FMI Principles Relevant issues for CSDs Froukelien Wendt, IMF Miami, 24 September 2012

Table of content Introduction new FMI Principles History Motivation Objectives Implementation Relevant issues for CSDs New principles New issues in existing principles

History New distinct principles on liquidity and credit risks New principle on default procedures and segregation and portability New principle on general business risk New principle on tiered participation 2012

History Central banks, market regulators and other relevant authorities should adopt, where relevant the principles for CSDs 2012

FMI Principles - Motivation Lessons from the crisis FMIs stopped contagion FMI operations continued Still room for improvement Support the G20/FSB strategy Mandatory clearing and reporting of OTC derivatives Four safeguards Fair and open access to CCPs Cooperative oversight Resolution and recovery regimes Appropriate liquidity arrangements Reflect new developments

FMI Principles - Objectives Harmonize existing standards Core Principles for systemically important payment systems Recommendations for securities settlement systems Recommendations for central counterparties Strengthen existing standards Lessons from the crisis Experience in applying standards Ensure consistent applications CPSS-IOSCO members commit to apply ‘to the fullest extent possible’ Enhance safety and efficiency in payment, clearing, settlement and recording arrangements – limit systemic risk!

FMI Principles – Implementation Implementation in legal and regulatory framework by the end of 2012 Self assessments by FMI Ongoing basis Discuss findings with authorities Complete the CPSS-IOSCO disclosure framework (Principle 23) Assessments by authorities (central bank, regulators,…) Assessment of FMIs in jurisdiction Promote observance Assessments by international financial institutions (IMF, World Bank) Financial Sector Assessment Program (FSAP) Technical assistance

Assessment methodology Step 1: Scope Step 2: Facts Step 3: Conclusions Step 4: Rating Step 5: Timeframe Output: Which FMI Which perimeter Which principles Which authorities Output: Approach taken Analyses, processes, rationale Measuring and monitoring Evidence Output: Summary per KC Gaps and shortcomings Risks and implications Output: Issues of concern Magnitude of risk Urgency Rating: O, BO, PO, NO, NA Output: Timeframe Responsible party To be further discussed tomorrow

First assessments so far * *we are aware of Assessors FMIs assessed Principles covered World Bank Brazil FSAP P 1 - 23 R A - E Malaysia FSAP Uruguay FSAP CLS Oversight Committee CLS P 1-5,7-9,12,13,15,17-19,21 ECB EURO1 P 1-9,13,16, 17-19,21,22,23 IMF Euroclear iCSD Euroclear ESES P 1-23 R A-E

Follow on work Assessment methodology and disclosure framework Ongoing, following public consultation April – June 2012 Recovery and resolution of FMIs Public consultation until September 28, 2012 Authorities’ access to data in trade repositories Ongoing

Main implications for CSDs / SSS New principles are introduced Framework for comprehensive risk management (3) Participant default rules and procedures (13) General business risk (15) Tiered participation arrangements (19) Requirements in existing standards are strengthened Governance (2) Financial risk controls (4,5,7) Disclosure of data (23) Several market recommendations in annex C (RSSS 2-5, partly 12)

Principle 3: Framework for the comprehensive management of risks A CSD/SSS should have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational and other risks. Risk management policies, procedures and systems Risks from participants and its customers Risks from interdependencies Recovery and resolution plans

Principal 13: participant default rules and procedures An CSD/SSS 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 Default rules and procedures Prepared to implement Disclose Testing with participants and other stakeholders

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 losses […]. Systems to identify, monitor and manage general business risks Liquid assets funded by equity Recovery or wind-down plan High quality and liquid assets Plan for raising additional equity

Principle 19: Tiered participation arrangements Manage material risks to FMI arising from tiered participation arrangements Able to gather information on indirect participation Identify material dependencies that might affect the FMI Identify indirect participants: uncertainty about indirect participants’ transactions in a default scenario Regularly review risks

Principle 2: Governance Old: Governance arrangements to fulfill public interest requirements and to promote the objectives of owners and users (RSSS 13). New: Support the stability of the broader financial system, other relevant public interest considerations and the objectives of relevant stakeholders

Principles on financial risk management Old: The CSD should institute risk controls that, at a minimum, ensure timely settlement in the event of default of the participant with the largest payment obligation (RSSS 9). New: credit risk Cover credit exposure to every participant, not just single largest SSS without settlement guarantee: cover 2 Requirements based on participant family, not single legal entity Rigorous collateral requirements Rules and procedures to address and allocate uncovered credit losses New: liquidity risk Maintain sufficient liquid resources in all relevant currencies to settle payment obligations With a high degree of confidence under a wide range of stress scenario’s Cover default of one participant family Highly marketable collateral Due diligence liquidity providers

Principle 23: disclosure of rules, key procedures, and market data Old: Rules, regulations, laws, governance, risks and risk mitigation and the rights and obligations of participants. (RSSS 17) New: Rules and procedures System’s design and operations, participants’ rights and obligations Documentation and training to facilitate participants’ understanding or rules, procedures and risks Fees of individual services, and discounts Complete regularly and disclose publicly responses to the CPSS-IOSCO Disclosure framework Basic data on transaction volumes and values at a minimum