NEW STANDARDS FOR FINANCIAL MARKET INFRASTRUCTURES

The Committee on Payment and Settlement Systems or CPSS and the Technical Committee of the International Organization of Securities Commissioners or the IOSCO (whose members include the SEC and the CFTC) published the final report of the Principles of Financial Market Infrastructures or FMIs. This report replaces earlier published standards. The CPSS and IOSC expect the principles to be key in the regulation of FMIs.

FMIs that facilitate the clearing, settlement and recording of monetary and financial transactions are critical in fostering financial stability. The report details twenty-three principles grouped into ten categories regarding the governance and operation of FMIs. The new principles are designed, according to the Bank for International Settlements, to “ensure that the infrastructure supporting global financial markets is robust and thus well placed to withstand financial shock.” The principles include:

Category 1, General organization focuses on governance and the management of risks. It notes that firms should have governance arrangements that are clear and transparent and which promote safety and efficiency while having a sound risk-management framework.

Category 2, Credit and liquidity risk management is keyed to having effective measures to monitor and manage credit exposures including the resources sufficient to cover a wide range of potential stress categories. This includes the default of two participants and their affiliates. Policies should also that require collateral with low credit, liquidity and market risk. Margin should cover credit exposures to participants for all products and the firm should effectively measure, monitor and mange liquidity risk.

Category 3, Settlement is concerned with the finality of settlement which should be at a minimum by the end of the value date or, preferably, intraday or in real time.

Category 4, Central securities depositories notes that a CSD should have appropriate rules and procedures to help ensure the integrity of the securities issued and minimize and manage the risks. If there is two linked obligations the CSD should eliminate principal risk by conditioning final settlement of one on the other.

Category 5, Segregation and portability should be provided for as to the positions and the collateral.

Category 6, General business and operational risk management focuses on general business risk including suggesting that sufficient liquid net assets funded by equity be held to cover potential general business loses, custody and investment risks and the management of operational risk.

Category 7, Access and participation requirements notes that an FMI should have objective, risk-based and publicly disclosed criteria for participation which permit fair and open access.

Category 8, Efficiency and effectiveness provides that the FMI should be efficient in meeting the requirement of its participants and the markets it serves while using procedures to facilitate efficient payment, clearing, settlement and recording.

Category 9, Disclosure of rules, key procedures and market data provides that the FMI should have clear and comprehensive rules and procedures and provide for timely and accurate access to data by the relevant authorities and the public in view of their respective needs.

Category 10, Responsibilities of central banks, market regulators and other relevant authorities concerns the regulation and supervision of FMIs, the oversight of their powers and resources, their disclosure policies and cooperation with authorities.