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The World Bank FMI Principles Relevant issues for CSDs Froukelien Wendt, IMF Miami, 24 September 2012.

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Presentation on theme: "The World Bank FMI Principles Relevant issues for CSDs Froukelien Wendt, IMF Miami, 24 September 2012."— Presentation transcript:

1 The World Bank FMI Principles Relevant issues for CSDs Froukelien Wendt, IMF Miami, 24 September 2012

2 The World Bank Table of content  Introduction new FMI Principles  History  Motivation  Objectives  Implementation  Relevant issues for CSDs  New principles  New issues in existing principles 2

3 The World Bank History 3 New principle on general business risk New principle on tiered participation New distinct principles on liquidity and credit risks New principle on default procedures and segregation and portability 2012

4 The World Bank History 4 Central banks, market regulators and other relevant authorities should adopt, where relevant the principles for CSDs 2012

5 The World Bank 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 5

6 The World Bank 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! 6

7 The World Bank 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 7

8 The World Bank Assessment methodology  To be further discussed tomorrow 8 Step 1: Scope Step 2: Facts Step 3: Conclusions Step 4: Rating Step 5: Timeframe Output: Approach taken Analyses, processes, rationale Measuring and monitoring Evidence Output: Which FMI Which perimeter Which principles Which authorities 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

9 The World Bank First assessments so far * 9 AssessorsFMIs assessedPrinciples covered World BankBrazil FSAPP R A - E World BankMalaysia FSAPP R A - E World BankUruguay FSAPP R A - E CLS Oversight Committee CLSP 1-5,7-9,12,13,15,17-19,21 ECBEURO1P 1-9,13,16, 17-19,21,22,23 IMFEuroclear iCSD Euroclear ESES P 1-23 R A-E *we are aware of

10 The World Bank 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 10

11 The World Bank 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) 11

12 The World Bank 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 12

13 The World Bank 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 13

14 The World Bank 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 14

15 The World Bank 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 15

16 The World Bank 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 16

17 The World Bank 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 17

18 The World Bank 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 18

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