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More preccisely, it have addressed in particular the risks faced by central securities depositories (CSDs), central counterparty clearing houses (CCPs), payment systems, securities settlement systems (SSSs) and central trade repositories.
The aim of the two organisations was to produce, based on the
various regulations in force [[Core principles for systemically important payment systems – CPSS – 2001
Recommendations for securities settlement systems – CPSS/ IOSCO – 2001
Recommendations for central counterparties – CPSS/ IOSCO – 2004
Recommendations for securities settlements systems in the EU – ESCB/CESR –
2009]], a document (the Principles) common to all FMIs deemed to be of systematic importance and to support it with a range of rules (the Responsibilities) aimed at supervisory authorities (central banks, regulators and supervisory bodies) responsible for supervising FMIs’ compliance with the Principles.
With its institutional rather than functional approach, this new
framework also removed the vagueness linked to existing texts
regarding their application scope. There is no doubt in this case that
the texts relate solely to financial market infrastructures.
Some dates
- 10 March 2011: publication
- 29 July 2011: end of consultation
- End of 2012: implementation
Simple common sense principles…
Designed to reinforce the robustness and resilience of FMIs, the report
took a risk-based approach (systemic, credit, liquidity, etc.).
The result is bound to encourage commitment. How could anyone not
approve the need to provide a clear legal framework or the benefits of
real-time gross settlement? Similarly, requiring an FMI to cover itself
against the risks it incurs or causes to be incurred is simply good
practice.
However, the fact that the Principles are in a single document aimed
at all FMIs impacts their clarity and makes it difficult for FMIs to know
whether they are completely, partially or not at all affected. This lack of
detail was highlighted by the majority of responses received.
… but whose detailed description arouses comments
To reduce the settlement fail ratio, Principle 11, for example, allows a
CSD to act as a securities lender, although it is clearly stated that in the
event of borrower default, the CSD is exposed to credit and liquidity
risk.
Principle 13 covers the impact of bankruptcy of an FMI participant on
other members. However, it appears to view as acceptable that a CCP
should pass on to its members the financial loss remaining after use of
all reserve deposits.
Principle 4 does not prohibit the use of guarantees deposited with a
CCP relative to one market to cover bankruptcy on another market. If a certain amount of interoperability is taken into account, this is a far cry from information enabling participants to assess their risk when they use a CCP (Principle 13) … unless you consider that the assessment is easy, since the risk is unlimited!
Principle 19 focuses on the risk which may be caused to the FMI by
clients of its participants (indirect participants). Apart from identifying
who the “client” is (particularly for CCPs), this principle generates
several comments. How can an FMI make a judgement about
participants with which it has no direct link? What about competition
risk (if a custodian has to reveal the identity of its clients to a CSD
which is also a competitor)? And what if the FMI is capable of making
a judgement, what will it do? Ask its participant to no longer work with
this client? FMIs are infrastructures, not supervisory bodies. It is their
responsibility to ensure the quality of their direct participants, but
nothing more.
… and whose monitoring raises questions
While the Responsibilities certainly present obligations on the
supervisory bodies and identify the necessary means (resources,
expertise, etc.), they appear a little weak compared with the
requirements for FMIs. Furthermore, nothing is said of the obligation
for local authorities to give supervisors, regulators, etc. the identified
means.
Another question mark relates to the monitoring of an FMI by a
supervisor, regulator, etc. that owns or operates the FMI. It should
obviously be clear that the Principles apply in the same way whatever
the ownership structure. This question appears in most of the
consultation’s feedback, as well as the issue of who will then supervise
the FMI.
Positioning in a European framework
From EMIRs to the consultation regarding CSDs, there have been
innumerable European initiatives designed to strengthen financial
market infrastructures.
The CPSS IOSCO Principles are international in scope. They must
therefore take account of each country’s particular characteristics and
represent a consensus aiming to be the minimum to ensure the
resilience of infrastructures. The consultation also allows a local
authority to go further and establish reinforced requirements, within its
perimeter, raising the question of a “level playing field” and regulatory
arbitrage.
Should the Principles then be expected to represent the “necessary
and sufficient”? This appears difficult for two reasons: European
regulations are operational and include requirements we would like to
“export”. So it is up to us to convince CPSS IOSCO to adopt our point
of view.
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