[PDF] Principles for Financial Market Infrastructures

Principles for Financial Market Infrastructures

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Committee on Payment and

Settlement Systems

Technical Committee of the

International Organization of

Securities Commissions

Principles for financial market infrastructures

April 2012

This publication is available on

the BIS website (www.bis.org ) and the IOSCO website www.iosco.org © Bank for International Settlements and International Organization of Securities Commissions

2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is

stated.

ISBN 92-9131-108-1 (print)

ISBN 92-9197-108-1 (online)

Contents

Overview of principles and responsibilities........................................................................

.......1

1.0. Introduction........................................................................

Background ........................................................................

FMIs: definition, organisation, and function.....................................................................7

Public policy objectives: safety and efficiency...............................................................10

Scope of the principles for FMIs........................................................................

............12 Scope of the responsibilities of central banks, market regulators, and other relevant authorities for financial market infrastructures........................................16 Implementation, use, and assessments of observance of the principles and ..............................16 Organisation of the report........................................................................ ......................17

2.0. Overview of key risks in financial market infrastructures...............................................18

Systemic risk ........................................................................ Legal risk........................................................................ Credit risk ........................................................................ Liquidity risk........................................................................ General business risk........................................................................ ............................19

Custody and investment risks ........................................................................

...............19 Operational risk ........................................................................ .....................................20

3.0. Principles for financial market infrastructures................................................................21

General organisation ........................................................................ ......................................21 Principle 1: Legal basis ........................................................................ .........................21 Principle 2: Governance........................................................................ ........................26 Principle 3: Framework for the comprehensive management of risks...........................32

Credit and liquidity risk management........................................................................

..............36 Principle 4: Credit risk ........................................................................ ...........................36 Principle 5: Collateral ........................................................................ ............................46 Principle 6: Margin........................................................................ .................................50 Principle 7: Liquidity risk........................................................................ ........................57

Principle 8: Settlement finality ........................................................................

...............64

Principle 9: Money settlements ........................................................................

.............67

Principle 10: Physical deliveries........................................................................

............70

Central securities depositories and exchange-of-value settlement systems ..........................72

Principle 11: Central securities depositories .................................................................72

CPSS-IOSCO - Principles for financial market infrastructures - April 2012 i ii CPSS-IOSCO - Principles for financial market infrastructures - April 2012

Principle 12: Exchange-of-value settlement systems................................................... 76

Default management........................................................................ ......................................78

Principle 13: Participant-default rules and procedures................................................. 78

Principle 14: Segregation and portability...................................................................... 82

General business and operational risk management............................................................. 88

Principle 15: General business risk ........................................................................

...... 88

Principle 16: Custody and investment risks.................................................................. 92

Principle 17: Operational risk........................................................................

................ 94 Access ........................................................................ ......................................................... 101

Principle 18: Access and participation requirements.................................................. 101

Principle 19: Tiered participation arrangements......................................................... 105

Principle 20: FMI links........................................................................ ......................... 109 ...................................................... 116

Principle 21: Efficiency and effectiveness................................................................... 116

Principle 22: Communication procedures and standards........................................... 119 ............................................... 121 Principle 23: Disclosure of rules, key procedures, and market data........................... 121

Principle 24: Disclosure of market data by trade repositories..................................... 124

4.0 Responsibilities of central banks, market regulators, and other relevant

authorities for financial market infrastructures............................................................ 126

Responsibility A: Regulation, supervision, and oversight of FMIs.............................. 126 Responsibility B: Regulatory, supervisory, and oversight powers and resources ...... 128

Responsibility C: Disclosure of policies with respect to FMIs..................................... 130

Responsibility D: Application of the principles for FMIs.............................................. 131

Responsibility E: Cooperation with other authorities .................................................. 133

Annex A: Mapping of CPSIPS, RSSS, and RCCP standards to the principles in this report ........................................................................ .................................................. 138 Annex B: Mapping of the principles in this report to CPSIPS, RSSS, RCCP, and other ............................................. 140

Annex C: Selected RSSS marketwide recommendations ................................................... 141

Annex D: Summary of designs of payment systems, SSSs, and CCPs.............................. 148

Annex E: Matrix of applicability of key considerations to specific types of FMIs.................. 158

Annex F: Oversight expectations applicable to critical service providers ............................ 170

Annex G: Bibliography........................................................................ ................................. 172 Annex H: Glossary........................................................................ ....................................... 174

Annex I: Members of the CPSS-IOSCO review of standards.............................................. 180

Abbreviations

ACH Automated clearing house

BCBS Basel Committee on Banking Supervision

CCP Central counterparty

CGFS Committee on the Global Financial System

CPSIPS Core principles for systemically important payment systems

CPSS Committee on Payment and Settlement Systems

CSD Central securities depository

DNS Deferred net settlement

DvD Delivery versus delivery

DvP Delivery versus payment

FMI Financial market infrastructure

FSB Financial Stability Board

ICSD International central securities depository

IOSCO International Organization of Securities Commissions

IT Information technology

Lamfalussy Report Report of the Committee on Interbank Netting Schemes of the central banks of the Group of Ten countries

LEI Legal entity identifier

LVPS Large-value payment system

OTC Over the counter

PS Payment system

PvP Payment versus payment

RCCP Recommendations for central counterparties

Repo Repurchase agreement

RSSS Recommendations for securities settlement systems

RTGS Real-time gross settlement

SSS Securities settlement system

TR Trade repository

CPSS-IOSCO - Principles for financial market infrastructures - April 2012 iii

Overview of principles and responsibilities

Principles for financial market infrastructures

General organisation

Principle 1: Legal basis

An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

Principle 2: Governance

An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders. Principle 3: Framework for the comprehensive management of risks An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.

Credit and liquidity risk management

Principle 4: Credit risk

An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more- complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions.

Principle 5: Collateral

An FMI that requires collateral to manage its or its participants' credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.

Principle 6: Margin

A CCP should cover its credit exposures to its participants for all products through an effective margin system that is risk-based and regularly reviewed.

Principle 7: Liquidity risk

An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of CPSS-IOSCO - Principles for financial market infrastructures - April 2012 1 confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.

Settlement

Principle 8: Settlement finality

An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.

Principle 9: Money settlements

An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

Principle 10: Physical deliveries

An FMI should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor, and manage the risks associ ated with such physical deliveries. Central securities depositories and exchange-of-value settlement systems

Principle 11: Central securities depositories

A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimise and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilised or dematerialised form for their transfer by book entry. Principle 12: Exchange-of-value settlement systems

If an FMI settles transactions that involve t

he settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.

Default management

Principle 13: Participant-default rules and procedures An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.

Principle 14: Segregation and portability

A CCP should have rules and procedures that enable the segregation and portability of positions of a participant's customers and the collateral provided to the CCP with respect to those positions.

2 CPSS-IOSCO - Principles for financial market infrastructures - April 2012

General business and operational risk management

Principle 15: General business risk

An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.

Principle 16: Custody and investment risks

An FMI should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. An FMI's investments should be in instruments with minimal credit, market, and liquidity risks.

Principle 17: Operational risk

An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, andquotesdbs_dbs31.pdfusesText_37