Article 16
Other equivalent financial resources for exposures in interoperable links
Other equivalent financial resources may include bank guarantees and letters of credit, used to secure credit exposures created between CSDs that establish interoperable links, that meet all of the following conditions:
(a)
they cover only the credit exposures between the two linked CSDs;
(b)
they have been issued by a consortium of creditworthy financial institutions that fulfil the requirements set out in Article 38(1), in which each of those financial institutions is obliged to pay the part of the total amount that has been contractually agreed upon;
(c)
they are denominated in a currency the risk of which the CSD-banking service provider is able to adequately manage;
(d)
they are irrevocable, unconditional and the issuing institutions cannot rely on any legal or contractual exemption or option allowing the issuer to oppose the payment of the letter of credit;
(e)
they can be honoured, on demand, free of any regulatory, legal or operational constraint;
(f)
they are not issued by:
(i)
an entity that is part of the same group as the borrowing CSD or a CSD with an exposure covered by the bank guarantee and letters of credit;
(ii)
an entity whose business involves providing services critical to the functioning of the CSD-banking service provider;
(g)
they are not subject to significant wrong-way risk within the meaning of Article 291 of Regulation (EU) No 575/2013;
(h)
the CSD-banking service provider monitors the creditworthiness of the issuing financial institutions on an regular basis by independently assessing the creditworthiness of those institutions and by assigning and regularly reviewing internal credit ratings for each financial institution;
(i)
they can be honoured during the period of liquidation within three business days from the moment when the defaulting CSD-banking service provider fails to meet its payment obligations when they are due;
(j)
qualifying liquid resources referred to in Article 34 are available to a sufficient amount that covers the time gap until the time at which the bank guarantee and letters of credit has to be honoured in case of default of one of the linked CSDs;
(k)
the risk of not having the full amount of the bank guarantee and letters of credit being paid by the consortium is mitigated by:
(i)
establishing appropriate concentration limits ensuring that no financial institution, including its parent undertaking and subsidiaries, is part of the consortium guarantees for more than 10 % of the total amount of the letter of credit;
(ii)
limiting the credit exposure that is covered using the bank guarantee and letters of credit to the total amount of the bank guarantee minus either 10 % of the total amount, or the amount guaranteed by the two credit institutions with the largest share of the total amount whichever is lower;
(iii)
implementing additional risk mitigation measures such as a loss-sharing arrangements that are effective and have clearly defined rules and procedures;
(l)
the arrangements are periodically tested and reviewed pursuant to Article 41(3) of Regulation (EU) No 909/2014.