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

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

3. 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

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

5. 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

6. 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!

7. 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

8. 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

9. First assessments so far *
*we are aware of
Assessors
FMIs assessed
Principles covered
World Bank
Brazil FSAP P
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

10. 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

11. 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)

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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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