New Rules Strengthen Risk Management for Financial Markets

A pair of international standard-setters have released a final report on the principles for financial market infrastructures, aimed at strengthening the risk management and related standards for the financial markets.

The Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions published the final report Monday. The report updates, harmonizes, and strengthens the risk management and related standards for financial market infrastructures, including systemically important payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories. The final report replaces standards previously published by CPSS and IOSCO. CPSS and IOSCO expect the principles in the final report to play an important role in the regulation of financial market infrastructures around the world. The report supports the initiatives of the Group of 20 finance ministers and the Financial Stability Board to strengthen core financial infrastructures and markets.

"FMIs performed well during the financial crisis and we gained a deeper understanding of their true importance,” said Masamichi Kono, vice commissioner for international affairs at the Financial Services Agency of Japan and chairman of IOSCO’s Technical Committee. “Robust FMIs help markets to continue functioning even in conditions of great uncertainty, making them a fundamental element of financial stability."

Compared with the old standards, the new principles introduce new or more demanding requirements in many important areas including 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 and IOSCO also released for comment on Monday a Disclosure Framework for Financial Market Infrastructures and an Assessment Methodology for the Principles for FMIs and the Responsibilities of Authorities. The Disclosure Framework outlines basic information that FMIs should disclose to increase transparency of their governance, risk management, and operations in order to inform participants, authorities, and the public and to facilitate comparisons across FMIs. Under Principle 23 of the Principles for Financial Market Infrastructures, FMIs would be required to complete the Disclosure Framework and disclose their answers publicly on a regular basis.

The Assessment Methodology provides guidance for assessing and monitoring observance of the principles. It is primarily intended for external assessors at the international level. It also provides a baseline for national authorities to assess FMIs under their oversight or supervision.

CPSS and IOSCO released for comment the Disclosure Framework and the Assessment Methodology. The Board of Governors of the Federal Reserve System, as a member of CPSS, and the Commodity Futures Trading Commission and the Securities and Exchange Commission, as members of IOSCO, encourage interested persons to review and comment on the consultative documents. The deadline for submitting comments on both documents to CPSS and IOSCO is June 15, 2012.

The final report on the Principles for Financial Market Infrastructures, the consultative document for the Disclosure Framework, and the consultative document for the Assessment Methodology are available at http://www.bis.org/publ/cpss101.htm and http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.