The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have released new, strengthened international standards for financial market infrastructures (FMIs), including central securities depositories (CSDs), central counterparty clearing houses (CCPs), securities settlement systems, payment systems and trade repositories.
“FMIs performed well during the financial crisis, and we gained a deeper understanding of their true importance,” Masamichi Kono, vice commissioner for International Affairs, Financial Services Agency, Japan and chairman of IOSCO’s Technical Committee, said in a statement. “Robust FMIs help markets to continue functioning even in conditions of great uncertainty, making them a fundamental element of financial stability.”
CPSS-IOSCO expects members to begin implementing the new standards immediately, with full implementation by the end of 2012, following G-20 and Financial Stability Board (FSB) initiatives to strengthen market infrastructures.
“With these new principles, authorities have a good basis on which to ensure a safe and stable financial infrastructure,” said Paul Tucker, deputy governor for Financial Stability at the Bank of England and chairman of CPSS. “It is essential that authorities adopt the principles, and FMIs observe them, as soon as possible.”
The ‘Principles for financial market infrastructures’ replace three existing sets of standards, comprising: “Core principles for systemically important payment systems,” dating from 2001; “Recommendations for securities settlement systems,” also from 2001 and; “Recommendations for central counterparties,” from 2004.
The principles update existing standards and add new ones relating to the financial resources and risk management procedures an FMI uses to cope with the default of participants; the mitigation of operational risk; the links and other interdependencies between FMIs through which operational and financial risks can spread; achieving the segregation and portability of customer positions and collateral; tiered participation; and general business risk.
CPSS-IOSCO has been reviewing the standards for an update since 2010, when increasing risk and uncertainty in the financial markets highlighted the importance of market infrastructures. In March 2011, CPSS-IOSCO released a draft report of the updated principles, which drew dozens of responses from market infrastructures, banks, industry bodies and other financial institutions.
The quick turnaround for implementation of the principles is due to the commitment of the G-20 to implement mandatory centralised clearing of OTC derivatives by the end of the year.
“Under the new regime of central clearing for standardized OTC derivatives trades, the role of FMIs will become even more important in the future,” William C Dudley, president of the Federal Reserve Bank of New York and a co-chair of the CPSS-IOSCO work on the standards, said in a statement. “The principles provide an important safeguard that FMIs will be robust enough to take on this role.”
In the US, the Depository Trust & Clearing Corporation (DTCC) welcomed the principles. “As the operator of the primary infrastructure for the U.S. cash securities markets, owner of a central counterparty for equities in Europe and operator of global trade repositories for the OTC derivatives markets, DTCC is committed to fostering greater risk management and safety in the trading of financial instruments worldwide,” it said in a statement.
Reporting by Christopher Gohlke, Global Custodian, an Asset International publication