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

C 10/2020 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. 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. (details of PFMI are available in the two websites: www.bis.org and www.iosco.org).
     
  2. 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 RPS that are systemically important.
     
  3. A poorly designed and operated systemically important RPS can contribute to and exacerbate systemic crises if the risks of the RPS are not adequately managed. The financial shocks, as a result, could be passed from one Participant Person to another Participant Person as well as a separate Systematically Important Payment System. The effects of such a disruption could extend well beyond the RPS and their Participant Persons, threatening the stability of domestic financial markets and the broader economy.
     
  4. Against this backdrop, the SI and/or SO should robustly manage the risks of their systematically important RPS to ensure its safety and promote financial stability. In addition, a systemically important RPS should not only be safe, but also efficient. Efficiency refers generally to the use of resources by SO and/or SI and their Participant Persons in performing their functions. Safe and efficient systemically important RPS contributes to well-functioning financial markets and economy.
     
  5. The Central Bank requires any designated RPS to observe and comply with the relevant principles in the PFMI, in addition to the compliance with the ongoing requirements set out in Article (8) of this Regulation. Moreover, the Central Bank may consider imposing higher requirements than PFMI for the designated RPS either on the basis of specific risks posed by the RPS or as a general policy.
     
  6. The SO and/or SI must apply the relevant principles on an ongoing basis in the operation of their RPS 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, RPS must comply with the relevant principles set out in the following paragraphs.
     
  8. Principle 1: Legal basis – a systemically important RPS 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 RPS must have governance arrangements that are clear and transparent, promote the safety and efficiency of the RPS, 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 RPS 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 RPS must effectively measure, monitor, and manage its credit exposures to Participant Persons and those arising from its payment, clearing and settlement processes. The systematically important RPS 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 RPS that requires collateral to manage its or its Participant Persons’ credit exposure should accept collateral with low credit, liquidity, and market risks. A systematically important RPS should also set and enforce appropriately conservative haircuts and concentration limits.
     
  13. Principle 6: Liquidity risk – a systemically important RPS must effectively measure, monitor, and manage its liquidity risk. A systemically important RPS should 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 Person and its affiliates that would generate the largest aggregate liquidity obligation for the systemically important RPS in extreme but plausible market conditions.
     
  14. Principle 7: Money settlement – a systemically important RPS should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a systemically important RPS should minimize and strictly control the credit and liquidity risk arising from the use of commercial bank money.
     
  15. Principle 8: Participant-default rules and procedures – a systemically important RPS 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 RPS can take timely action to contain losses and liquidity pressures and continue to meet its obligations.
     
  16. Principle 9: General business risk – a systemically important RPS 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.
     
  17. Principle 10: Operational risk – a systemically important RPS 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. Systemically important RPS 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 RPS’s obligations, including in the event of a wide-scale or major disruption.
     
  18. Principle 11: Access and participation requirements – a systemically important RPS should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.
     
  19. Principle 12: Tiered participation arrangements – a systemically important RPS should identify, monitor, and manage the material risks to the systemically important RPS arising from tiered participation arrangements.
     
  20. Principle 13: Financial market infrastructure links – a systemically important RPS that establishes a link with one or more FMIs should identify, monitor, and manage link-related risks.
     
  21. Principle 14: Efficiency and effectiveness – a systemically important RPS should be efficient and effective in meeting the requirements of its Participant Persons and the markets it serves.
     
  22. Principle 15: Communication procedures and standards – a systemically important RPS should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.
     
  23. Principle 16: Disclosure of rules, key procedures, and market data – a systemically important RPS must have clear and comprehensive rules and procedures and must 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 RPS. All relevant rules and key procedures should be adequately disclosed.