Legal, regulatory, and governance issues have become topical in the current corporate environment. The CPSS-IOSCO has issues guidelines to help Financial Market Infrastructure (FMI)’s manage these issues. FMIs include payment systems, depositories, securities settlement systems, etc.
The IOSCO Principles are designed to ensure that the essential infrastructure supporting global financial markets is robust and better placed to withstand financial shocks.
Below is the summary of the principles. Follow the link for the full report http://www.bis.org/cpmi/publ/d101a.pdf
Principle 1: Legal Basis
An FMI should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
Principle 2: Governance
An FMIs should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.
Principle 3: Framework for the Comprehensive Management of Risks
An FMIs should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational and other risks.
Principle 4: Credit Risk
An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.
Principle 5: Collateral
An FMI that requires collateral to manage its or its participants’ credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.
Principle 6: Margin
A CCP should cover its credit exposure to its participants for all products through an effective margin system that is risk-based and regularly reviewed.
Principle 7: Liquidity Risk
An FMI should effectively measure, monitor and manage its liquidity risk. An FMI 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 and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.
Principle 8: Settlement Finality
An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time
Principle 9: Money Settlements
An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimize and strictly control the credit and liquidity risk arising from the use of commercial bank money.
Principle 10: Physical Deliveries
An FMI should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor, and manage the risks associated with such physical deliveries.
Principle 11: Central Securities Depositories
A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimize and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilized or dematerialized form for their transfer by book entry.
Principle 12: Exchange-of-value Settlement Systems
If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.
Principle 13: Participant Default Rules and Procedures
An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.
Principle 14: Segregation and Portability
A CCP should have rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to the CCP with respect to those positions.
Principle 15: General Business Risk
An FMI should 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 asset should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.
Principle 16: Custody and Investment Risks
An FMI should safeguard its own and its participants’ assets and minimize the risk of loss on and delay in access to these assets. An FMI’s investments should be in instruments with minimal market, credit and liquidity risks.
Principle 17: Operational Risk
An FMI should 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. Systems 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 fulfillment of the FMI’s obligations, including in the event of a wide-scale or major disruption.
Principle 18: Access and Participation Requirements
An FMI should have objective, risk based and publicly disclosed criteria for participation, which permit fair and open access.
Principle 19: Tiered Participation Requirements
An FMI should identify, monitor and manage the material risks to the FMI arising from tiered participations arrangements.
Principle 20: FMI Links
An FMI that establishes a link with one or more FMIs should identify, monitor, and manage link- related risks.
Principle 21: Efficiency and Effectiveness
An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves.
Principle 22: Communication Procedures and Standards
An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.
Principle 23: Disclosure of Rules, Procedures and Market data
An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed.
Principle 24: Disclosure of Market data by Trade Repositories
A Trade Repository should provide timely and accurate data to relevant authorities and the public in line with their respective needs.