Financial market infrastructure can collapse

By Wire services | August 1, 2012 | Last updated on August 1, 2012
2 min read

Global financial regulators have released a consultation paper on how to plan for the potential failure of firms that make up financial market infrastructure.

The paper was published by the Committee on Payment and Settlement Systems (CPSS) and IOSCO, and outlines the issues that should be taken into account when developing recovery plans for different types of firms.

It’s also looking for input on a number of technical points related to these issues. It says the disorderly failure of important firms and systems could lead to “severe systemic disruption” and that they should be subject to regimes for recovery and resolution.

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The CPSS-IOSCO released 24 principles for these financial infrastructures in April 2012, which include guidelines on how they should be set up and governed, as well as how aspects like their credit and liquidity risks, and margins should be managed.

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Paul Tucker, Deputy Governor, Financial Stability of the Bank of England and CPSS Chairman said, “The vital role of the financial system’s infrastructure makes it essential that credible recovery plans and resolution regimes exist. FMIs need to be a source of strength and continuity for the financial markets they serve.”

“This is even more important as a safeguard given the commitment made by G20 Leaders in 2009 that all standardized over-the-counter derivatives should be cleared through central counterparties,” adds Masamichi Kono, vice commissioner for International Affairs, Financial Services Agency, Japan and Chairman of the IOSCO Board.

Comments on the report are due by September 28.

Additionally, a final rule establishing risk-management standards for financial market utilities (FMUs) has been approved, says the Federal Reserve Board.

These utilities include payment systems, central securities depositories, and central counterparties, all of which provide the infrastructure to clear and settle payments, as well as other financial transactions.

Two provisions are included in the rule:

  • It establishes risk-management standards governing the operations related to the payment, clearing, and settlement activities of designated FMUs (except those registered as clearing agencies with the SEC, or as derivatives clearing organizations with the CFCT)
  • Advance notice must be given for proposed material changes to the rules, procedures, or operations of important firms and systems.

The final regulation is similar to the proposed rule, but includes two exceptions; the Fed can waive applications if the associated risks or the design of an FMU doesn’t comply with standards, and has also added to the previous list of changes that don’t require advance notice.

The final rule will be effective on September 14, 2012.

Wire services