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Oversight , PFMI and Business Continuity Management Michiel van Doeveren

Oversight , PFMI and Business Continuity Management Michiel van Doeveren Sixth Macedonian Financial Sector Conference on Payments and Securities Settlement Systems Ohrid , 1-3 July 2013. Agenda. What is Oversight? Standards and methodology

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Oversight , PFMI and Business Continuity Management Michiel van Doeveren

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  1. Oversight, PFMI and Business Continuity Management Michiel van Doeveren SixthMacedonian Financial Sector Conference on PaymentsandSecuritiesSettlement Systems Ohrid, 1-3 July 2013

  2. Agenda • What is Oversight? • Standards and methodology • Overlay services and access to bank accounts • CPSS Principles for Financial Market Infrastructures • Framework for Business Continuity Planning

  3. DNB – Oversight: Mission Oversight aims to contribute to and maintain financial stability by • Reducing systemic risks • Promote adequate payment settlements in the Netherlands Criterium for DNB Oversight: relevance for The Netherlands (both domestically and located abroad)

  4. DNB – Oversight - Objects • Payment systems • Wholesale • retail • Payment instruments • Securities clearing and settlement • Risk-based approach, no scientific approach (so far) • Accountability (and explain) • Annual Oversight Report, http://www.dnb.nl/Oversight

  5. Oversight on Equens • European Market Share: 10-15% • 10 crossborder links with other Retail Payment Systems • Regular meetings with operator: every 6 weeks • Quarterly meetings with CEO Equens and Head Oversight

  6. Oversight (on payment schemes) • Oversight framework: Standards • Oversight methodology: Key issues • Oversight guide: Key checkpoints

  7. Oversight standards(for payment schemes) • Standard 1: The scheme should have a sound legal basis under all relevant jurisdictions • Standard 2: The scheme should ensure that comprehensive information , including appropriate information on financial risks, is available for all actors • Standard 3: The scheme should ensure an adequate degree of security, operational reliability and business continuity • Standard 4: The scheme should implement effective, accountable and transparent governance arrangements • Standard 5: The scheme should manage and contain financial risks in relation to the clearing and settlement process

  8. FMI FMI Venn diagram diagram FinanciaI Infrastructure Financial Market Infrastructures Rest of Economy TR Retail payment instruments CCP CSD SIPS SSS End-investors Consumers Merchants Banks Corporates Pension Funds Correspondent banking OTC trading ACH ELMI Banks as participant of FMIs Payment Institutions CSP Exchange MTF Insurance companies Government / Public sector

  9. End client Indirect participantof FMI Correspondent banking Direct participant of FMI Messaging (SWIFT)DatacomIT-processing Three types of interdependencies System-based Institutions-based Environmental FMI Warehouse (links) 2nd Derivatives OTC 2nd Securities 1st Large-value payments TR SSS ACH ExchangeMTF CCP SIPS CSP CSD Bank Bank CCP GF Retail payments

  10. Fundamental risks financial infrastructure • Three fundamental risks: • Settlement risk (at level individual transactions anywhere) • Infrastructural systemic risk (at the 1st and 2nd floor of warehouse) • Social unrest (warehouse basement and ground floor)

  11. Why Oversight on Financial Infrastructure? • Improvesafetyandefficiency of financial infrastructure financial stability • Mitigate infrastructural systemic risk • Prevent social unrest • Oversight assesses compliance with internationally agreed principles (standards) and induces change where compliance is not fully observed • No standards, no oversight

  12. Features of the Oversight Principles • Risk reduction standards • Minimum character • Principle-based, not rule-based • Prevention (ex ante) • Design of systems • Feedback (cyclical) • Assessment of operation of systems

  13. Oversight scoring table Scoring per principle; no overall score

  14. Exampleassessment outcome of a CCP European Multilateral Clearing Facility (EMCF)

  15. How are the Oversight standards set? • Committee on Payment and Settlement Systems (CPSS) • International Organisation of Securities Commissions (IOSCO) • Eurosystem(User Standards for SSS and standards for credit transfers, direct debit and cards) • CPSS-IOSCO Principles for Financial Market Infrastructures (2012)

  16. What are financial market infrastructures? • Definition: • An FMI is a multilateral system amongparticipating financial institutions, including the operator of the system, usedfor the purposes of recording, clearing, or settlingpayments, securities, derivatives, or other financial transactions. • In practice: • SystemicallyImportant Payment Systems (SIPS) • Central SecuritiesDepositories (CSD) • SecuritiesSettlement Systems (SSS) • Central Counterparties (CCP) • Trade Repositories (TR)

  17. CPSS-IOSCO Principles for FMIs Governance Legal risk Risk management framework Credit risk Efficiency General organisation (3) Collateral Communication standards Liquidity risk Credit & liquidity risk management (4) Efficiency (2) Margin Finality Access Principles for Financial Market Infrastructures (24) Access (3) Settlement (3) Money settlements Tiering Links Physical deliveries General business and operational risk management (3) CSDs and exchange of value settlement systems (2) Business risk CSD Investment risk Default management (2) Transparency (2) Operational risk DVP Participant default Segregation & portability Disclosure system rules Disclosure market data Legend: completely new raising the bar basically unchanged

  18. Dual consent: a new approach • Integrated approach • Access to a bank account by a third party is only acceptable if account holder and bank agree contractually on the conditions.

  19. Discussion points • How to stimulate innovations and security in the access to payment accounts? • Is Dual Consent a good solution for access to payment acounts? • Are there other elements to take care on in the further analysing of the approach?

  20. Principles for Financial Market Infrastructures (FMI) Co-production of: • BIS Committee on Payment and Settlement Systems • Technical Committee of the International organization of Securities Commission (IOSCO) • FMI Principles replaces all older separate principles for Systemically Important Payment Systems, Securities Settlement Systems and Retail Payment Systems • Final report was publishes in 2012

  21. FMI Principles General organisation • Principle 1: Legal basis • Principle 2: governance • Principle 3: Framework for the comprehensive management of risks

  22. Business Continuity Management

  23. What is Business Continuity? • Business Continuity Management:a whole-of-business approach, that includes policies, standards, and procedures, to ensure (critical) operations can be maintained, or restored in a timely fashion, in the event of a disruption. • Itspurposeis to minimise the financial, legal, reputational and other material consequences arising from disruptionSource: BIS 2005

  24. Financial Core Infrastructure (FCI) • The FCI is: • A list of financial institutions and financial market infrastructures that form the critical parts of the Dutch payment and securities infrastructure • Compiled by DNB in collaboration with Ministry of Finance and Authority for Financial Markets (AFM)

  25. Financial Core Infrastructure Why: • Effective operational crisis management • Stricter requirements for crucial players concerning operational reliability

  26. Financial Core Infrastructure Criteria: • Disruption of the institution leads to large financial losses for the economy or leads to serious social upheaval. • The institution is directly regulated in the Netherlands. • Cumulative 80% of the total transaction volume or value.

  27. Financial Core Infrastructure Requirements for FCI institutions: • Comply with the DNB Business Continuity Assessment Framework. • Participate in the sector crisismanagement organisation • Connect to the terrorism alert system. • Contribute to critical infrastructure programs and projects.

  28. Tripartite Crisismanagement Organization • The goal of this organisational structure is to perform sector crisis management in case of a major operational disruption of payment and / or securities systems and infrastructures.

  29. Tripartite Crisismanagement Organization

  30. (inter)national crisismanagement

  31. DNB BCP Assessment Framework (1) • Drafted in cooperation with the financial institutions • Commitment to use it on a high level • Assessment Framework consists of • 9 ‘principles’ • Guidance note Human Factor • Agreement between DNB and the financial sector for joint BCP initiatives • In line with international principles such as BIS • Used by supervisor and overseer to assess the institutions of the financial core infrastructure against these principles

  32. DNB BCP Assessment Framework (2) • BCP should be approved by the EB/senior management • Risk analyses of critical systems and activities should be made • Explicit attention should be paid to the human factor

  33. DNB BCP Assessment Framework (3) 4.Each institution should have a crisis organisation, including senior management • Single points of failure (SPOFs) should be identified • Critical processes and systems should be resumed as quickly as possible

  34. DNB BCP Assessment Framework (4) 7.A back-up site/secondary site should be available 8. Alternate systems and contingency procedures should be regularly tested and exercised 9. Each institutions should have a communication plan for all stakeholders

  35. DNB Assessment framework

  36. Guidance Note Human factor • Assessment showed that institutions have problems with principle 3, paying explicit attention to the human factor • DNB developed a ‘Guidance note human factor’ to assess the human factor aspect for critical systems and business processes, depending on the level of knowledge that is required (specific in the extreme, highly specific, specific, not very specific, not specific) • Matrix with level of required knowledge and human factor strategy  see www.dnb.nl – payments - BCP

  37. Standard(izing) human (factor) s:skills

  38. Standard(izing) human (factor) s: preparedness

  39. Standard(izing) human (factor) s: preparedness

  40. Players/documents – Professional bodies e.g. BCI (Business Continuity Institute) Good Practice Guideline BCM Academy BCM Pocketbook ENISA (European Network and Information Security Agency) Business and IT continuity: overview and implementation principles Inventory of business and IT continuity methods / tools 41

  41. Players/documents – Standards bodies • BSI (British Standards Institute) • BS 25777: Information and communication technology continuity management • BS 25999: Business continuity management • ISO (International Organization for Standardization) • ISO / PAS 22399: Guidelines for incident preparedness and operational continuity management • ISO / IEC 27031: ICT readiness for business continuity • ISO / IEC 24762: Guidelines for information and communication technology disaster recovery services

  42. Players – Regulators (supervisors / overseers) • Global • BIS – BCBS / BIS – CPSS (Bank for International Settlement – Basel Committee for Banking Supervision / Committee on Payment and Settlement Systems) • FSB (Financial Stability Board) • IOSCO (International Organization of Securities Commissions) • IAIS (International Association of Insurance Supervisors) • Joint Forum (BCBS – IOSCO – IAIS)

  43. Questions?

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