More preccisely, it have addressed in particular the risks faced by central securities depositories (CSDs), central counterparty clearing houses (CCPs), payment systems, securities settlement systems (SSSs) and central trade repositories.

The aim of the two organisations was to produce, based on the various regulations in force[1], a document (the Principles) common to all FMIs deemed to be of systematic importance and to support it with a range of rules (the Responsibilities) aimed at supervisory authorities (central banks, regulators and supervisory bodies) responsible for supervising FMIs’ compliance with the Principles.

With its institutional rather than functional approach, this new framework also removed the vagueness linked to existing texts regarding their application scope. There is no doubt in this case that the texts relate solely to financial market infrastructures.

Some dates

• 10 March 2011: publication
• 29 July 2011: end of consultation
• End of 2012: implementation

Simple common sense principles…

Designed to reinforce the robustness and resilience of FMIs, the report took a risk-based approach (systemic, credit, liquidity, etc.). The result is bound to encourage commitment. How could anyone not approve the need to provide a clear legal framework or the benefits of real-time gross settlement? Similarly, requiring an FMI to cover itself against the risks it incurs or causes to be incurred is simply good practice.

However, the fact that the Principles are in a single document aimed at all FMIs impacts their clarity and makes it difficult for FMIs to know whether they are completely, partially or not at all affected. This lack of detail was highlighted by the majority of responses received.

… but whose detailed description arouses comments

To reduce the settlement fail ratio, Principle 11, for example, allows a CSD to act as a securities lender, although it is clearly stated that in the event of borrower default, the CSD is exposed to credit and liquidity risk.

Principle 13 covers the impact of bankruptcy of an FMI participant on other members. However, it appears to view as acceptable that a CCP should pass on to its members the financial loss remaining after use of all reserve deposits.

Principle 4 does not prohibit the use of guarantees deposited with a CCP relative to one market to cover bankruptcy on another market. If a certain amount of interoperability is taken into account, this is a far cry from information enabling participants to assess their risk when they use a CCP (Principle 13) … unless you consider that the assessment is easy, since the risk is unlimited!

Principle 19 focuses on the risk which may be caused to the FMI by clients of its participants (indirect participants). Apart from identifying who the "client" is (particularly for CCPs), this principle generates several comments. How can an FMI make a judgement about participants with which it has no direct link? What about competition risk (if a custodian has to reveal the identity of its clients to a CSD which is also a competitor)? And what if the FMI is capable of making a judgement, what will it do? Ask its participant to no longer work with this client? FMIs are infrastructures, not supervisory bodies. It is their responsibility to ensure the quality of their direct participants, but nothing more.

The CPSS IOSCO Principles are international in scope and represent a consensus minimum to ensure the resilience of infrastructures.

Sylvie Bonduelle

… and whose monitoring raises questions

While the Responsibilities certainly present obligations on the supervisory bodies and identify the necessary means (resources, expertise, etc.), they appear a little weak compared with the requirements for FMIs. Furthermore, nothing is said of the obligation for local authorities to give supervisors, regulators, etc. the identified means.

Another question mark relates to the monitoring of an FMI by a supervisor, regulator, etc. that owns or operates the FMI. It should obviously be clear that the Principles apply in the same way whatever the ownership structure. This question appears in most of the consultation’s feedback, as well as the issue of who will then supervise the FMI.

Positioning in a European framework

From EMIRs to the consultation regarding CSDs, there have been innumerable European initiatives designed to strengthen financial market infrastructures.

The CPSS IOSCO Principles are international in scope. They must therefore take account of each country’s particular characteristics and represent a consensus aiming to be the minimum to ensure the resilience of infrastructures. The consultation also allows a local authority to go further and establish reinforced requirements, within its perimeter, raising the question of a “level playing field” and regulatory arbitrage.

Should the Principles then be expected to represent the “necessary and sufficient”? This appears difficult for two reasons: European regulations are operational and include requirements we would like to “export”. So it is up to us to convince CPSS IOSCO to adopt our point of view.