SSRN Id4011746

Evolution in Financial Market Infrastructure Governance
Eleanore Hickman and Eilís Ferran*
1. Introduction
The 2007/08 financial crisis ignited a regulatory drive to align the internal governance
arrangements of financial market actors with public interest objectives. It is has become
unassailable orthodoxy that ‘effective corporate governance is critical to the proper functioning
of the banking sector and the economy as a whole’.1 Building on foundations laid in the
commercial sector, where corporate governance had developed initially as a non-legal way to
better align the interests of shareholders and managers, post-crisis reformers identified better
corporate governance as an important way to rein in excessive risk-taking by banks. ‘Soft law’
corporate governance norms thus hardened into ‘hard law’ prudential regulatory requirements
whilst adopting a more stakeholder-oriented character that reflected banks’ systemic
significance, highly distinctive risk profile, and asset and funding structures.
This orthodoxy was first developed in relation to banks but has since extended across
the financial sector. There is logic to sector-wide regulatory consistency to the extent that
different types of financial market actor are exposed to the same risks. 2 This, after all, is the
essence of the functional approach to financial regulation, which focuses on underlying
functions performed rather than the institutional architecture.3 Consistency promotes
accessibility, simplicity and efficiency, especially for financial services corporate groups that
* Dr Eleanore Hickman, is a Lecturer in Law at the University of Bristol. Professor Eilís Ferran, FBA is Professor
of Company & Securities Law at the University of Cambridge, and the Tom Ivory Professorial Fellow of St
Catharine’s College, Cambridge. We are grateful to Professor Jo Braithwaite for her comments on an earlier
draft.
1 Basel Committee on Banking Supervision, Corporate Governance Principles for Banks (July 2015) 3. Yet
financial regulation and regulatory bodies including the Basel Committee on Banking Supervision and the
Financial Stability Board are thought to over-rely on economists and economic scholarship at the expense of
lawyers and legal scholarship, to the detriment of financial regulation (Steven L Schwarcz and Theodore L
Leonhardt, ‘Lawmaking Without Law: How Overreliance on Economics Fails Financial Regulation’ [2021] SSRN
Electronic Journal <https://www.ssrn.com/abstract=3942767> accessed 5 January 2022.)
2 See Eddy Wymeersch, ‘Financial Regulation: Its Objectives and Their Implementation in the European Union’,
European Financial Regulation. Levelling the Cross-sectoral playing field. (Hart Publishing 2019) 53.
3 Steven L Schwarcz, ‘Regulating Financial Change: A Functional Approach’ (2016) 100 Minnesota Law Review
1441.
Electronic copy available at: https://ssrn.com/abstract=4011746

include a diverse range of financial businesses. On the other hand, in the absence of careful
and dynamic risk calibration, the generalised application of regulations may be of limited or
potentially detrimental effect when applied to firms whose business models and risk profiles
differ.4
There is danger in introducing rigidities through mandatory corporate governance
requirements imposed through financial regulation.5 Uniformity underpinned by a
bureaucratic mentality could stifle the innovation needed to drive successful, sustainable
business, both now and in a more digital future. Layering uniformity on top of national company
laws that, for deep-rooted social, economic and political reasons, remain quite divergent in
many respects, risk further compounding the problem. 6
We apply this perspective to Financial Market Infrastructures (FMIs) by which we mean
central counterparties (CCPs) (also known as clearing houses) and (international) central
securities depositories ((I)CSDs). FMIs are often described as the ‘back office’, the ‘plumbing’,
the ‘postage and packaging’ of the financial markets. Such metaphors help to convey a sense
of the criticality of these organisations to the smooth functioning of global finance. In an era
of intensifying cyber and ransomware threats against critical infrastructure, it is more vital than
ever that these technology heavy systemically important institutions are well run. FMIs’ IT
systems handle a mindboggling volume of clearing and settlement traffic daily, and any
failures or interruptions could transmit major shocks throughout the financial markets. At the
same time, these metaphors obscure the fact that the seemingly dull world of post-trade
processing is in the vanguard of pivotal developments in Fintech. FMIs are rapidly innovating
with the current ‘buzzwords’ in finance - blockchain, distributed ledger technologies (DLT),
tokenization, digital currencies - and seeking to turn them into scalable ways of doing business
4 Jens-Hinrich Binder, ‘Governance of Investment Firms Under MiFID II’, Regulation of the EU Financial Markets:
MiFID II and MiFIR (OUP) 3.23.
5 For a discussion of research showing a correlation between banks with “good” corporate governance and poor
outcomes see Guido Ferrarini, ‘Understanding the Role of Corporate Governance in Financial Institutions: A
Research Agenda’ [2017] SSRN Electronic Journal <https://www.ssrn.com/abstract=2925721> accessed 21
February 2020.
6 For a discussion of national divergence in corporate laws see Mariana Pargendler, ‘The Grip of Nationalism on
Corporate Law’ (2020) 95 Indiana Law Journal 533.

differently. New winners and losers among current incumbents and new entrants are likely to
emerge.7 Technological change will also create new operational risks that will, inevitably, lead
to further regulatory attention.8
In this paper we look at how corporate governance in FMIs, as mandated by financial
regulation has evolved and is evolving. We consider how and to what extent governance
strategies are effective in balancing profitable pursuit of existing business lines and new
technological opportunities, with the need for resilience to withstand attacks and a robust
approach to risk and systemic safety. From all this we suggest there is an increasingly
compelling case for paying closer attention to FMI governance.
2. The case study: European FMIs

European post-trade FMIs are the case study of this research. In this section we introduce the
key market actors, how they are regulated and how this compares with the regulation of
governance in banks.
a. The actors
(I)CSDs are described by the International Monetary Fund as carrying out a ‘public function’,
that is central to the financial markets in most countries and across borders. 9 Their main
functions are to record the issuance of securities, maintain securities accounts at the top level
and operate a securities settlement system.10 An issuer (I)CSD is responsible for the initial
recording of the issuance of securities, while an investor (I)CSD holds on its books securities
7 Randy Priem, ‘Distributed Ledger Technology for Securities Clearing and Settlement: Benefits, Risks and
Regulatory Implications’ (2020) 6 Financial Innovation; Morten Bech, Jenny Hancock, Tara Rice and Amber
Wadsworth, ‘On the Future of Securities Settlement’ (March 2020) BIS Quarterly Review
8 To an extent this is already in hand: European Commission, Proposal for a Regulation of the European
Parliament and of the Council on digital operational resilience for the financial sector COM(2020) 595; Bank of
England, Policy on Operational Resilience of FMIs, 29 March 2021,
https://www.bankofengland.co.uk/paper/2021/bank-of-england-policy-on-operational-resilience-of-fmis
9
International Monetary Fund, ‘Monetary and Capital Markets Department How-to Notes. How to Organise
Central Securities Depositories in Emerging Markets’ (2019).
10 For more detail see Eilís Ferran and Eleanore Hickman, ‘European Central Securities Depositories’, Jens-
Hinrich Binder and Paolo Saguato (eds), Financial Market Infrastructure: Law and Regulation (Oxford University
Press 2021).

that were initially issued through another (I)CSD. A single (I)CSD may perform both roles. The
criticality of (I)CSDs to the smooth and safe functioning of the market can hardly be overstated.
There were 26 European (I)CSDs as of January 2022.11 In 2016 five European
(I)CSDs held 70% of the 55 trillion securities in Europe.12 In descending order by value of
securities held these were Euroclear Bank, Clearstream Banking Frankfurt, Euroclear France,
Clearstream Banking Luxembourg and Euroclear UK and International. 13 All of these
companies are subsidiaries within either the Euroclear or the Deutsche Börse (DBAG) groups.
CCPs are critical in a different way. They step in between buyers and sellers thereby
breaking the chain of interconnection, ensuring trades are made and that if one party fails to
pay, that failure does not ripple through the financial markets. 14 In November 2021 there were
14 European CCPs, with three UK established CCPs operating outside of the union.15 Unlike
for (I)CSDs there were no available official comparisons of size or market share but clearing
volumes are recorded in a European Central Bank database. Using data obtained from the
European Central Bank database16 we created Figures 1 and 2 to show the relative market
share of the biggest five European CCPs by value of equity and derivatives cleared in 2019.
11 ESMA, ‘CSD Register’ (2022).

12 ECSDA, ‘CSD Factbook’ (2017) 19 <https://ecsda.eu/archives/5563> accessed 10 October 2019.
13 ibid. Post-Brexit, Irish securities were migrated to Euroclear Bank and Euroclear UK and Ireland became
Euroclear UK and International. As of January 2022 this factbook had not been updated.
14 For detail on CCPs see Paolo Saguato, ‘The Ownership of Clearinghouses: When Skin in the Game Is Not
Enough, the Remutualization of Clearinghouses’ (2017) 34 Yale Journal on Regulation 601.

15 ESMA, ‘CCPs Authorised under EMIR’ (November 2021).
16 Data obtained from ‘CCP - Central Counterparty Clearing Statistics - ECB Statistical Data Warehouse’
<https://sdw.ecb.europa.eu> accessed 29 October 2020 and reviewed in January 2022 at which point the data
had not been consistently updated. The relevant search results from this data are on file with the authors.

Figure 1. Total value of derivatives cleared
EuroCCP
ICE Clear Europe
LCH Ltd
LCH SA
Eurex
0 500,000 1,000,000 1,500,000

Billions (€)
Non OTC Derivatives OTC Derivatives
Figure 2. Total value of equity cleared
EuroCCP
ICE Clear Europe
LCH Ltd
LCH SA
Eurex
0 5,000 10,000 15,000

Billions (€)
LCH Ltd cleared the most equities and derivatives by a considerable margin. 17 LCH Ltd and
ICE Clear Ltd are based in the UK and, following Brexit, have been temporarily recognised by
the European Securities and Markets Authority (ESMA) to provide clearing services in the
17 These proportions may change as a consequence of Brexit. For now, clearing benefits from a temporary
determination of equivalence with the EU, now extended beyond the most recent deadline of June 2022 (new
deadline still to be determined) ‘Commissioner McGuinness Announces Proposed Way Forward for Central
Clearing’ (European Commission, 10 November 2021) <https://ec.europa.eu/commission/commissioners/2019-
2024/mcguinness/announcements/commissioner-mcguinness-announces-proposed-way-forward-central-
clearing_en> accessed 7 January 2022.The EU presents this as buying time for much of the euro denominated
trades that currently clear in the UK to be moved to Europe (Philip Stafford, ‘EU Financial Watchdog Says Banks
Can Continue to Use UK Clearing Houses’ Financial Times (17 December 2021)
<https://www.ft.com/content/0fda2f0a-f2a5-40ab-b47a-8c7c5a7c2cae> accessed 7 January 2022.) The EU have
been concerned with the UK dominance in the clearing of euro denominated trades for some time, on this see
Christian Chamorro-Courtland, ‘Brexit Scenarios: The Future of Clearing in Europe’ [2019] Columbia Journal of
European Law.

Union as systemically important third country CCPs. 18 All CCPs in the above figures are
clearing trillions of Euros in at least one of the equity or derivative categories annually.
The parent company for each (I)CSD and CCP in the study will also be considered.
These are Deutsche Börse Group (DBAG), Euroclear Holding/Euroclear SA, London Stock
Exchange Group (LSEG), Cboe Inc, Intercontinental Exchange, SIX and Euronext.
Collectively, they will be referred to as the ‘FMI Groups’. Table 1 below sets out key information
about the group structures, gathered as part of this research project.
Table 1: Key post-trade FMIs

Parent Post-trade FMI subsidiaries Ownership Group
company structure19
Euroclear Euroclear Bank Private Horizontal
Holding/ Euroclear Belgium
Euroclear Euroclear Finland
SA/NV20 Euroclear France
Euroclear Nederland
Euroclear Sweden
Euroclear UK & International
SIX21 Iberclear Private Vertical
BME Clear
DBAG22 Clearstream Banking SA Public Vertical
Clearstream Banking AG
Eurex Clearing AG
European Commodity Clearing
Lux CSD (50% owned)
LSEG23 LCH SA Public Vertical
18 Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC
derivatives, central counterparties and trade repositories Text with EEA relevance OJ L 257, 28.8.2014, p. 1–72.
OJ L 201, 27.7.2012, p. 1–59 (EMIR) art 25 (as amended by Regulation (EU) No 2099/2019 [2019] OJ L322/1).
Their classification as Tier 2 CCPs denotes the systemic significance to the Union ‘ESMA to Recognise Three
UK CCPS from 1 January 2021’ <https://www.esma.europa.eu/press-news/esma-news/esma-recognise-three-
uk-ccps-1-january-2021> accessed 11 January 2022.
19 We are categorising group structure as either horizontal or vertical. Those categorised as vertical indicate a
vertical silo where the group provides an all through service, including at least one Exchange, CCP and (I)CSD.
Those categorised as horizontal groups have several business lines but are mainly focused on one aspect of
post-trade.
20 ‘Our Group Structure’ <https://www.euroclear.com/about/en/ourgovernancestructure.html> accessed 11
January 2022.
21 ‘Six Group Uncovers Share Control of UBS and Credit Suisse in Taking BME’ (Web24 News, 27 March 2020)
<https://www.web24.news/u/2020/03/six-group-uncovers-share-control-of-ubs-and-credit-suisse-in-taking-
bme.html> accessed 24 September 2020.
22 ‘Deutsche Börse Group - Company Structure’ <https://www.deutsche-boerse.com/dbg-en/our-
company/deutsche-boerse-group/company-structure> accessed 11 January 2022.

23
‘Our Organisation’ (LSEG) <https://www.lseg.com/careers/who-we-are/our-organisation> accessed 11 January
2022. LSEG and LCH Group Holdings UK are UK companies. The focus of this paper is not on UK regulation but
the relevant prudential regulator for the FMI arm of the group is the French authority, the Autorité de Contrôle
Prudentiel et de Résolution (ACPR) (LCH Group Holdings Ltd Basel III Pillar 3 Disclosures Report (2019)
https://www.lch.com/system/files/media_root/2019%20LCH%20Group%20Pillar%203%20-

LCH Ltd
Intercontinenta ICE Clear Netherlands Public Vertical

l Exchange, ICE Clear Europe
Inc24
Cboe Global EuroCCP Public Vertical
Markets, Inc25
Euronext26 Euronext Clearing Public Vertical
Euronext Securities Milan
Euronext Securities Copenhagen
Euronext Securities Porto
Euronext Securities Oslo
Euroclear is the only FMI Group that is horizontally integrated, the others being vertical
silos.27 It is also one of a minority that is privately owned and has just 91 shareholders
compared to, for example, DBAG’s 52,000.28 The varied nature of the ownership of FMIs and
the consequentially variable nature of shareholder engagement is an important factor
influencing their governance.
b. Regulation overview
The European Market Infrastructure Regulation (EMIR) and the Central Securities
Depositories Regulation (CSDR) are the main EU regulations relating specifically to post-trade
FMIs in Europe.29 EMIR regulates CCPs and requires the central clearing of certain classes
of over-the-counter (OTC) derivatives so that market participants reduce their counterparty
risk, investors are well protected and a level playing field between market participants is
%20FINAL%2029.04.20.pdf). We include reference, where appropriate, to the UK corporate law and governance
framework within which LCH Group Holdings and the wider LSEG group operate.
24 Intercontinental Exchange, Inc, ‘ICE at a Glance’.
25 ‘EuroCCP’ <https://www.euroccp.com/> accessed 11 January 2022.
26 ‘Our Organisation’ <https://www.euronext.com/en/about/our-organisation accessed 11 January 2022
27 See footnote 17 for definitions.
28 ‘Our Group Structure’ (n 20). Deutsche Borse Group, ‘Annual Report 2018. Excerpt: Fundamental Information
about the Group’. This information was not provided in the 2020 version of the same document (Deutsche Borse
Group, ‘Annual Report 2020. Excerpt: Fundamental Information about the Group’.
29 Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC
derivatives, central counterparties and trade repositories Text with EEA relevance
OJ L 201 , 27.7.2012, p. 1–59 (EMIR) Regulation (EU) No 909/2014 of the European Parliament and of the
Council of 23 July 2014 on improving securities settlement in the European Union and on central securities
depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 Text with
EEA relevance OJ L 257, 28.8.2014, (CSDR).

created.30 CSDR regulates (I)CSDs.31 It seeks to increase the safety, efficiency and
competition between infrastructures enabling increasingly prevalent cross-border
transactions.32 Together EMIR and CSDR are referred to here as the ‘FMI Regulations’. Both
(I)CSDs and CCPs should operate according to the principles of governance set out in the
Principles for Financial Market Infrastructure.33 These are international soft law standards
applicable to FMIs and issued by the Committee on Payments and Market Infrastructures and
the International Organisation of Securities Commissions. Much of the CPMI-IOSCO
Principles is baked into the FMI Regulations.
Prudential regulatory and supervisory requirements established by Capital
Requirements Directive IV (as amended) (CRD IV) 34 and the related Capital Requirements
Regulation (CRR)35 apply in addition to the FMI Regulations to those FMIs that are also credit
institutions.36 LCH SA and Eurex Clearing AG are CCPs that are also credit institutions as a
consequence of the requirements of their respective jurisdictions.37 All the ICSDs, (Euroclear
Bank, Clearstream Banking Luxembourg and Clearstream Banking Frankfurt) are also credit
institutions as a consequence of their licence to carry out ‘banking-type ancillary services’.38
Ascending the FMI Group structures, the application of CRD IV becomes more
complicated. Financial holding companies that consolidate a credit institution are brought
30 EMIR Recital 14.

31 For details see Ferran and Hickman (n 10).
32 European Commission, ‘Impact Assessment on Proposal for a Regulation of the European Parliament and of
the Council on Improving Securities Settlement in the European Union and on Central Securities Depositories
(CSDs)’ 21.
33 Principles for Financial Market Infrastructures 2012.
34 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity
of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive
2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC OJ L 176, 27.6.2013, p. 338–436 (CRD IV).
Amended by Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending
Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding
companies, remuneration, supervisory measures and powers and capital conservation measures (Text with EEA
relevance.) PE/16/2019/REV/1 OJ L 150, 7.6.2019,(CRD V)
35 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential
requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 OJ L 176,
27.6.2013, p. 1–337 (CRR)
36 EBA, ‘Credit Institutions Register’ (European Banking Authority) <https://eba.europa.eu/risk-analysis-and-
data/credit-institutions-register> accessed 11 August 2020; ESMA, ‘CCPs Authorised under EMIR’ (n 17).
37 Article L.440-1 of the Code Monetaire et Financier specifies that CCPs may be designated credit institutions
where their ‘nature, volume or complexity’ so requires it’ and section 1(1) of the Gesetz Uber Das Kreditwesen
specifies that CCPs are credit institutions.
38 CSDR art 54(1)

within the scope of CRD IV by CRD V.39 Depending on the range of businesses within the
corporate group, prudential consolidation may apply at the level of the ultimate parent
company or at an intermediate (‘sub-consolidation’) level. As diversified businesses,
prudential consolidation for the DBAG and the LSEG, which are ultimate parent companies of
CRD IV credit institutions, operates at sub-consolidated levels.40 In the case of Euroclear,
where prudential consolidation is located at the level of Euroclear SA/NV, the ultimate parent,
Euroclear Holding, benefits from a derogation under Belgian banking law and has applied for
an exemption from the requirements applicable to financial holding companies under the
amended CRD IV.41 Euroclear SA/NV (the immediate parent of the ICSD Euroclear Bank and
the Euroclear CSDs), is not itself a credit institution but prudential requirements derived from
CRD IV/CRR have been applied already under national banking law. 42
Under CRD IV, the consolidating institution has responsibility for the establishment and
oversight of consistent implementation of group-wide prudential policies including with respect
to the suitability of the members of management bodies and internal governance. 43 The
European Banking Authority (EBA) Internal Governance Guidelines44 and the Joint ESMA and
EBA Suitability Guidelines45 should be considered in the drawing up of such policies. The legal
39 CRD IV art 21a (as amended by CRD V)

40 For LSEG, prudential consolidation is at the level of LCH Group Holdings Ltd. LSEG is the majority
shareholder of LCH Group Holdings: LCH Group Holdings Ltd, Basel III Pillar 3 Disclosures Report (2019).
For DBAG, prudential consolidation takes place at the level of Clearstream Holding AG. The Clearstream Group
is fully owned by DBAG. Clearstream Holding AG is subject to consolidated supervision by the German Federal
Financial Supervisory Authority. See Clearstream, Pillar 3 Disclosure Report of Clearstream Group (2019)
https://www.clearstream.com/resource/blob/2136594/bad163a2089711d273a9bc9397d39c3d/en-pillar3-cbl-discl-
rep-19-data.pdf. Prudential regulation of Eurex Clearing AG is on a stand-alone basis: Eurex Clearing, Pillar 3
Disclosure Report of Eurex Clearing AG (2019)
https://www.eurexclearing.com/resource/blob/2025424/0e1b97f04327eda015c4884757ca74df/data/pillar-3-
2019_ecag-en.pdf
41 The narrow conditions under which an exemption is possible are set out in CRD IV, art 21a (4)(a)-(e) (as
amended).
42 Euroclear SA, as well as Euroclear Bank, is categorised by the National Bank of Belgium as an ‘other
systemically important institution (O-SII): NBB, ‘Notification for Article 131 CRD’
<https://www.esrb.europa.eu/pub/pdf/other/esrb.notification190116_osii_be.en.pdf>.
43 CRD IV, art 109(2).
44
Final Report on Guidelines on internal governance under Directive 2013/36/EU (EBA/GL/2021/05) 2021
(Internal Governance Guidelines).
45 Final report on joint ESMA and EBA guidelines on the assessment of the suitability of members of the
management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU (ESMA35-
36-2319 EBA/GL/2021/06) 2021 117.Suitability Guidelines (Suitability Guidelines).

status of such guidelines is that regulated entities and supervisors must make every effort to
comply with them.46
c. Comparing FMIs and banks
Like banks, some FMIs are systemically important, but otherwise their similarities are minimal.
This is especially evident, and relevant here, in relation to risk. 47 Even those FMIs that hold
banking licences bear only limited resemblance to mainstream banks because their banking
activity is restricted and ancillary to their core business. ICSDs provide intra-day liquidity to
the users of their systems but they do not engage materially in the maturity transformation that
is a core part of traditional banking business. Likewise, CCPs assume a certain amount of
counterparty credit and liquidity risk but they specialize in managing these exposures in ways
that are very different from the management of a conventional banking book. It has been said
that ‘managing risk is what CCPs do’ and for this they have ‘a staggered arsenal of risk
management requirements, processes and practices they employ to support the financial
resilience of the firm, along with multiple lines of defence to tackle risk’.48 The combination of
their distinct function and approach to risk means that, as compared to banks, there is less
scope for FMIs to take advantage of their systemic importance through the taking of excessive
risk.49
Nevertheless, FMIs have the potential to pose a systemic threat that is arguably more
serious than that created by globally-interconnected banks. In the ordinary course FMIs
reduce systemic risk as intended but, in exceptional circumstances, these critical nodes in the
financial system could become harm-bearing vectors. A consequence of their central position
and depth of interconnection across the financial markets is that the failure of a CCP or ICSD
46 Article 16 of the founding Regulation of each of the European Supervisory Authorities (EBA, ESMA and
EIOPA).
47 For more on the nature of the risks in (I)CSDs and CCPs see Ferran and Hickman (n 10).
48 Paolo Saguato, ‘The Unfinished Business of Regulating Clearinghouses’ (2020) 2020 Columbia Business Law
Review 83, 471.

49 ibid 496.
10

could rapidly transmit financial crises across the global markets. In a situation of extreme
financial stress, in order to preserve itself (and thus the operation of the market), a CCP may
need to increase margin calls, but doing so puts the market under further stress by reducing
liquidity and this could precipitate market failure. 50 This is the issue of procyclicality.51 EMIR
is quite prescriptive about what needs to happen in these circumstances but there remains a
material element of discretion.52 From an (I)CSD perspective such conflict is less likely given
the absence of material counterparty risk but even (I)CSDs have some unsecured exposures
(eg to cash correspondents) that could be material in certain extreme scenarios. If such an
event were to occur, any resulting reduction in the amount of short-term liquidity that the
(I)CSD normally provides to smooth the settlement process would have ramifications
throughout the ecosystem. These issues highlight the paradox that although the purpose of
FMIs is to remove risk from the financial markets they also have outsized potential to originate
or amplify risk. These unusual factors weigh on FMI governance and its regulation.
A more speculative, but nevertheless, arguable difference between banks and FMIs is
with respect to propensity for misconduct. Experimental studies suggest bankers cheat more
than non-bankers when primed with their profession.53 Exacerbating this are findings
indicating dysfunction in bank whistleblowing culture. 54 This propensity may be attributable to
strong profit focus, the uncertainty of financial products and the asymmetry of information
between customers and bankers.55 In FMIs uncertainty is substantially smaller because the
nature of the FMI ‘product’ is to reduce transaction uncertainty. Further, although there is
asymmetry of information, clients of FMIs are often much more knowledgeable about the
50 Turing refers to this as a ‘balance between two species of systemic risk’ Dermot Turing, Clearing and
Settlement (Bloomsbury Professional 2021) 235.
51 See Pedro Gurrola Perez, ‘Procyclicality of CCP Margin Models: Systemic Problems Need Systemic
Approaches’ [2020] World Federation of Exchanges Working Paper. <https://www.ssrn.com/abstract=3779896>

accessed 18 November 2021. Perez argues that procyclicality is inherent in CCP function and is a problem that
needs to be addressed from a system wide perspective as opposed to one focused on CCPs.
52 EMIR RTS 153/2015 art 28
53
Alain Cohn, Ernst Fehr and Michel André Maréchal, ‘Business Culture and Dishonesty in the Banking Industry’
(2014) 516 Nature 86.
54 House of Commons (n 129) paras 142-152.
55 Sue Jaffer, Nicholas Morris and David Vines, ‘Why Trustworthiness Is Important’ in Nicholas Morris and David
Vines (eds), Capital Failure (Oxford University Press 2014) 10.
11

financial ecosystem (given their role in it) than many bank customers. This reduced uncertainty
and asymmetry of information may serve to reduce opportunities for misconduct.
A distinction that could cut either way is that banks are more directly connected to the
consumer, receiving substantial media attention that makes them sensitive to reputational risk.
Regulation can then harness that reputational sensitivity for example by imposing
transparency requirements obliging management to disclose information and standards by
which they can be publicly held to account. FMIs take a more backstage role in the financial
markets making their reputational risk lower. To the extent misconduct and excessive risk
taking does occur in FMIs, it would likely not garner the same level of media attention.
Therefore, regulation drafted to harness reputational sensitivity in FMIs, may be relatively
ineffective.56 On the other hand, the extent to which FMIS stress their position as trusted
actors in the market is an indicator of their self-assessment of the importance of reputation.
Finally, in many respects FMI clients have little choice as to whether they engage (due
to regulatory and system necessity) and limited choice as to who they engage with because
competition between FMIs is underdeveloped.57 For banks, clients have more choice, creating
a level of competition not seen in FMIs. 58 Client choice places greater pressure on
governance, particularly in more profit focused sectors.
d. Deviations in the regulation of governance in FMIs
Given the differences in the business models, risks, pressures, and influences on governance
in banks and FMIs set out above, governance norms derived from the banking sector may not
have the desired effect when applied to FMIs. Doubts about the suitability of prescriptive
corporate governance requirements and the derived nature of FMI governance regulations
suggests we could be building multiple layers of weakness into the governance of FMIs. Turing
56 Group of Thirty (ed), Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform (Group of
Thirty 2015) 48.
57 Shaofang Li and Matej Marinč, ‘Competition in the Clearing and Settlement Industry’ (2016) 40 Journal of
International Financial Markets, Institutions and Money 134.

58 Mark Yallop, ‘Rebuilding Trust in Financial Markets: Beyond the Limits of Law and Regulation’, Research
Handbook on Law and Ethics in Banking and Finance (Edward Elgar Publishing 2019) 192.
12

has recently commented that ‘nobody has yet devised a [governance] model which adequately
reflects the risk profile of an [FMI]. There is no right way to arrange the fees or dividends of an
[FMI] if its mismanagement can jeopardise an economy’. 59
Despite their derived nature, there are calibrations in the FMI Regulations to account
for bank-FMI differences, some of which are set out in Table 2 below. However, for the major
European FMIs operating under the banking model in CRD IV, the calibrations of the FMI
Regulations are unavailable (although the particularities of their risk profile could be factored
into the application of CRD IV in accordance with the proportionality principle).60 One study
comparing the governance provisions in CRD IV with other financial regulations such as MiFID
II, advocates for a cross sectoral approach to iron out what the authors argue are arbitrary
differences in the regulations.61 To the extent the regulatory differences under scrutiny here
appear to be arbitrary, a similar approach is advocated. However, material differences
between FMIs and banks suggest variations may be necessary. We begin by assessing the
importance and relevance of the differences. To do this we have compared the governance
regulations of European FMIs and credit institutions as set out in the table below and
considered in more detail in the sections that follow.
Table 2: Variations in the governance provisions of FMI Regulations.

CSDR EMIR CRD IV
Governance arrangements
Responsibilities Detailed list of As CSDR with some Some specific
of board responsibilities62 minor differences63 responsibilities and
overall responsibility
for the institution
Art 88(1)(a)
59 Turing (n 50) 252.

60 Suitability Guidelines Title I.
61 Sofie Cools and others, ‘A Cross-Sectoral Analysis of Corporate Governance Provisions: About Forests and
Trees’ (Hart, 20191231) 181.

62 Commission Delegated Regulation (EU) 2017/392 of 11 November 2016 supplementing Regulation (EU) No
909/2014 of the European Parliament and of the Council with regard to regulatory technical standards on
authorisation, supervisory and operational requirements for central securities depositories 2017 art 49(2) (CSDR
RTS 2017/392) .
63 Commission Delegated Regulation (EU) No 153/2013 of 19 December 2012 supplementing Regulation (EU)
No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on
requirements for central counterparties 2012 art 7 (2) (EMIR RTS 153/2013) .
(“EMIR RTS 153/2013) art 7 (2)
13

Committees Risk, remuneration As CSDR65 As CSDR plus
required and audit64 nomination
committee for
significant
institutions66
Director suitability
Honesty and None None Required.
integrity (CRD IV art 91 (9))
requirement
Skills Not specified Not specified List is provided67
considered
Review An overall review of As CSDR Reassessment of
compliance. (art 21(3)) director suitability
Regularity depends when events occur
on factors such as that may affect
size and systemic 68
suitability
importance
(art 22(4))
Change to be No Yes Yes69
notified to (art 27 (1), (2), 31(1))
competent
authority
Competent No Yes Yes70
authority power (art 31(1))
to remove
director
Assessment of Not specified Not specified Prior to
new appointment71,
appointments exceptionally within a
month of
72
appointment.
Independence
Definition of Not defined but EMIR No business, family or “does not have any
independence definition referred to in other relationship that present or recent past
an ancillary raises a conflict of relationships or links
document73 interest regarding the of any nature with the
CCP concerned or its relevant institution or
controlling its management that
shareholders, its could influence the
management or its member’s objective
clearing members and and balanced
who has had no such judgement and
64 CSDR RTS 2017/392 art 48(1)

65 EMIR RTS 153/2013 art 7(1), EMIR art 28
66 CRD IV art 88(2), 92(1), 76 (3). Audit committees are required for Public Interest Entities Directive 2014/56/EU
of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory
audits of annual accounts and consolidated accounts OJ L 158, 27.5.201 art 39
67 Suitability Guidelines Annex II.
68 ibid 26.
69 ibid 143.
70
ibid 194.
71 ibid 134.
72 ibid 138.
73 ESMA, ‘Questions and Answers. Implementation of the Regulation (EU) No 909/2014 on Improving Securities
Settlement in the EU and on Central Securities Depositories’ (2020).
14

relationship during the reduce member’s
preceding five years ability to take
preceding (art 2 (28)) decisions
independently”74
Proportion to At least one third As CSDR It is “good practice”
‘be’ (art 27(2)) (art 27(2)) for significant or listed
independent credit institutions to
have a sufficient
number.75 In
systemically
important institutions,
risk and nomination
committees must be
50% independent.
Independence No No Yes for all members
of mind of management
requirement body76
Independence No specific reference Independence to be Lack of

of directors on to independence but considered at group independence is
multiple boards organisational level and account for presumed (though
in group arrangements should the potential for conflict that may be
account for potential of board members on rebutted).79
conflicts.77 more than one board in
the group. 78
Conflict of Interest
Requires As CSDR Requires governance
arrangements to (art 33 (1)) arrangements that
identify and manage include the
any potential conflicts segregation of duties
of interest with in the organisation
adequate procedures and prevent conflicts
for resolving possible of interest.
conflicts. (art 88 (1))
(art 26 (3))
Diversity
Diversity policy A representation None As CSDR
target for under- (Art 88(2)(a))
represented gender
should be identified.
Diversity policy should
be published.
(art 27(4))
Diversity Gender None Age, gender,
factors geographical
provenance and
74 Suitability Guidelines 80.

75
ibid 87, 88. Sufficiency is determined proportionally (ibid 88.)
77 CSDR RTS 2017/392 art 50 (2)(3).
78 EMIR RTS 153/2013 Art 3 (4)
15

educational and
professional
background.80
Remuneration
Standard Authorisation as CSD Policies promote As EMIR and in
requirement must contain sound and effective addition, the policy
remuneration risk management, should align with
policies.81 accounting for business strategy,
prospective risks and and values, be
balancing fixed and gender neutral and be
variable reviewed by the
remuneration.82 management body.
(art 26(5)) (art 94)
Deferment of Not specified The policy shall take Minimum of 40% to
variable due account of be deferred by 4 to 5
remuneration possible mismatches years for significant
of performance and institutions.84
risk periods and ensure
that payments are
deferred as
83
appropriate.
Stakeholder engagement
Users/clients A user committee is Clients are invited to None.
required. They can meetings relating to
advise management transparency and
on matters that impact segregation and
them, and details of portability.86 The risk
this advice (including committee is
implementation) is composed of clearing
annually reported to members, independent
the competent directors and client
authority.85 representatives.87
3. Key variations in FMI governance regulations
Drawing on the research set out in Table 2, this section focuses on variances in the
governance regulations relating to independence requirements, remuneration, and
stakeholder participation. Note that, as discussed above, the most systemically important
FMIs are subject both to the FMI Regulations and CRD IV.
80 ibid 16.
81 CSDR RTS 2017/392 art 10(a)
82 EMIR RTS 153/2013 art 8
83
EMIR RTS 153/2013 art 8 (2)
84 CRD IV art 94 (as amended by CRD V)
85 CSDR art 28.1 and 28(3). CSDR RTS 2017/392 art 41 (c)
86 EMIR art 27 (2)
87 EMIR art 28 (1)
16

a. Independence
A discussion of independence regulations is divided here into issues relating to the meaning
of independence, and the proportion of independent directors required on boards.
i. Concepts of independence
There are two regulatory concepts of independence relevant to this discussion: ‘being
independent’ and ‘independence of mind’.
To ‘be independent’ is typically determined according to proxies that contra indicate
independence, such as relationships and ties.88 As set out in Table 2 above, the FMI
Regulations define being independent as precluding any ‘business, family or other relationship
that raises a conflict’ with shareholders, management or clients/clearing members for the
preceding five years.89 National governance codes including the UK, Belgium, France, and
the Netherlands are consistent with the more prescriptive definition of independence in the
FMI Regulations, but they are soft law in nature. In contrast, CRD IV has a more subjective
approach, precluding ‘relationships that could influence the members objective and balanced
judgement’90 together with a list of circumstances in which a lack of independence is
presumed (though rebuttable).91 The Codes in Germany and Luxembourg are less
prescriptive still.92 For example, the German Code describes independence as having no
personal or business relationships that ‘may cause a substantial and not merely temporary
conflict of interest’.93 These variations in meaning between the regulations and national codes
may foster inconsistency in practice. Of greater concern, by virtue of the content and hard law
88
Grant Kirkpatrick, ‘The Corporate Governance Lessons from the Financial Crisis’ (2009) 2009 OECD Journal:
Financial Market Trends 61.
89 EMIR art 2(28). No definition of independence in CSDR but it is indicated that the EMIR definition is to be used
ESMA, ‘Questions and Answers. Implementation of the Regulation (EU) No 909/2014 on Improving Securities
Settlement in the EU and on Central Securities Depositories’ (2020).
90 Suitability Guidelines para 80
92 A comparison of the corporate governance codes for each of these jurisdictions was completed as part of this
research and is on file with the authors.

93 German Corporate Governance Code 2019 C.7. Notably, the Belgian Companies Code 2019 has a similarly
subjective (but hard law) definition; requiring relationships ‘with the company or a major shareholder of the latter
which is likely to endanger his independence’ (The Belgian Companies Code 2019 art 7.87 s1). Note that the
negative list of criteria contained in the Belgian Corporate Governance Code also applies. Belgian banking law
has recently enacted a new definition of (formal) independence which is somewhat different from the one used in
the Code but is also comply or explain.
17

nature of the FMI Regulations, FMIs are subject to a more prescriptive definition of
independence than banks and corporations more generally.
There are at least two concerns to raise with the prescriptiveness of the FMI definitions
of independence. Firstly, in a general way, the definitions rely on proxies for a determination
of independence. Proxies are inexact and can apply despite variations in context that may
render them inappropriate. Using prescriptiveness in combination with proxies could create
inaccurate outcomes. This is problematic when applied to situations where there is not an
excess of suitable candidates, such as in FMIs (this issue is discussed further in the following
section (iii)).
The second issue is that using the definition of independence derived from that which
applies to corporations more generally, fails to account for differences in who directors should
be independent from.94 If subject to context, independence may be different for firms in which
directors are acting primarily for the benefit of the shareholders than if directors are also
required to consider the public interest. In the former, shareholders expect independent
directors to be independent of management, to ensure managers do not act in their own
interest to the detriment of the shareholders. In institutions with a public interest imperative
(including banks and FMIs) there are added expectations including that directors will be
independent of shareholders so as to prevent the board acting in shareholder interest to the
detriment of the public. Independence remains an important governance tool for holding the
executive to account but, where accountability is to a wider group of stakeholders than is
typical, this may need to be reflected in the regulation. For FMIs this could be achieved through
greater flexibility in the proxies used to determine ‘being independent’, such as moving
towards a definition more akin to CRD IV.
CRD IV contains the separate concept of independence of mind which is not
contained in the FMI Regulations. It pertains to the exercise of independent judgement95 and
94 Wolf-Georg Ringe, ‘Independent Directors: After the Crisis’ [2013] European Business Organization Law
Review 424.
95 Suitability Guidelines s9.2.
18

is evidenced through behavioural skills including courage, conviction and strength, the ability
to ask questions and resist group-think.96 Admittedly, it is hard to prove a person has these
skills and traits. However, because it is an ongoing requirement, it is placed at the forefront of
directors’ minds as a standard they are required to operate by, whether they are considered
to ‘be independent’ or not.97 This shifts the onus of responsibility for independence from the
company, to the individual director. Independence of mind requires the absence of conflicts of
interests which may impede a directors ability to perform their duties.98 Conflicts are assessed
according to a list of scenarios such as economic interests, personal relationships,
employment and political influence and in this way overlaps with the being independent
requirement.99 Authentic application of the ‘independence of mind’ concept may be more
effective than an assessment of who a director has had connections with at the time of
appointment and reappointment. However, ‘being independent’ provides an important buffer
against its inauthentic application.
Both concepts of independence add value to the construction of a board that is
effective for its stakeholders. For both concepts, independence of mind is the goal, and their
dual application is likely the best way to achieve it. At present, FMI Regulations rely only on
‘being independent’ in, what is argued above, too prescriptive a manner. A more effective
approach would be to apply independence of mind as the baseline for all directors in line with
CRD IV, supplemented by more subjective ‘being independent’ requirements that can respond
to demands of context and allow for the prioritisation of expertise.
ii. Proportion of independence
For FMIs, at least one third of the board must be independent. In contrast, CRD IV states that
it is ‘good practice’ to have a ‘sufficient number’. 100 This escalates for Globally Systemically
96
ibid 81.
97 ibid. CRD IV Art 91 s.8,
98 ibid 83.
99 ibid.
100 See Table 2
19

Important Institutions and Other Systemically Important Institutions (ICSDS are categorised
as the latter) who need majority independence on their nominations and risk committees. 101
These committees must have at least three members.102 In supervisory assessments of
director fitness and propriety, a directors’ independence103 is only considered if they are one
of the mandated independent committee members or it is required under national law.104
Individual jurisdictions can go beyond these requirements, for example, the National Bank of
Belgium also require majority independent directors on remuneration committees of
systemically important institutions.105
Given the publicly listed nature of the majority of FMI Groups in this study, national soft
law provisions, typically applying to listed companies on a comply or explain basis, are also
relevant, at least at parent company level. Here, there is substantial jurisdictional variation. In
descending order from the most restrictive, the UK recommends that at least half the board is
independent.106 The same is true for France in widely held corporations, increasing to two
thirds for closely held companies.107 In Belgium at least three of the NEDs should be
independent108 and in Luxembourg it is advised an appropriate number not less than two.109
The German Code is most flexible, allowing the supervisory board to include ‘what it considers
to be an appropriate number of independent members’, subject to the prioritisation of
expertise.110 National variations become apparent when looking at FMI boards in practice.
101 Internal Governance Guidelines para 52 and 54.

102 ibid para 47.
103 As distinct from the independence of mind requirement for all directors of credit institutions (Suitability
Guidelines art 81) discussed above at pg 19.

104
European Central Bank, ‘Guide to Fit and Proper Assessments’ (2018) 17.See further Danny Busch and
Annick Teubner, ‘Fit and Proper Assessments within the Single Supervisory Mechanism’ [2019] European
Banking Institute Working Paper 16. Under Belgian law there is a requirement that the remuneration committee
have a majority independent directors and, for Public Interest Entities, this requirement is the same on the audit
committee (dropping to just one for non-Public Interest Entities (Belgian Corporate Code art 7:120 ss2, :119) and
for certain transactions (such as a proposed merger) there need to be at least 3 independent board members,
there are no national legal independence requirements in the UK, Germany, French, Luxembourg or the
Netherlands [to confirm re France and the Netherlands]
105 National Bank of Belgium, ‘Governance Manual for the Banking Sector’ (2018) 28.
106 UK Corporate Governance Code 2018 para 11
107
AFEP/Medef French Code of Governance 2018 para 8.3
108 Belgian Corporate Governance Code Provision 2.3 Appendix A,
109 Recommendation 3.1 LuxSE The X Principles of Corporate Governance of the Luxembourg Stock Exchange
110 ‘The German Corporate Governance Code. Translation from Deutscher Corporate Governance Kodex’ (2019)
C.6. and C7, S25 d German Banking Act
20

FMIs based in Germany either do not specify who is independent (e.g Clearstream companies
and Eurex) or the proportion of independent directors is low (DBAG at 18%). In contrast, those
companies based in the UK and France have a higher proportion of independent directors (e.g
Euroclear UK & International Ltd at 50% and LCH SA at 45%). 111 This lack of consistency is
a matter for concern. The level of concern depends on the value of independence to effective
governance. This is discussed in the next section.
iii. Value of independence
Support for the value of independence is open to question.112 Valid issues surrounding
the weight of emphasis placed on independence provides support for the more nuanced
approach to independence suggested above. Hambrick et al state that independence is a
‘necessary but not sufficient’ director requirement, putting forward instead a ‘quad model’ of
factors.113 They advocate for a balance between four quadrants: independence, expertise,
motivation and bandwidth. Emphasising one quad over another may require a trade-off.
A lack of expertise may inhibit effective monitoring114 and the provision of advice and
counsel.115 An independent director’s level of expertise can impact on their credibility leading
to ‘a negative dynamic’ with the executives.116 Expertise is a particularly salient quad in the
FMI context because the industry is arcane, technology heavy, technically complex, and
critical in purpose. The proportionality principle117 requires expertise to escalate in proportion
with the complexity of the business. On this basis expertise requirements should be very high
111
Data obtained from company websites and correct as of 11 January 2022
112 Ringe (n 94). Dorothy S Lund and Elizabeth Pollman, ‘The Corporate Governance Machine’ [2021] ECGI
Working paper 34. Although there is research with a contrasting view, for example François Neville and others,
‘Board Independence and Corporate Misconduct: A Cross-National Meta-Analysis’ (2019) 45 Journal of
Management 2538.
113 Donald C Hambrick, Vilmos F Misangyi and Chuljin A Park, ‘The Quad Model for Identifying a Corporate
Director’s Potential for Effective Monitoring: Toward a New Theory of Board Sufficiency’ (2015) 40 Academy of
Management Review 323, 331.
114 Steven Boivie and others, ‘Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring’
(2015) 10 The Academy of Management Annals 1, 8.

115
James D Westphal, ‘Collaboration in the Boardroom: Behavioral and Performance Consequences of CEO-
Board Social Ties’ (1999) 42 The Academy of Management Journal 7.
116 John Roberts, Terry McNulty and Philip Stiles, ‘Beyond Agency Conceptions of the Work of the Non-Executive
Director: Creating Accountability in the Boardroom’ (2005) 16 British Journal of Management S5, S15.
117 CRD IV art 74(2)
21

in FMIs.118 Unfortunately, independence and expertise are not naturally compatible because
having the former renders obtaining the later more challenging and less likely.
The regulatory requirements of expertise for both FMIs and credit institutions are high.
Under CRD IV the requirements include education in specific fields (accounting for educational
‘level and profile’119), general and industry specific experience (assessed according to a list
of factors including hierarchy, length of service and number of subordinates 120) and skills
(assessed against a non-exhaustive list of 16 skills).121 The board of the consolidating
institutions (which would include Clearstream Holding AG and Euroclear SA/NV), ‘should
understand not only the legal, organisational and operational structure of the group but also
the links and relationships among them’ including group specific operational risks, intra-group
exposures and specifics about how the group would withstand adverse circumstance. 122 The
FMI regulations do not go into the same level of detail as CRD IV, but EMIR specifically
requires that board members have expertise in ‘financial services, risk management and
clearing services’.123 Other complicating factors include company geographic and structural
diversity which, although not unique to either the FMI sector or banking, may increase the
need for expertise because of the volume and variation of applicable regulation in the se ctor
across borders.
New expertise requirements are being added in response to the environmental, social
and governance (ESG) agenda and climate crisis. ECB guidance on director fitness and
propriety, currently under consultation, contains a collective requirement to understand
‘climate related and environmental risk’. 124 The Suitability Guidelines definition of risk has
also been updated to include ESG factors, as well as money laundering and terrorist
118 ECB Guide pg 10 which states ‘the principle of proportionality is inherently applicable, as the level of
experience required depends on the main characteristics of the specific function and of the institution. The more
complex these characteristics are, the more experience will be required’.
120
ibid 63–64.
121 ibid Annex II.
122 Internal Governance Guidelines para 73
123 EMIR art 27(2) CSDR also has expertise requirements, though not as specifically drafted.
124 European Central Bank, ‘Guide to Fit and Proper Assessments (Draft under Consultation)’ (2021) 38.
22

financing.125 The effect of this enhanced definition is to considerably expand the knowledge,
skill and experience requirements of the Guidelines.126 Other factors exacerbating the
pressure on FMI board appointments include the digital transformation (discussed in section
5) and the increasing threat of cyber-attack, which necessarily expands the breadth of risk
related knowledge required.127 Consequently, finding people with the appropriate blend of
talent and independence is a challenge of increasing magnitude.
If we restrict the motivation quad of director requirements to a consideration of
remuneration, there is debate as to whether performance-based remuneration is detrimental
to independence.128 This debate aside, opposition to variable remuneration for independent
directors means that, to some degree, director independence must be traded off with director
motivation. Instead, independent directors are typically paid according to their position and
activities, used as proxies for individual performance. 129 It is perhaps worth considering, in
future work, whether independent directors pay can be related to performance which is not
linked to firm financials.
Finally, the bandwidth quad. Under CRD IV sufficient time commitment is assessed
according to at least 11 factors, including number of directorships, relevant duties and
geographical presence.130 This requirement may further restrict the pool of potential
applicants but it need not be traded for independence.
The impact of motivation and bandwidth will not vary much between institutions, and
there is nothing specific about FMIs that necessitates a unique approach to either of these
quads. Expertise is different. Given the number of FMIs, their expertise requirements and the

127 See European Central Bank (n 124). European Commission and EY (n 8).
128 Chris Mallin, Andrea Melis and Silvia Gaia, ‘The Remuneration of Independent Directors in the UK and Italy:
An Empirical Analysis Based on Agency Theory’ (2015) 24 International Business Review 175, 184. Empirical
research shows conflicted support for a positive link between the alignment of managerial incentives with
shareholder interests. Research not supporting the link includes Rüdiger Fahlenbrach and René M Stulz, ‘Bank
CEO Incentives and the Credit Crisis’ (2011) 99 Journal of Financial Economics 11. Research supporting the link
includes Lucian A Bebchuk, Alma Cohen and Holger Spamann, ‘The Wages of Failure: Executive Compensation
at Bear Stearns and Lehman 2000-2008’ (2010) 27 Yale Journal on Regulation 257.
129 Mallin, Melis and Gaia (n 128). See the next section for a more detailed remuneration analysis.
130 Suitability Guidelines 41 c.
23

restrictions on remuneration, the pool of available candidates is likely to be relatively small.
This difference supports our argument for a more nuanced approach to independence to help
prioritise the unique expertise requirements of FMIs. Notwithstanding committee
independence requirements, the CRD IV wording ‘good practice to have a sufficient number’
(if the institution is significant or listed131) is more appropriate than the current construction of
the FMI Regulations because it allows independence and expertise to be weighed at both an
individual and board level, providing space for a more holistic approach to board composition
that can be tailored to context.
b. Remuneration
In effect, there is a scale of restrictiveness in the regulation of remuneration of FMIs and banks.
Under CSDR the board has substantial flexibility to structure remuneration policies, provided
those policies are disclosed.132 The same is true under EMIR except that a variable
remuneration requirement is also introduced.133 Under CRD IV, the remuneration provisions
are extensive. They include a cap on variable remuneration, minimum periods of deferment
and the inclusion of clawback provisions.134 The scale of restrictions could be said to
correspond with the respective riskiness of FMIs, in which CSDs are considered least risky,
followed by CCPs and then ICSDs (because ICSDs and the largest CCPs are subject to CRD
IV). 135 This aligns with research establishing a link between remuneration and risk taking. 136
However, this does not account for the level and type of risk which, as discussed in section
2(c), is distinctive in FMIs, being largely operational or counterparty risks. Neither of these
131 ibid 88.

132 CSDR RTS 2017/392 art 10(a)
133 EMIR art 26(5) RTS 153/2013 art 8
134 CRD IV art 94(i) For more detail on the remuneration provisions in CRD IV see Andreas Kokkinis, ‘Exploring
the Effects of the ‘Bonus Cap’ Rule: The Impact of Remuneration Structure on Risk-Taking by Bank Managers’
(2019) 19 Journal of Corporate Law Studies 167.
135
Industry study on relative FMI risk, on file with authors
136 Bebchuk, Cohen and Spamann (n 128).Jeffrey L Coles, Naveen D Daniel and Lalitha Naveen, ‘Managerial
Incentives and Risk-Taking’ (2006) 79 Journal of Financial Economics 431., Christopher S Armstrong and Rahul
Vashishtha, ‘Executive Stock Options, Differential Risk-Taking Incentives, and Firm Value’ (2012) 104 Journal of
Financial Economics 70.
24

risks are associated strongly with excessive risk taking, one of the main dangers addressed
by remuneration provisions. The flexibility in the FMI Regulations compared to CRD IV may
reflect the relative orientation of management towards risk. However, the largest FMI are
subject to CRD IV and are therefore unable to benefit from the calibrations to the remuneration
provisions contained in the FMI Regulations. CRD IV changed remuneration provisions to
make them more proportional but, because these calibrations were based on size and not
risk, the regulations for relevant FMIs did not change. 137
There are persuasive arguments that executive remuneration should, in general, be
considerably more restricted.138 Leaving that normative issue aside, the current purpose of
remuneration regulations are to prevent excessive risk taking,139 a risk to which FMIs are not
particularly prone. Effectively, the only FMIs subject to the same remuneration restrictions as
banks, are the ones for which being well-run is of paramount importance to the public interest.
This puts them at a disadvantage, as compared to non-systemically important FMIs, when
competing for the best managerial talent. As already discussed, although the scale of the
impact of risks is greater in systemically risky FMIs as compared to FMIs more generally, the
difference in substance is limited. We would therefore argue all FMIs be subject to the same
remuneration restrictions.
There are also regulatory variances regarding whether the remuneration of independent
directors can be linked to firm performance. Under CSDR and EMIR this is prohibited. 140 For
credit institutions there are guidelines suggesting independent directors can be paid variable
remuneration in exceptional circumstances. 141 Given that UK, German, Dutch, French and
Luxembourg Corporate Governance Codes (to which the FMI Groups are subject) recommend
137 ‘Directive (EU) 2019/ 878 of the European Parliament and of the Council - of 20 May 2019 - Amending
Directive 2013/ 36/ EU as Regards Exempted Entities, Financial Holding Companies, Mixed Financial
Holding Companies, Remuneration, Supervisory Measures and Powers and Capital Conservation
Measures’ 43.
138
See for example Hugh Collins, ‘Fat Cats, Production Networks, and the Right to Fair Pay’ [2022] The Modern
Law Review.
139 CRD V Recital 10
140 CSDR art 27(3) EMIR art 27(2)
141 ‘Guide to Sound Remuneration Policies EBA-GL-2015-22’ (2015). para 172
25

against performance related pay for independent directors, the effect of this difference in
practice may be minimal.142
c. Stakeholder representation
There are differences in the extent of stakeholder participation in management in FMIs. For
CCPs, client and clearing representatives are invited to attend board meetings and be a
constituent of the risk committee.143 They have no voting rights but they can exert influence .
Similarly, CSDR requires the establishment of user committees composed of ‘representatives
of issuers and of participants in securities settlement systems’.144 There are no stakeholder
representation requirements under CRD IV only a requirement that independent directors
ensure that all stakeholder interests are considered by the management body. 145 The FMIs
subject to CRD IV will be held cumulatively to this standard and the prescriptions of the FMI
Regulations.
It is a coherent evolution in FMI governance regulations to include requirements on client
and member participation that are not present for banks. This is because clients and users
are sophisticated financial market participants, often with ‘skin in the game’ and a vested
interested in the smooth functioning of the FMI with its clients. They also add technical skills
and expertise which, as discussed above, can be hard to assemble around the board table of
such a complex sector. However, the reasons for the difference in regulatory stakeholder
participation requirements are less clear. Whilst both client representatives for CCPs and user
committees for (I)CSDs are advisory, there is a material difference between the two. Client
representatives are in the room with board members discussing risks and strategies. 146 In
142 UK Corporate Governance Code Provision 34, German Corporate Governance Code provision G.18 (there is
some leeway here if the remuneration is geared to the long-term development of the company), Dutch Corporate
Governance Code principle 3.3, French Corporate Governance Code para 8.6, Belgian Corporate Governance
Code para 7.5 and Luxembourg Corporate Governance Code para 7.6.
143 EMIR art 27(2), 28(1)
144 CSDR art 28(1)
145 Suitability Guidelines para 90, Internal Governance Guidelines para 26
146 EMIR art 28(1)
26

contrast, user committees are separate and are therefore unable to participate directly with
board members.147 Potentially the most problematic issue is that user committees are
dependent on the board for the information they receive. These are factors likely to impact
stakeholder incentive to engage. On the other hand, for risk committees, client and clearing
member representatives in the room may inhibit discussions and stymy decision making.
Where the board goes against any advice of the user committee (in the case of (I)CSDs), or
the risk committee (in the case of CCPs), the competent authority must be informed.148
There are also jurisdictional variations. Companies that have a codetermined board also
have input from employees. EMIR permits CCPs to invite employees to risk committees, in an
advisory capacity, but there is no obligation to do so. 149 Codetermination is relevant to
Clearstream Banking SA, Clearstream Banking AG, DBAG and Eurex Clearing AG. Evidently,
the rules and processes of governance, from a stakeholder perspective differ materially
between FMIs and across jurisdictions. Research is needed to establish what the impact of
these differences between CCPs and (I)CSDs are so that, if indicated, the more beneficial
approach can be consistently adopted.
Having given some consideration to how governance provisions in FMIs have evolved
thus far, it is also critical to consider how they might need to further evolve, in light of the
changes being ushered in by the digital transformation. This is the focus of the following
section.
4. FMI governance and the digital transformation
Financial technology (Fintech) has the potential to transform how the financial markets operate
across asset classes on a global scale. Here we begin to consider the impact of Distributed
147 CSDR art 28(3). CSDR RTS 2017/392 art 41 (c)

148 CSDR art 28(6), EMIR art 28(5)
149 EMIR art 28(1)
27

Ledger Technology (DLT) on FMI governance and its regulation. 150 According to the World
Economic Forum ‘we are approaching an inflection point, with meaningful DLT use cases
going live and many institutions acknowledging that this technology will likely play some role
in the future of capital markets’.151 Use cases include the Australian Stock Exchange (ASX)
replacing their post-trade systems with a permissioned DLT system,152 and in Canada, Project
Jasper (now in its fourth phase) has been experimenting with DLT in clearing and settlement
since 2016.153 Of the companies in this study, a consortium that includes Euroclear and
Euronext, has supported the development of Liquidshare, a settlement platform for tokenised
assets.154 SIX are developing a ‘fully integrated trading, settlement and custody infrastructure
for digital assets’.155 Despite these developments, the European Central Bank have recently
concluded that ‘in the current landscape, a clear business case has not yet emerged for the
use of DLT in post-trade processes’.156
a. Using distributed ledger technology in post-trade
Simplistically, DLT can be viewed as a different way to store data. In a DLT system,
data is distributed amongst participants (nodes), creating a shared ledger which can be
contrasted to the single central ledger used in the legacy systems of (I)CSDs. Shared ledgers
150 For an overview of the potential ways in which DLT may change the financial markets see World Economic
Forum, ‘Digital Assets, Distributed Ledger Technology, and the Future of Capital Markets’ (2021).
151 ibid.
152 ASX, ‘ASX Selects DLT to Replace CHESS’ (2017). One of the questions to consider when deciding on the
role of DLT is whether it should be ‘permission ed’ or ‘permissionless’. Bitcoin operates a permissionless DLT in
which anyone can participate. A permissioned system restricts who can participate and therefore retains some
centralisation. For a discussion on potential for permissionless DLT in post-trade see Charles W Jr Mooney,
‘Beyond Intermediation: A New (Fintech) Model for Securities Holding Infrastructures’ (2019) 22 University of
Pennsylvania Journal of Business Law 386.
153 ‘Jasper Phase III: A Collaborative Research Initiative between Payments Canada, the Bank of Canada and
TMX Group’ (Payments Canada, 22 October 2018) <https://www.payments.ca/industry-info/our-research/jasper-

phase-iii-collaborative-research-initiative-between-payments> accessed 30 June 2021.
154 Ledger Insights, ‘Liquidshare, BNP Paribas, Euroclear in CBDC Trial for Securities Settlement’ (Ledger
Insights - enterprise blockchain, 5 July 2021) <https://ledgerinsights.com/liquidshare-bnp-paribas-euroclear-in-

cbdc-trial-for-securities-settlement/> accessed 13 July 2021.
155 SIX, ‘SIX to Launch Full End-to-End and Fully Integrated Digital Asset Trading, Settlement and Custody
Service’ (SIX) <https://www.six-group.com/en/newsroom/media-releases/2018/20180706-six-

digitalexchange.html> accessed 7 July 2021.
156 European Central Bank., The Use of DLT in Post-Trade Processes: Advisory Groups on Market
Infrastructures for Securities and Collateral and for Payments. (Publications Office 2021) 29
<https://data.europa.eu/doi/10.2866/98734> accessed 15 November 2021.
28

can be either permissioned or permissionless. In permissioned ledgers, in order to access and
add to the ledger, nodes need permission from a central authority. In permissionless ledgers
no individual or entity has control over the network. In both cases the nodes all have access
to the entirety of the records in the ledger. Nodes can add to this information, although in the
case of permissionless ledgers, a complex validation process called the ’consensus
mechanism’ needs to be completed in order to do so. This ensures only legitimate new data
is added. 157 According to the World Bank:
‘two core attributes of a DLT based infrastructure are the ability to: (i) store,
record and exchange “information’ in digital form across different, self-interested
counter-parties without the need for a central record-keeper (i.e. peer-to-peer) and
without the need for trust among counterparties; and (ii) ensure there is no “double-
spend” (i.e. the same asset or token cannot be sent to multiple parties).’ 158
Of financial sectors, post-trade is one of the most likely targets for DLT. The current
post-trade system has been described as ‘functional [but also] complex, costly and
inefficient’.159 DLT is projected to be a solution to these issues, potentially disrupting the
position of FMIs in the markets. The possible scope for usage of DLT in post-trade is very
wide, ranging from complete replacement of current systems by issuing tokens on a
blockchain (as in the case of SIX), to the much less drastic use of DLT to supplement the
processes and systems already in place.160 One European CSD is already using DLT for its
notary services with an intention to expand.161 In a review of DLT projects and experiments
worldwide the International Monetary Fund report that ‘all projects concluded that securities
settlement is a highly suitable and feasible environment for DLT-based solutions’.162
Advocates of DLT in post-trade cite numerous advantages, including that DLT could:
reduce the cost of trade processing;163 improve efficiency by ‘streamlining the entire share
157 For an explanation of blockchain and tokenisation in the FMI context see Rüdiger Veil, ‘Blockchain and the
Future of Financial Market Infrastructures’, The Law and Regulation of Financial Market Infrastructures (2021).
158 World Bank Group, ‘DLT and Blockchain’ (2017) 2.
159 Bank of England, ‘The Future of Post-Trade’ (2020) 6.
160 World Economic Forum (n 150) 38.
161
ESMA, ‘Report to the European Commission. Use of Fintechs by CSDs’ (2021) 12.
162 International Monetary Fund and others, ‘FinTech Notes. Distributed Ledger Technology Experiments In
Payments and Settlements’ 3.

163 Morten Linnemann Bech and others, ‘On the Future of Securities Settlement’ 17. One Fintech company
estimates cost savings of $2 – 4 billion annually ‘Charting a Path to Post-Trade Utility | Broadridge’
29

ownership architecture’;164 increase transparency and thereby return more control to investors
(for example by allowing them to see where their securities are being rehypothecated);165
allow investor rights to be more easily exercised; 166 reduce or even remove counterparty
risk167 and reduce the risk of data manipulation.168 For industry incumbents it remains unclear
whether digital transformation poses a threat or an opportunity.169 The entry of Fintechs into
the post-trade sector raises the prospect of an unprecedented level of competition in this field.
Further, because in a DLT system transfers are instantaneous and immutable, the need for
CCPs to step in between buyers and sellers is in some cases obviated. However, where
settlement is not instant, such as in the case of derivatives, the need for CCPs remains. For
FMIs more generally, resistance to change may be supported by the knowledge that although
virtually instantaneous transfers may already be achievable without DLT, there is limited
market appetite for this because of the impact on liquidity management. 170
Instantaneousness may also have other detrimental effects such as lender-imposed penalties
and increased borrowing.171
<https://www.broadridge.com/white-paper/charting-a-path-to-post-trade-utility> accessed 13 July 2021. Empirical

research suggests that accounting only for cost reductions in IT and personnel, DLT could improve bank profit by
an average of 2% Marco Cucculelli and Martino Recanatini, ‘Distributed Ledger Technology Systems in
Securities Post-Trading Services. Evidence from European Global Systemic Banks’ [2021] The European Journal
of Finance 1.
164 Federico Panisi, Ross P Buckley and Douglas Arner, ‘Blockchain and Public Companies: A Revolution in
Share Ownership Transparency, Proxy Voting and Corporate Governance?’ Stanford Journal of Blockchain Law
and Policy 32.
165 Emilios Avgouleas and Aggelos Kiayias, ‘The Promise of Blockchain Technology for Global Securities and
Derivatives Markets: The New Financial Ecosystem and the “Holy Grail” of Systemic Risk Containment’ (2019)
20 European Business Organization Law Review 81.
166
Eva Micheler, ‘The No-Look-Through Principle: Investor Rights, Distributed Ledger Technology, and the
Market’ (Social Science Research Network 2021) SSRN Scholarly Paper ID 3871369
<https://papers.ssrn.com/abstract=3871369> accessed 1 July 2021.
167 Eva Micheler, ‘Holding, Clearing and Settling Securities through Blockchain/Distributed Ledger Technology:
Creating an Efficient System by Empowering Investors’ [2016] Journal of International Banking and Financial Law
6.
168 Euroclear and Oliver Wyman, ‘Blockchain in the Capital Markets: The Price and the Journey’ (2016) 8.
169 Randy Priem, ‘Distributed Ledger Technology for Securities Clearing and Settlement: Benefits, Risks, and
Regulatory Implications’ (2020) 6 Financial Innovation 11.

170 ‘It is market choice that a settlement cycle no shorter than two days is standard for cash equities in European
markets’ Euroclear and Wyman (n 168) 8. See also Gary Gensler, Session 21: Post Trade Clearing, Settlement,
& Processing | Video Lectures | Blockchain and Money | Sloan School of Management | MIT OpenCourseWare
(2018) <https://ocw.mit.edu/courses/sloan-school-of-management/15-s12-blockchain-and-money-fall-2018/video-
lectures/session-21-post-trade-clearing-settlement-processing/> accessed 9 July 2021.
171 Mariana Khapko and Marius Zoican, ‘How Fast Should Trades Settle?’ (2020) 66 Management Science 4573.
30

DLT usage is not without persuasive scepticism. From the perspective of DLTs use in
the economic system generally, Schuster argues that DLT requires the oversight of a central
body with ability to correct ledger entries (i.e. it needs to be permissioned) but, if there is such
a body, DLT’s efficiencies dissipate.172 A survey of post-trade professionals reported similar
concerns.173 According to the originator of the blockchain DLT concept, ‘the main benefits are
lost if a trusted third party is still required’.174 A permissioned distributed ledger would fit more
easily into the current framework of legacy systems and regulation but, because it creates a
single point for the whole network, it is also more vulnerable to cyber-attack.
Zetzsche et al point out various challenges of DLT usage, including data privacy
concerns, increased opportunity for market abuse, cyber and operational risks.175 Regulating
DLT is also problematic given that it will need to operate on a cross jurisdictional basis and
that its distributed nature necessarily means there is no clear party to whom the regulation
should be addressed.176 Priem highlights a number of CCP and (I)CSD specific risk including
incompatibility between DLT systems leading to fragmentation and new prudential and
conduct risks.177 Benos et al raise a number of FMI specific concerns, including that DLT
cannot ensure settlement finality.178 Scalability, once thought to be one of the biggest issues
with DLT, is appearing less of an issue after industry experimentation. 179 Nevertheless,
projected use of DLT remains less efficient in terms of both speed of transaction and energy
172 Edmund Schuster, ‘Cloud Crypto Land’ [2021] The Modern Law Review.
173
Michael Mainelli and Alistair Milne, ‘The Impact and Potential of Blockchain on the Securities Transaction
Lifecycle’ SWIFT Institute Working Paper 81.
174 Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ [2008] Decentralized Business Review
<https://learning.oreilly.com/library/view/mastering-bitcoin-2nd/9781491954379/app01.html> accessed 13 July

2021.
175 Dirk A Zetzsche, Ross P Buckley and Douglas W Arner, ‘The Distributed Liability of Distributed Ledgers: Legal
Risks of Blockchain’ (2018) 2018 University of Illinois Law Review 1361.

176 Philipp Paech, ‘The Governance of Blockchain Financial Networks’ (2017) 80 The Modern Law Review 1073.
177 Priem (n 169).
178 Evangelos Benos, Rodney Garratt and Pedro Gurrola-Perez, ‘The Economics of Distributed Ledger
Technology for Securities Settlement’ (2019) 4 Ledger 132 <http://ledger.pitt.edu/ojs/ledger/article/view/144>

accessed 29 June 2021.
179 DTCC, ‘DTCC Announces Study Results Demonstrating That DLT Can Support Trading Volumes in the US
Equity Markets’ (October 2018) <https://www.dtcc.com/news/2018/october/16/dtcc-unveils-groundbreaking-

study-on-dlt> accessed 12 July 2021.
31

consumption.180 These are just a few of many concerns and highlight the need for firms and
regulators to advance carefully into the digital transformation.
Despite the challenges, digital transformation of finance, including the increased use
of DLT, seems increasingly inevitable. Regulation needs to keep pace. Presently there is
181
divergence in the weight of regulation between FMIs and Fintechs. This is despite the
European Commission indicating there to be a general consensus towards the regulatory
approach ‘same service, same risk, same rules’.182 With this in mind they have proposed that
Multilateral Trading Facilities and (I)CSDs trialling DLT systems be allowed certain exemptions
from the Markets in Financial Instruments Directive and Regulation (MiFID/MiFIR) 183 and
CSDR respectively, in an effort to ‘allow EU financial services to retain global
competitiveness’.184 Under the proposed regime, applicants would be exempted from certain
requirements that were not designed with DLT in mind. This reflects ESMA’s view that ‘it is
important to ensure that CSDR is technology neutral and does not create undue barriers to
the use of DLT by CSDs’.185 Described as a ‘pilot regime’, it is a regulatory sandbox in all but
name.186 There are no governance related provisions in the potential exemptions so the
standard governance requirements in MiFID/MiFIR and CSDR/CRD IV will continue to
apply.187 For now, this seems right in that governance requirements should be agnostic where
180 Jens Weidmann, ‘Prometheus and Epimetheus in the Digital Age’ (Deutsche Bundesbanke)
<https://www.bundesbank.de/en/press/speeches/prometheus-and-epimetheus-in-the-digital-age-798160>
accessed 5 July 2021.
181 OECD, ‘The Tokenisation of Assets and Potential Implications for Financial Markets - OECD’ 33
<https://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets.htm>
accessed 29 June 2021.
182 European Commission, ‘Summary Report of the Targeted Consultation Document on the Review of
Regulation on Improving Securities Settlement in the European Union and on Central Securities Depositories’
(2021) 19. Proposal for a Regulation of the European Parliament and of the Council on a Pilot Regime for Market
Infrastructures based on Distributed Ledger Technology 2020 (COM(2020) 594 final) 5.
183 References to be added.
184 Proposal for a Regulation of the European Parliament and of the Council on a Pilot Regime for Market
Infrastructures based on Distributed Ledger Technology 4.

185 ESMA (n 161) 15.
186 FCA, ‘Regulatory Sandbox’ (FCA, 4 May 2016) <https://www.fca.org.uk/firms/innovation/regulatory-sandbox>
accessed 16 July 2021.For more of regulatory sandboxes in financial markets see Wolf-Georg Ringe and
Christopher Ruof, ‘Regulating Fintech in the EU: The Case for a Guided Sandbox’ (2020) 11 European Journal of
Risk Regulation 604. Wolf-Georg Ringe, ‘The DLT Pilot Regime: An EU Sandbox, at Last!’ (Oxford Business Law
Blog, 19 November 2020) <https://www.law.ox.ac.uk/business-law-blog/blog/2020/11/dlt-pilot-regime-eu-
sandbox-last> accessed 1 July 2021.
187 Proposal for a Regulation of the European Parliament and of the Council on a Pilot Regime for Market
Infrastructures based on Distributed Ledger Technology.
32

the risks are largely the same and it is only the underpinning technologies that are changing.
However, the digital transformation is about far more than simply providing more technically
advanced and efficient ways to do the same things; as the world changes, so too will the
governance challenge.
b. Regulating governance in a DLT post-trade world
As already discussed, current banking regulations were formulated to respond to the failings
of the financial crisis creating an industry sea change of reduced risk taking and leverage. A
regulatory response will also be required for the digital transformation which, instead of
occurring overnight, is taking place by degrees and with greater foreseeability. That
foreseeability provides an opportunity to craft governance regulations that not only prevent
firms from failing but also facilitate responsive, efficient and innovative financial markets.
There is a fine line to tread between ensuring market safety and stability and creating an
environment conducive to innovation and development.
FMI governance will be impacted by new technology through its introduction of new
risks and, in some cases, amplification of old ones. In the long term, overall risk may reduce,
partly due to a reduction in counterparty risk because market transfers become instantaneous
or contingent upon the fulfilment of smart contracts.188 However, at least for the transition
period, new risks will arise from new market participants, operational change and increasing
expertise requirements. Each of these risks are considered below.
Considering first new market participant risk. As discussed in section 2(a), there are
relatively few CCPs and (I)CSDs, some of which are systemically important. ESMA indicates
that a majority of (I)CSDs have already established partnerships of varying types with
emerging Fintechs.189 There may be complementarities between incumbents and Fintechs
188 Smart contracts are ‘contracts based on decentralised consensus and hacking proof algorithmic consensus
[…that] reduce reliance on relationships or collateral and broadens the universe of possible arms-length
transactions’ (Thorsten Beck and Yung Chul Park, ‘Fostering FinTech for Financial Transformation’ (VoxEU.org,
16 September 2021) <https://voxeu.org/article/fostering-fintech-financial-transformation> accessed 30 November
2021. Pg 51)
189 ESMA (n 161) 13.
33

that offer benefits for both parties: investment and networks for the start-ups and nimble
innovation for the incumbents.190 But there are questions that need to be asked about the
effect of increased competition on market stability. For banks this is a question that has
received a lot of attention though the answers remain inconclusive. 191 For FMIs the
consideration will be different, but the question of whether there is a possibility of greater
financial instability as a result of risk taking in response to increased competition for market
share, deserves attention. This research imperative is further underlined when you consider
other competitive challengers, such as BigTech, also have the potential to develop a role in
the sector.192
FMIs are required to consider the public interest in their decision making.193 This duty
to consider the public interest reflects how purpose in banking and FMIs has matured from
aligning shareholder and managerial interests to safeguarding stakeholders’ interest in
conformity with public interest on a sustainable basis. This positive and necessary change
affecting FMIs and banks is yet to be consistently implemented for corporations across
jurisdictions.194 Emerging Fintechs are not regulated as FMIs. A lack of a level playing field
between market participants at this early stage will ultimately impact on the direction of DLT
development across the sector. It is recognised that Fintech generally ‘may pose risks to
consumers and investors and, more broadly to financial stability and integrity’. 195 Regarding
DLT specifically, the Bank for International Settlements states that ‘most jurisdictions are still
exploring potential policy responses’.196 But Fintech firms are pushing forward whilst these
190 Beck and Park (n 188) 55.

191 Elena Carletti and Philipp Hartmann, ‘Competition and Stability: What’s Special about Banking?’ [2002] ECB
Working Paper, No. 146, European Central Bank (ECB) 51.
192 Juan Carlos Crisanto, Johannes Ehrentraud and Marcos Fabian, ‘Big Techs in Finance: Regulatory
Approaches and Policy Options’ <https://www.bis.org/fsi/fsibriefs12.htm> accessed 30 November 2021.

193 Basel Committee on Banking Supervision, ‘Corporate Governance Principles for Banks’ (2015) 3.
194 For example, Belgian directors prioritise the interests of shareholders (art 1:1 Belgian Companies Code 2019).
However, the Belgian Commission on Corporate Governance clarify the need to balance the interests of
shareholders and stakeholders on a sustainable basis (Belgian Code of Corporate Governance Code CL2.1-
2.2). In France the prioritisation of shareholders has been tempered by a ‘social interest’ provision (art 1833 Civil
Code 2019), bringing it more in line with Germany (s. 93(1) AktG: ‘Wohl der Gesellschaft’)
195 Johannes Ehrentraud and others, ‘Bank for International Settlements. Policy Responses to Fintech: A Cross-
Country Overview’ 60, 8.

196 ibid 34.
34

explorations are taking place. The period waiting for regulation to catch up could facilitate the
rapid growth of Fintechs over and above the heavily regulated FMIs to the potential detriment
of the public interest. The European Central Bank argues that, to create ‘clear and sound
governance’ in a DLT environment, ‘a consolidated approach based on regulatory licences
and conduct of business rules will create appropriate incentives to manage conflicts of
interest.197 There is some way to go to achieving this.
Exacerbated operational risk is another pressing area for attention in terms of FMI
governance. Operational risk is not new for FMIs, having long been one of the main risks for
legacy systems, particularly for (I)CSDs.198 In the digital transformation, whatever changes
occur will need a transitory period in which DLT and legacy systems work in tandem, perhaps
‘for the next 20-30 years’.199 The European Central Bank state that
‘legacy and DLT-based systems need connection and communication

standards that are robust. This will help to avoid a situation where each system becomes
a different ecosystem isolated from the others [and] ensure a level playing field among
market participants, irrespective of the underlying technology’.200
Interoperability between DLT and legacy systems introduces a complexity that is hard
to exaggerate. There may be reason for optimism given a recent Banque de France project
which successfully experimented using central bank digital currency for repo transactions
using DLT which synchronized with the legacy platform Target 2 Securities. 201 Deutsche
Bundesbank also conducted a similarly successful interoperability experiment. 202 But the
issue is more complex. Interoperability risk is not just between new systems and legacy
systems but also between different new systems. As has already been discussed, many
industry actors are working on different DLT projects, creating the risk of incompatibility
197 European Central Bank. (n 156) 10.

198 Ferran and Hickman (n 10).
199 Priem (n 169).
200 ESMA (n 161) 22.
201 ‘Banque de France Conducts a New Central Bank Digital Currency Experiment’ (Banque de France, 25 June
2021) <https://www.banque-france.fr/en/communique-de-presse/banque-de-france-conducts-new-central-bank-
digital-currency-experiment-0> accessed 15 November 2021.
202 ‘DLT-Based Securities Settlement in Central Bank Money Successfully Tested’
<https://www.bundesbank.de/en/press/press-releases/dlt-based-securities-settlement-in-central-bank-money-
successfully-tested-861444> accessed 30 November 2021.
35

leading to industry fragmentation.203 According to the Bank for International Settlements ‘there
is a worldwide need to develop international standards that will allow for interoperability and
compatibility among multiple DLT protocols’.204 Until such standards are forthcoming, FMI
governance needs to account for interoperability concerns, perhaps through a more
collaborative approach across the sector.
The scale and degree of change facing the sector and the risks this unearths means
that board expertise in Fintech will be essential in the coming transformation. The European
Central Bank state that there is ‘a limited pool of qualified human capital available to lead DLT-
based projects’.205 This has a knock-on effect on the already limited supply of DLT expertise
at board level. Developments in this field are occurring exceptionally fast and expertise erodes
at the same rate. If industry connections are considered a barrier to independence a level of
expertise will be unobtainable. A lot can change in the five years you would need to be without
connections to the relevant institution to be deemed independent.206 We suggest a re-
emphasis on expertise may be necessary, perhaps by increasing flexibility in the appointment
process in relation to ‘being independent’ as suggested above.207 Additionally, and
notwithstanding our argument regarding the need for flexibility in director suitability
requirements, consideration should be given to a regulatory prescription for Fintech expertise
on the board. This would be a significant change for the FMI Regulations which do not
reference specific skills, whereas CRD IV could add Fintech expertise to the existing list of
skills.208 The challenge will be in creating a definition of Fintech expertise that balances adding
explicit and functional skills to the board with the flexibility to respond to varieties in context
and the dynamism of the sector.
From a business perspective, there are a lot of opportunities and risks in the future of
FMIs that will need skilful decision making to navigate. Adaptation and the ability to pivot

204
Ehrentraud and others (n 195).
206 EMIR art 2(28)
207 EMIR art 27, CSDR art 27
208 Suitability Guidelines Annex II
36

functions and services will be essential. Some avenues are already being capitalised such as
in relation to the vast amounts of data accessible to (I)CSDs. 209 The proficiency of adaptation
will be key both to business performance and the development of beneficial services to the
financial system and society. Fintech expertise will be essential to this but in their current form,
director expertise and independence regulations leave little room for the necessary Fintech
fortification.210 Even without additional Fintech expertise requirements, finding suitable
candidates is very difficult. Attention needs to be paid to governance regulations to prioritise
the FMI specific skills needed now and in the digital transformation. Alongside this, attention
must be paid to the regulation of new market participants to ensure that there is a level playing
field of rules designed to protect the public interest at this pivotal time for FMI direction.
5. Conclusion
FMIs are distinct from banks for reasons that include their purpose, risk appetite and risk type.
In light of these differences and having compared governance regulation for both, we question
how FMI governance standards have evolved from those applied to banking. To the extent
that systemically important FMIs that offer limited banking services are subject to both FMI
Regulations and CRD IV, the evolution is in an additional layer of regulation. For the rest, the
evolution is arguably deficient in a number of ways.
A look at variation in the meaning of independence suggests FMI Regulations are
under evolved. The concept of independence of mind, used in banking, introduces a level of
individual responsibility for conduct and behaviour that is over and above the ‘being
independent’ requirement for FMIs. We question the rigidity of the ‘being independent’
requirements in light of the often mutually exclusive expertise requirement. This tension is
likely to intensify as we move into the digital transformation. We believe a move towards more
individual responsibility for behaviour in the manner of an independence of mind concept,
209 See for example, ‘Euroclear LiquidityDriveTM’ <https://www.euroclear.com/campaigns/en/innovation/data-

euroclear-information-solutions/liquiditydrive.html> accessed 9 July 2021.
210 See pgs 22-24 regarding the trade-offs between independence and the already substantial, and growing,
expertise requirements.
37

combined with greater flexibility in the ‘being independent’ criteria, would bring a positive
change to FMI governance.
Our study also shows prescriptive FMI Regulations regarding the proportion of
independent board members go further than those applying to banks. This over-evolution in
respect of proportion of independence is hard to justify given the heightened expertise
requirements and type of risks FMIs are subject to. Expertise requirements are continually
evolving in response to changing concerns such as ESG, but the intensity of change is likely
to escalate rapidly with the digital transformation. DLT has the potential to disrupt post-trade
FMIs and in this way introduce risks, incentive misalignments and pressures that place the
stakeholder interests in FMIs (including in particular, the public interest) in a position of
heightened risk and uncertainty. There is a concurrent need to re-prioritise FMI director
suitability regulations to respond to the changing requirements of effective governance,
particularly in relation to expertise, and for regulatory consistency to ensure all parties
operating in this area are subject to the same restrictions and obligations. At this inflection
point of the digital transformation much is at stake and the importance of good governance is
paramount. There is an increasingly urgent need for FMI governance regulation to further
evolve to ensure FMIs can respond and innovate as needed, whilst adhering to fluid public
interest boundaries.
38

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Evolution in Financial Market Infrastructure Governance

Eleanore Hickman and Eilís Ferran*

whilst adopting a more stakeholder-oriented character that reflected banks’ systemic

essence of the functional approach to financial regulation, which focuses on underlying

functions performed rather than the institutional architecture.3 Consistency promotes

Electronic copy available at: https://ssrn.com/abstract=4011746

There is danger in introducing rigidities through mandatory corporate governance

requirements imposed through financial regulation.5 Uniformity underpinned by a

many respects, risk further compounding the problem. 6

We apply this perspective to Financial Market Infrastructures (FMIs) by which we mean

Corporate Law’ (2020) 95 Indiana Law Journal 533.

Electronic copy available at: https://ssrn.com/abstract=4011746

to further regulatory attention.8

In this paper we look at how corporate governance in FMIs, as mandated by financial

compelling case for paying closer attention to FMI governance.

2. The case study: European FMIs

Electronic copy available at: https://ssrn.com/abstract=4011746

There were 26 European (I)CSDs as of January 2022.11 In 2016 five European

Clearstream Banking Luxembourg and Euroclear UK and International. 13 All of these

11 ESMA, ‘CSD Register’ (2022).

Enough, the Remutualization of Clearinghouses’ (2017) 34 Yale Journal on Regulation 601.

Electronic copy available at: https://ssrn.com/abstract=4011746

ICE Clear Europe

0 500,000 1,000,000 1,500,000

Non OTC Derivatives OTC Derivatives

Figure 2. Total value of equity cleared

ICE Clear Europe

0 5,000 10,000 15,000

Electronic copy available at: https://ssrn.com/abstract=4011746

about the group structures, gathered as part of this research project.

Table 1: Key post-trade FMIs

company/deutsche-boerse-group/company-structure> accessed 11 January 2022.

Electronic copy available at: https://ssrn.com/abstract=4011746

Intercontinenta ICE Clear Netherlands Public Vertical

the consequentially variable nature of shareholder engagement is an important factor

influencing their governance.

of over-the-counter (OTC) derivatives so that market participants reduce their counterparty

Electronic copy available at: https://ssrn.com/abstract=4011746

competition between infrastructures enabling increasingly prevalent cross-border

the International Organisation of Securities Commissions. Much of the CPMI-IOSCO

Principles is baked into the FMI Regulations.

Prudential regulatory and supervisory requirements established by Capital

institutions as a consequence of their licence to carry out ‘banking-type ancillary services’.38

30 EMIR Recital 14.

Electronic copy available at: https://ssrn.com/abstract=4011746

company or at an intermediate (‘sub-consolidation’) level. As diversified businesses,

CRD IV credit institutions, operates at sub-consolidated levels.40 In the case of Euroclear,

oversight of consistent implementation of group-wide prudential policies including with respect

39 CRD IV art 21a (as amended by CRD V)

Electronic copy available at: https://ssrn.com/abstract=4011746

comply with them.46

c. Comparing FMIs and banks

Review 83, 471.

Electronic copy available at: https://ssrn.com/abstract=4011746

indicating dysfunction in bank whistleblowing culture. 54 This propensity may be attributable to

Approaches’ [2020] World Federation of Exchanges Working Paper. <https://www.ssrn.com/abstract=3779896>

Vines (eds), Capital Failure (Oxford University Press 2014) 10.

Electronic copy available at: https://ssrn.com/abstract=4011746

and asymmetry of information may serve to reduce opportunities for misconduct.

transparency requirements obliging management to disclose information and standards by

Therefore, regulation drafted to harness reputational sensitivity in FMIs, may be relatively

actors in the market is an indicator of their self-assessment of the importance of reputation.