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IOSCO and CPSS release standards for centralised OTC clearing

New and more demanding international standards for payment, clearing and settlement systems, including central counterparties for over the counter (OTC) derivative trades, have been issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO).

Outlined in a report entitled Principles for financial market infrastructures, the new standards provide important support for the G20 strategy to make the financial system more resilient by making central clearing of standardised OTC derivatives mandatory. CPSS and IOSCO members will strive to adopt the new standards by the end of 2012. Financial market infrastructures (FMIs) are expected to observe the standards as soon as possible.

The CPSS and IOSCO have published three documents in total that seek to promote global efforts to strengthen financial market infrastructures (FMIs):

The latter two documents are currently out for public consultation until 15 June 2012.

The new FMI ‘principles’ as they are called (or standards in reality) replace the three existing sets of international standards set out in the Core principles for systemically important payment systems (CPSS, 2001); the Recommendations for securities settlement systems (CPSS-IOSCO, 2001); and the Recommendations for central counterparties (CPSS-IOSCO, 2004).

CPSS and IOSCO have strengthened and harmonised these three sets of standards by raising minimum requirements, providing more detailed guidance and broadening the scope of the standards to cover new risk-management areas and new types of FMIs.

The new principles are designed to ensure that the infrastructure supporting global financial markets is robust and thus well placed to withstand financial shocks. They apply to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively “financial market infrastructures”). These FMIs collectively clear, settle and record transactions in financial markets.

William C Dudley, President, Federal Reserve Bank of New York and a co-chair of the CPSS-IOSCO work on the standards, noted that: “Under the new regime of central clearing for standardised OTC derivatives trades, the role of FMIs will become even more important in the future. The principles provide an important safeguard that FMIs will be robust enough to take on this role.”

Paul Tucker, Deputy Governor, Financial Stability at the Bank of England and CPSS Chairman, added that: “With these new principles, authorities have a good basis on which to ensure a safe and stable financial infrastructure. It is essential that authorities adopt the principles, and FMIs observe them, as soon as possible.”

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.

The principles were first issued for public consultation in March 2011. The finalised principles being issued now have been revised in light of the comments received during that long consultation phase.