Financial market infrastructures (FMIs) are central to the clearance and settlement of transactions in the financial markets as well as the movement of money and securities around the world. They can strengthen the markets they serve and foster financial stability. But without appropriate management they can become a significant source of systemic risk, especially during times of market stress.
FMIs include payment systems (PS), central securities depositories (CSDs), central counterparties (CCPs), securities settlement systems (SSSs), and trade repositories (TRs).
In the U.S., examples of FMIs include:
- The Depository Trust and Clearing Corporation (DTCC), which serves as a CCP for clearing and settling equity and fixed income trades;
- The Options Clearing Corporation (OCC), which operates as a CCP for clearing and settling equity derivatives trades; and
- The Federal Reserve Banks operate three payment systems:
- The Fedwire Funds Service,
- The Fedwire Securities Service, and
- The National Settlement Service.
Recently, the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) engaged in formulating standards to harmonize and strengthen the existing international standards for FMIs.
In March 2011, CPSS-IOSCO released a consultative report entitled Principles for financial market infrastructures (24 Principles). The report contained 24 Principles designed to ensure a more robust infrastructure for the global financial markets and allow the infrastructure to withstand financial shocks. CPSS-IOSCO asked industry participants to comment on the principles.
After CPSS-IOSCO reviewed the comments it received on the Principles report, it revised the principles and released the final version of the report in April 2012. CPSS-IOSCO noted that its members would strive to adopt the new standards by the end of 2012 and that it expects FMIs to observe them as soon as possible.
Along with the release of the final Principles report, CPSS-IOSCO also published two additional related documents for FMIs: Assessment methodology for the principles for FMIs and the responsibilities of authorities and Disclosure framework for financial market infrastructures. The assessment methodology provides a framework for international regulators to measure FMIs’ performance against the 24 Principles. The disclosure framework is meant to assist FMIs in providing consistent and comprehensive disclosure as expected of them under CPSS-IOSCO Principle 23 related to disclosure of rules, key procedures, and market data.
Most recently, in June 2012, CPSS-IOSCO published a consultative report entitled Recovery and resolution of financial market infrastructures. Because of the important role that FMIs play in the global financial markets, CPSS-IOSCO notes that “the disorderly failure of an FMI can lead to severe systemic disruption if it causes markets to cease to operate effectively.” The report is intended to outline the issues that should be considered for different types of FMIs when implementing effective recovery plans and resolution regimes.