities are still working with the SIX Group to implement changes. The arrangements of SIX x-clear and SIX SIS to manage credit, liquidity, investment and general business risks are summarized at a high level in Appendix VIII. At a high level, the FMIs appear to generally observe the requirements of the PFMI in these areas (although, as noted above, this report does not include a deep dive into the Principles). However, some observations are listed below. The FMIs also have further work to do to ensure their recovery arrangements fully meet the requirements in the Principles; this is discussed in the Section C.

49. The planned introduction of a new clearing platform for SIX x-clear will result in further significant changes to the financial risk management of the CCP. The new system will replace the existing systems (SECOM and CLARA—which is used for the Norwegian branch, as well as add-ons that have been made to these systems) with a single system covering the whole CCP. This project will include a replacement of core clearing risk management models, including margining and stress testing. Subject to regulatory approval, SIX x-clear intends to launch the new system in late 2020. This project presents an opportunity to update and enhance the CCP’s risk models. However, it is also a significant undertaking and the authorities will need to monitor the project closely to ensure that SIX x-clear fully implements the relevant regulatory requirements. The SNB has indicated it may seek its own external validation in addition to the validations that SIX will seek; given the significance of this change SNB is strongly encouraged to adopt this approach.

C. FMI Crisis Management

D. Cyber Resilience

70. Cyber resilience is a continuing focus of FINMA and the SNB’s supervision and oversight of the SIX Group FMIs. The authorities have an intensive ongoing program of work in this area, which includes regular meetings with relevant staff at SIX Group and detailed annual assessments (including assessments by external auditors). Both authorities refer to international standards for cyber resilience, in particular the National Institution of Standards and Technology (NIST) Framework for Improving Critical Infrastructure Cybersecurity, as well as the CPMI-IOSCO Guidance on cyber resilience for financial market infrastructures.

71. FINMA and the SNB have access to expertise regarding cyber resilience. Both authorities can make use of external experts and engage with IT and cyber experts within their organizations. For example, FINMA’s FMI Supervision Unit engages with IT/cyber risk experts within FINMA’s banking supervision team, and can benchmark SIX Group against the approach taken by supervised banks. FINMA and the SNB also exchange information with other Swiss authorities regarding cyber risk, including the State Secretariat for International Finance (SIF) and the Reporting and Analysis Centre for Information Assurance (MELANI).

72. The Risk Committee of the SIX Group Board of Directors is responsible for oversight of cyber risks. At a management level, the Group Chief Security Officer (CSO) is responsible for cyber resilience and IT security, as well as crisis management, business continuity and physical security. The CSO’s team sits within the SIX Group CRO function and the CSO reports to the CRO. The CSO regularly presents cyber risk trends to the Executive Board and to the Risk Committee of the Board of Directors. The Board of Directors has received training on cyber-risk issues.

73. SIX Group has established a dedicated cyber security program. Various initiatives being implemented cover, among other things, governance and staff awareness, testing, and interdependencies with third parties. SIX Group is also conducting extensive work on threat monitoring and intelligence. The Group has established a cyber security operations center, which operates 24/7 to monitor cyber threats. The initial focus of the center is to protect SIX Group from cyber attacks; in time SIX intends to also offer threat assessment and monitoring services to market participants. SIX also engages with MELANI and international organizations to share intelligence.

74. The authorities and SIX Group are encouraged to undertake work on cross-sectoral cyber resilience. Cross-sectoral analysis would provide greater insight into the impact of a cyber event across the financial sector, facilitating further strengthening of resilience. SIX is planning to undertake simulations of cyber or other business-continuity events with several market participants, extending an exercise it recently undertook with one Swiss bank. The SNB intends to participate in the simulations in its role as a major system participant (i.e., through its Banking Operations Division). FINMA and the SNB are also considering conducting work on this topic.

E. Fintech

75. The FMI teams at FINMA and the SNB are contributing to broader work of the authorities regarding fintech.²⁵ Among other things, a working group considered whether the FMIA supports the sound legal operation of innovative firms in the exchange and FMI space. The SNB’s banking operations team is also considering the specific implications of fintech for SIC.²⁶

76. SIX Group has a strong focus on innovation. The Group has a dedicated “Digital and Innovation” business unit, and has established a venture fund to promote innovation in the Swiss financial center. Fintech issues relevant to specific business lines are led by and worked on within the relevant business line.

77. SIX Group has announced that it will launch SIX Digital Exchange, an integrated digital asset trading, settlement and custody service. The product scope is yet to be finalized, but will likely include tokenized versions of ‘real world’ securities and assets, as well as other digital assets. Digital Exchange will use distributed ledger technology; certain elements of the technology will be developed in conjunction with a third-party provider. The service will be provided by a separate subsidiary of SIX Group AG, SIX Digital Exchange AG, and will be run operationally within the Securities and Exchanges Division.

78. SIX Digital Exchange will present novel risks and regulatory issues. SIX Group has announced its intention to seek full licensing from FINMA for the service. SIX Group has announced that it intends to launch the first services about mid-2019. However, the Swiss authorities will need to conduct a thorough analysis of how the new service—and any related changes to the services of authorized FMIs—meet the relevant regulatory requirements. The authorities intend to refer to relevant international guidance concerning evaluation of risks associated with the use of distributed ledger technology by FMIs, as necessary. FINMA and the SNB are engaging with SIX Group as the project develops and, as discussed above, have the ability to access specialist external resources should that be necessary.