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CPSS-IOSCO’s Proposed Principles for Financial Market Infrastructures

CPSS-IOSCO’s Proposed Principles for Financial Market Infrastructures The World Bank role and experience. ACSDA General Assembly Bermuda, 25 March 2011 Froukelien Wendt PSDG, The World Bank. Table of contents. The importance of the new CPSS-IOSCO Principles

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CPSS-IOSCO’s Proposed Principles for Financial Market Infrastructures

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  1. CPSS-IOSCO’s Proposed Principles for Financial Market Infrastructures The World Bank role and experience ACSDA General Assembly Bermuda, 25 March 2011 Froukelien WendtPSDG, The World Bank

  2. Table of contents • The importance of the new CPSS-IOSCO Principles • World Bank experience with international standards (including outcomes from the Global Payment Systems Survey 2010) • Conclusions 2

  3. The importance of the new CPSS-IOSCO Principles 3

  4. Stock Exchange / OTC trading Trade Repositories Clearing / CCP SSS CSD RTGS / commercial bank Importance of new CPSS-IOSCO principles Business risk Investment risk Operational risk Credit risk Replace-ment cost risk Custody risk Legal risk Liquidity risk Trading and Registration Gross • Securities and Derivatives Settlement involves a variety of risks Clearing Gross / Net Securities settlement DVP 1, 2, 3 or no DVP Cash settlement 4

  5. Importance of new CPSS-IOSCO principles World Bank perspective • Increase safety and financial stability, by requiring FMIs to manage their risks • Increase efficiency and transparency of the payment, derivatives and securities settlement systems • Provide guidance for system development • To FMI’s and authorities worldwide • To the World Bank and IMF to assess payment and settlement systems and provide technical assistance • Ensure consistency in system development, between FMI’s and between countries • Reflect new developments • Lessons of recent crisis taken into account • New technology and risk management practices 5

  6. New distinct principles on liquidity and credit risks CPSS-IOSCO Principles for FMIsSince 1990 ongoing improvement and coverage of standards New principle on default procedures and segregation and portability New principle on general business risk New principle on tiered participation 6

  7. Role of the World Bank Chairs Sub-group on Assessment Methodologies together with IMF New Assessment Methodology • Key points under discussions: • How to ensure consistent assessments across assessors? Methodology could include detailed key questions for each key consideration and a list of background information, which will be tailored to the specific type of FMI (SIPS, CSD, SSS, CCP, TR)? • How to ensure appropriate and timely improvements? • Ratings could be complemented with classifications of the significance of the evaluations, such as “a serious shortcoming that needs to be rectified immediately” or an “opportunity for improvement for management to consider”? • How to prepare appropriate action plans for improvements based on priorities? 7

  8. Role of the World Bank Chairs Sub-group on Assessment Methodologies together with IMF New Assessment Methodology • Timeline under discussion: • 2010: evaluation of the current methodologies. Report on Assessment Methodologies delivered to the ET in July 2010 • March 2011: consultative report published with key considerations (with an annex sorting them by type of FMI) • Summer 2011: Draft Assessment Methodology (process, ratings, etc.) • By end 2011: pilot assessments • Early 2012: finalized report with assessment methodology 8

  9. World Bank experience and findings The Global Payment Systems Survey 2010 9

  10. World Bank observations for CSDs/SSS Legal framework • Increasingly complex in a global environment • Key concepts (finality, netting) are often not sufficiently addressed • Not always co-ordination between Central Bank and Securities Regulator Operational reliability • More attention to business continuity planning, but secondary site often too close to primary site Credit risk • Understanding of DvP not always in line with international standards • In many cases there is no “true” DvP (e.g. lack of effective guarantees when model 2 or model 3 DvP are used). Size of additional funding not always correctly estimated • CCP function may be part of CSD of Stock Exchange 10

  11. World Bank observations for CSDs/SSS Custody risk • Provisions in the law are not always supervised by an authority Settlement bank risk • Government securities usually settled in RTGS system • Corporate securities often settled in commercial bank money • Access to central bank money not always available to non-bank brokers • These and other issues have been brought forward during the development of the new CPSS-IOSCO Principles for FMIs 11

  12. WorldBank Global Payment Systems Survey 2010 Final outcomes will be soon available at www.worldbank.org/ paymentsystems • Launched in July 2010 • Answers received from 132 Central Banks, representing 139 countries • Topics covered: • Legal and Regulatory Framework • Large-Value Funds Transfer Systems • Retail Payment Systems • Foreign Exchange Settlement Systems • Cross-border Payments and International Remittances • Securities Settlement Systems • Payment System Oversight and Cooperation • Planned and On-going Reforms to the National Payments System • NEW: Annex 1! Survey on innovations in retail payments issued as an Annexure to GPSS. Builds on CPSS “Survey of Developments in Electronic Money and Internet and Mobile Payments”. Annex 1 is divided into 5 key areas: • Type of Products • Design Features of the Products • Legal and Regulatory Framework • Statistics • Planned Reforms/New Products 12

  13. Global Payment Survey 2010: sneak preview Principle 9: An FMI should conduct its money settlements in central bank money where practical and available. If not, an FMI should minimize and strictly control credit and liquidity risk […]. • Finding Global Payment Survey 2010: LAC follows global trend to increasingly settle in central bank money. North America applies alternative solutions Both statements apply to South Africa 13

  14. Global Payment Survey 2010: sneak preview Principle 11: […] A CSD should maintain securities in an immobilized or dematerialized for their transfer by book entry. Where appropriate, a CSD should provide incentives to immobilize or dematerialize securities • Finding Global Payment Survey 2010: Level of dematerialization significantly increased in LAC countries since 2007 South Africa high level of dematerialization in both years 14

  15. Global Payment Survey 2010: sneak preview Principle 12: If an FMI settles transactions […], it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other • Finding Global Payment Survey 2010: North American CSDs settle always DvP. LAC countries behind world average in applying DvP (14% no DvPvs 8% worldwide). DvP model 1 most popular South Africa applies DvP models 2 and 3 15

  16. Global Payment Survey 2010: sneak preview Principle 17: […] Systems should ensure a high degree of security and operational reliability. Business continuity plans should aim for timely recovery of operations, including in the event of a wide-scale disruption • Finding Global Payment Survey 2010: Clear progress has been made in all countries on the application of back-up servers, alternate sites, BCP plans and crisis management South Africa applies all measures 16

  17. Global Payment Survey 2010: sneak preview Responsibility E: Central banks, market regulators and other relevant authorities should cooperate with each other […]. • Finding Global Payment Survey 2010: Central banks and securities regulators increasingly share responsibilities, so cooperation is becoming increasingly important Both statements apply to South Africa 17

  18. Global Payment Survey 2010: sneak preview Annex C, Recommendation 3: Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. • Finding Global Payment Survey 2010: LAC follows global trend to decrease settlement cycle. The settlement cycles of T+3 is less strict applied by CSDs in North America No information for South Africa 18

  19. Conclusions 19

  20. Conclusions • The World Bank is dedicated to mitigating risks of payment and securities settlement systems in developing countries • The new CPSS-IOSCO Report with Principles for FMIs is an important guide for FMIs, authorities and external assessors (World Bank, IMF) to enhance safety and efficiency of payment and securities settlement systems (i.e. CSDs, SSS and CCPs). • The Sub-Group chaired by the World Bank/IMF aims to develop an assessment methodology for FMIs, taking full advantage of the members’ practical experience in applying the methodologies in the field as assessors. The proposal will be discussed at the level of the CPSS-IOSCO Steering Group. • The Global Survey shows increased compliance with some of the international standards - both in the America’s as well as worldwide - but a lot of improvements are still necessary. 20

  21. Thank you Froukelien Wendt fwendt@worldbank.org; +1 202 473 5540 Payment Systems Development Group The World Bank www.worldbank.org/paymentsystems 21

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