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Article (9): Compliance with Principles of Financial Market Infrastructures Requirements

C 9/2020 Effective from 10/2/2021
  1. The Committee on Payment and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have set forth a set of PFMI (details of PFMI are available in the two websites: www.bis.org and www.iosco.org).
     
  2. PFMI aims to assist central banks, market regulators, and other relevant authorities in enhancing safety and efficiency in payment, clearing, settlement, and recording arrangements, and more broadly, limiting systemic risk and fostering transparency and financial stability.
     
  3. Another objective of PFMI is to harmonize and, where appropriate, strengthen the existing international standards and risk management practice for Financial Infrastructure Systems such as LVPS that are systemically important. In general, these standards are expressed as broad principles in recognition of the differing organizations, functions, and designs of the SO and/or SI, and the different ways to achieve a particular result. The principles have also incorporated a range of specific minimum requirements (such as in the credit, liquidity, the general business risk principles) to ensure a common base level of risk management across Systemically Important Financial Infrastructure Systems and jurisdictions.
     
  4. The SI and SO must robustly manage the risks of their systemically important LVPS to ensure their safety and promote financial stability. In addition, a systemically important LVPS should not only be safe, but also efficient. Efficiency refers generally to the use of resources by SO, SI and their Participant Persons in performing their functions. Safe and efficient systemically important LVPS contributes to well-functioning financial markets.
     
  5. PFMI, as global standards, are broadly designed to apply to all Systemically Important Financial Infrastructure Systems across jurisdictions. The Central Bank therefore requires any designated LVPS to observe and comply with the relevant principles in PFMI, in addition to the compliance with the oversight requirements set out in Article (8) of this Regulation. Moreover, the Central Bank may impose higher requirements than PFMI for the LVPS either on the basis of specific risks posed by a LVPS or as a general policy.
     
  6. The requirements set out in the following paragraphs are applicable to the systemically important LVPS operated by the Central Bank, a related entity/subsidiary of the Central Bank and those operated by the private sector. The SO and/or SI should apply these requirements on an ongoing basis in the operation of their LVPS and business, including when reviewing their own performance, assessing or proposing new services, or proposing changes to risk controls.
     
  7. In aligning this regulation with leading international practice, LVPS must comply with the relevant principles set out in the following paragraphs.
     
  8. Principle 1: Legal basis – a systemically important LVPS must have a well-founded, clear, transparent, with a high degree of legal certainty and an enforceable legal framework for each material aspect of its activities.
     
  9. Principle 2: Governance – a systemically important LVPS must have governance arrangements that are clear and transparent, promote the safety and efficiency of the LVPS, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.
     
  10. Principle 3: Framework for the comprehensive management of risks – a systemically important LVPS must have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.
     
  11. Principle 4: Credit risk – a systemically important LVPS must effectively measure, monitor, and manage its credit exposures to Participant Person and those arising from its payment, clearing and settlement processes. The systemically important LVPS must maintain sufficient financial resources to cover its credit exposures to each Participant Person fully with a high degree of confidence.
     
  12. Principle 5: Collateral – a systemically important LVPS that requires collateral to manage its or its participants’ credit exposure must accept collateral with low credit, liquidity, and market risks. A systemically important LVPS must also set and enforce appropriately conservative haircuts and concentration limits.
     
  13. Principle 6: Liquidity risk – a systemically important LVPS must effectively measure, monitor, and manage its liquidity risk. A systemically important LVPS must maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the systemically important LVPS in extreme but plausible market conditions.
     
  14. Principle 7: Settlement finality – a systemically important LVPS must provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, a systemically important LVPS should provide final settlement intraday or in real-time.
     
  15. Principle 8: Money settlement – a systemically important LVPS must conduct its money settlements in central bank money where practical and available. If central bank money is not used, a systemically important LVPS should minimize and strictly control the credit and liquidity risk arising from the use of commercial bank money.
     
  16. Principle 9: Exchange-of-value settlement systems – if a systemically important LVPS settles transactions that involve the settlement of two linked obligations such as securities or foreign exchange transactions, it must eliminate principle risk by conditioning the final settlement of one obligation upon the final settlement of the other.
     
  17. Principle 10: Participant-default rules and procedures – a systemically important LVPS must have effective and clearly defined rules and procedures to manage a Participant Person default. These rules and procedures should be designed to ensure that the systemically important LVPS can take timely action to contain losses and liquidity pressures and continue to meet its obligations.
     
  18. Principle 11: General business risk – a systemically important LVPS must identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialize. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.
     
  19. Principle 12: Custody and investment risks – a systemically important LVPS must safeguard its own and its Participant Persons’ assets and minimize the risk of loss on and delay in access to these assets. A systemically important LVPS’s investments should be in instruments with minimal credit, market, and liquidity risks.
     
  20. Principle 13: Operational risk – a systemically important LVPS must identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. LVPS should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the systemically important LVPS’s obligations, including in the event of a wide-scale or major disruption.
     
  21. Principle 14: Access and participation requirements – a systemically important LVPS must have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.
     
  22. Principle 15 – Tiered participation arrangements – a systemically important LVPS must identify, monitor, and manage the material risks to the systemically important LVPS arising from tiered participation arrangements.
     
  23. Principle 16: Financial market infrastructure links – a systemically important LVPS that establishes a link with one or more FMIs must identify, monitor, and manage link-related risks.
     
  24. Principle 17: Efficiency and effectiveness – a systemically important LVPS must be efficient and effective in meeting the requirements of its Participant Persons and the markets it serves.
     
  25. Principle 18: Communication procedures and standards – a systemically important LVPS must use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.
     
  26. Principle 19: Disclosure of rules, key procedures, and market data – a systemically important LVPS must have clear and comprehensive rules and procedures and should provide sufficient information to enable Participant Persons to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the systemically important LVPS. All relevant rules and key procedures should be adequately disclosed.
     
  27. In addition, CPMI issued a strategy, “Reducing the risk of wholesale payments fraud related to endpoint security”, on 8th May 2018, to encourage industry efforts to reduce the risk of wholesale payments fraud and help market participants stay focused. The strategy is designed to help SO, SI and Participant Persons of Financial Infrastructure Systems and messaging networks as well as their respective supervisors, regulators and overseers. The strategy sets out seven elements, which cover all areas relevant to preventing, detecting, responding to and communicating about fraud and will work holistically.
     
  28. The Central Bank requires the SO and/or SI of the designated LVPS to take into account this CPMI strategy and any amendments thereto, when implementing the security measures over the LVPS.