Regulators in the European Union, Japan and the United States have made “good progress” in implementing the Principles of Financial Market Infrastructures, according to a peer review conducted and publicized last week by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions.
CPMI and IOSCO found that, generally, regulators have made greater progress in implementing the Principles related to central clearing counterparties (CCPs), while their efforts to apply the Principles to trade repositories (TRs) “has been more varied.”
The PFMIs—which the Committee on Payment and Settlement Systems and IOSCO adopted in April 2012—are high-level best practices for key financial market infrastructures, including financial exchanges, TRs and CCPs (e.g., clearinghouses and clearing agencies (CCAs)), that set forth standards for organization; credit and liquidity risk management; settlement; default management; general business and risk management; and other topics (click here to access the Principles).
CPMI and IOSCO found that US regulators (the Commodity Futures Trading Commission, the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System) have “developed rules that completely and consistently implement the majority of the Principles that are applicable to CCPs.” However, CPMI and IOSCO found that the CFTC has not sufficiently implemented a principle for systemically important derivative clearing organizations (SIDCOs) that requires potential principal risk caused by exchange of value settlements to be mitigated solely through a delivery-versus-payment mechanism. Instead, the CFTC permits SIDCOs to manage this risk through the use of “appropriate tools and procedures,” which the regulatory organizations claim “is far more general and could conceivably be met by the use of measures other than DvP.”
CPMI and IOSCO also found that the SEC’s proposed regulations regarding CCAs do not include an unambiguous requirement that a CCP use central bank money “where available and practical,” and fail to set forth in sufficient detail requirements related to a board of director’s role in the governance of a CCP’s operational risk management framework (including business continuity requirements).
CPMI and IOSCO likewise found regulations adopted in Europe regarding CCPs (e.g., the European Market Infrastructure Regulation) are “consistent or broadly consistent with a majority of the Principles” but identified a number of specific areas requiring improvement. The regulatory organizations concluded that Japan “has completely and consistently adopted the Principles applicable for CCPs and TRs,” effectively giving it the best grade.
All assessments were as of April 18, 2014. CPMI operates under the umbrella of the Bank for International Settlements.