[Federal Register Volume 72, Number 12 (Friday, January 19, 2007)]
[Notices]
[Pages 2518-2527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-589]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1259]
Policy on Payments System Risk
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Policy Statement.
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SUMMARY: The Board has adopted several revisions to Part I of its
Policy on Payments System Risk (PSR policy) addressing risk management
in payments and settlement systems. Specifically, the Board has (1)
incorporated into the PSR policy the Recommendations for Central
Counterparties (Recommendations for CCP) as the Board's minimum
standards for central counterparties, (2) clarified the purpose of Part
I of the policy and revised its scope with regard to central
counterparties, and (3) established an expectation that systemically
important systems subject to the Board's authority disclose publicly
self-assessments against the Core Principles for Systemically Important
Payment Systems (Core Principles), Recommendations for Securities
Settlement Systems (Recommendations for SSS), or Recommendations for
CCP, as appropriate, demonstrating the extent to which these systems
meet the principles or minimum standards.
EFFECTIVE DATE: January 19, 2007. The Board expects each systemically
important payments and settlement system subject to its authority to
complete and publish its initial self-assessment by December 31, 2007.
FOR FURTHER INFORMATION CONTACT: Jeff Stehm, Deputy Associate Director
(202/452-2217), Division of Reserve Bank Operations and Payment
Systems, or Jennifer Lucier, Financial Services Project Leader (202/
872-7581), Division of Reserve Bank Operations and Payment Systems; for
the hearing impaired only: Telecommunications Device for the Deaf, 202/
263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
On June 22, 2006, the Board requested comment on proposed revisions
to Part I of the PSR policy, which addresses risk management in
payments and settlement systems.\1\ The key aspects of the proposal
included the (1) incorporation of the Recommendations for CCP as the
Board's minimum standards for central counterparties, (2) the
clarification of the purpose of Part I of the policy and revisions to
its scope with regard to central counterparties, and (3) the
establishment of an expectation that systemically important systems
subject to the Board's authority disclose publicly self-assessments
against the Core Principles, the Recommendations for SSS, or the
Recommendations for CCP, as appropriate.\2\ The proposed changes did
not affect Part II of the PSR policy.
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\1\ 71 FR 36800 (June 28, 2006).
\2\ The G-10 central banks' Committee on Payment and Settlement
Systems (CPSS) published in 2001 the Core Principles to foster
safety and efficiency in the design and operation of systemically
important payments systems. The Recommendations for SSS and
Recommendations for CCP were developed by the CPSS in conjunction
with the Technical Committee of the International Organization of
Securities Commissions (IOSCO) in 2001 and 2004, respectively. The
Recommendations for SSS set forth minimum standards promoting safety
and efficiency in securities settlement systems, while the minimum
standards set forth in the Recommendations for CCP focus
specifically on central counterparty risk management.
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The Board proposed these revisions to update the policy to
incorporate new international risk management standards for central
counterparties. As discussed in more detail in the proposal, at the
time the Board last revised Part I of the policy, the Federal Reserve
was working with the CPSS and IOSCO to finalize the Recommendations for
CCP.\3\ These recommendations established minimum standards for central
counterparty risk management, operational reliability, efficiency,
governance, transparency, and regulation and oversight. At the time it
incorporated the Core Principles and Recommendations for SSS into the
PSR policy, the Board noted it would review the Recommendations for CCP
at a later time and determine whether it would be appropriate to
incorporate them into its PSR policy. The Board has considered the
comments and is incorporating the Recommendations for CCP into the
policy to highlight the importance of central counterparties to the
financial markets and to demonstrate the Board's desire to encourage
the use of the Recommendations for CCP globally in cooperation with
other domestic and foreign financial system authorities. In light of
this change, the Board has clarified the purpose of Part I of the
[[Page 2519]]
policy and revised its scope in order to reflect the important role
central counterparties play in the stability of the financial system.
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\3\ Final recommendations were issued in November 2004. In
addition to the Federal Reserve, the Securities and Exchange
Commission and the Commodity Futures Trading Commission also
participated in the development of the Recommendations for CCP. The
full report on the Recommendations for CCP is available at http://www.bis.org/publ/cpss64.htm.
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The Board believes that the implementation of the Core Principles
and Recommendations for SSS and CCP can help foster global financial
stability. The Board further believes that broadening the availability
of information concerning a system's risk management controls,
governance, and legal framework, for example, can assist users and
other interested persons in understanding and assessing systems against
internationally accepted principles and minimum standards and in
evaluating and managing any risk exposure to a particular system. The
policy revisions proposed by the Board in June were designed to meet
these objectives. Therefore, the Board is establishing an expectation
that systemically important systems subject to its authority disclose
publicly self-assessments against the Core Principles, Recommendations
for SSS, or Recommendations for CCP, as appropriate, demonstrating the
extent to which these systems meet the principles or minimum standards.
II. Summary of Comments and Analysis
The Board received four comment letters on the June proposal--two
from private-sector payments system operators, one from a credit union,
and one from a foreign central bank. Comments generally supported the
three key policy revisions proposed by the Board, but varied in
response to some of the Board's specific questions concerning the
proposed guidelines for completing self-assessments, namely the
content, scope of disclosure, and frequency of review. One commenter
requested further clarity on the scope of Part I of the existing
policy. The final policy retains all substantive elements of the
proposed revisions, except that it will adopt a two-year review period
for self-assessments rather than the annual review proposed. In
addition, the final policy includes one minor change to clarify that
self-assessments may need to be considered in the context of the
system's rules, procedures, and other relevant materials, in order for
the reader to gain a full appreciation of any risks associated with a
particular system.
Content of Self-Assessments
The Board requested comment on whether the implementation
guidelines in the Core Principles and the assessment methodologies
accompanying the Recommendations for SSS and CCP provide sufficiently
clear and useful frameworks to complete comprehensive and objective
self-assessments.\4\ The Board also requested comment on whether self-
ratings should be included in self-assessments. These self-ratings
would indicate the extent to which a system meets a particular
principle or minimum standard, and system operators would be expected
to use one of the following assessment categories: observed, broadly
observed, partly observed, or non-observed.
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\4\The assessment methodologies accompanying the Recommendations
for SSS and CCP developed by CPSS and IOSCO provide some structure,
referred to as ``assessment criteria,'' for rating a system against
a particular recommendation. The Core Principles include
implementation guidelines intended to assist with the interpretation
of the principles by providing detailed explanations of each
principle and practical examples of how they have been interpreted
and implemented.
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None of the comments addressed the sufficiency of the guidance, but
three of the four commenters discussed the inclusion of self-ratings.
One commenter explicitly supported including ratings. Another stated
that systemically important systems should perform periodic self-
assessments to ensure they are in compliance with the applicable
principles or minimum standards. The third commenter did not explicitly
disagree with the inclusion of ratings; however, it did state that in
order for self-assessments to be useful it is important that they be
comparable across different systems, and noted that the risk of systems
assigning subjective ratings ``make[s] comparison across systems
difficult.'' Two commenters did state that the risk that ratings would
be overly subjective could be limited by the Federal Reserve's review
of self-assessments.
The Board supports the inclusion of ratings in self-assessments.
Where the content of self-assessments is sufficiently detailed to
support the rating assigned, we believe the inclusion of ratings can
add value to the self-assessment by providing the reader with an
overall indication on how well the system meets particular principles
or minimum standards and additional information on how the system views
its risk management controls. As stated in the final policy, as part of
its ongoing oversight of systemically important payments and settlement
systems, the Federal Reserve will review self-assessments published by
systems subject to the Board's authority. The purpose of this review is
to ensure the Board's policy objectives and expectations are being met,
including the expectation that self-assessments are both comprehensive
and objective.\5\
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\5\As stated in the final policy, any review of an assessment by
the Federal Reserve should not be viewed as an approval or guarantee
of the accuracy of a system's self-assessment.
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The final policy establishes an expectation that a system's senior
management and board of directors review and approve the self-
assessment upon completion. The Board believes that the accountability
of the system's senior management and board of directors for the
accuracy and completeness of the assessment will encourage them to
publish robust self-assessments with fully supported ratings. The Board
also believes that the implementation guidelines for the Core
Principles and the assessment methodologies for the Recommendations for
SSS and CCP may facilitate greater consistency in the content of self
assessments.
The Board is adopting the final policy with language to clarify
that self-assessments may need to be considered in the context of
supplementary information, such as the system's rules, procedures,
organizational documents, or other relevant information, in order for
the reader to gain a full appreciation of any risk exposure associated
with a particular system.\6\ Self-assessments, including the ratings,
are only one resource for financial system participants and other
interested persons to consider when evaluating and addressing any risks
associated with a particular system.
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\6\These materials may be publicly available or may need to be
requested directly from the system.
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Scope of Disclosure of Self-Assessments
The Board proposed that a systemically important system make its
self-assessment readily available to the public, such as by posting it
on the system's public Web site. All four comment letters expressed
support for some degree of disclosure. Three commenters support public
disclosure. One commenter stated that in order for the reader to gain a
comprehensive understanding of the system to support an evaluation of
the system against the applicable standards the self-assessment would
have to be read or interpreted against the system's rules and
organizational documents. Therefore, this commenter stated that
disclosure would be limited to those who have access to this
supplementary documentation.
The Board agrees with the proponents of broad disclosure. Public
disclosure of self-assessments will enable the Board to meet its
objective of improved information availability. If a system has chosen
to limit the disclosure of its rules or other documentation to members
only, then the onus will be on
[[Page 2520]]
the system operator to explain pertinent rules or procedures with
enough detail to support the reader's independent analysis and
understanding of how the system meets a particular principle or minimum
standard.
Frequency of Review of Self-Assessments
The proposed revisions included an expectation that, in order for
self-assessments to reflect correctly the system's current rules,
procedures, and operations, a systemically important system should
update the relevant parts of its self-assessment following material
changes to the system or its environment and, at a minimum, review its
self-assessment annually to ensure continued accuracy. One commenter
recommended that the review period be extended to every three years.
The Board has reconsidered the time period for reviewing self-
assessments and is adopting a two-year review period rather than the
annual review proposed. This longer review period reduces the burden
associated with an annual review while ensuring sufficiently frequent
reviews to help ensure assessments remain accurate. A three-year review
period may allow an unacceptable accumulation of individual ``non-
material'' changes that could affect the accuracy and usefulness of the
assessment. The Board believes that a biennial review addresses the
commenter's concern while still achieving the objectives of the policy.
The final policy retains the requirement that a system update the
relevant parts of its self-assessment if there is a material change to
the system or its environment.
Scope of Part I of the Policy
One commenter sought clarification with respect to which systems
would be required, and which would be encouraged, to comply with the
changes to the policy. The Board believes the existing policy describes
sufficiently what types of systems are expected to comply with the
Board's general policy expectations. Moreover, the Board communicates
directly with systems that it has determined to be systemically
important.
With regard to the scope, one commenter stated that it ``shares the
view of the Board that central counterparties should be within the
scope of central bank oversight.'' While the Board is interested in
central counterparties as part of its oversight function, the policy
acknowledges that the Board does not have exclusive authority over all
payments and settlement systems. Systems organized as central
counterparties are often supervised by other federal agencies pursuant
to the existing legal framework. In such circumstances, the policy
states the Board will work with the other domestic and foreign
financial system authorities to promote effective risk management in
those systems, as appropriate.
III. Regulatory Flexibility Act Analysis
The Board has determined that the final policy statement would not
have a significant economic impact on a substantial number of small
entities. The policy would require payments and securities settlement
systems to address material risks in their systems. The policy does not
apply to smaller systems that do not raise material risks.
IV. Competitive Impact Analysis
The Board has established procedures for assessing the competitive
impact of rule or policy changes that have a substantial impact on
payments system participants.\7\ Under these procedures, the Board will
assess whether a change would have a direct and material adverse effect
on the ability of other service providers to compete effectively with
the Federal Reserve in providing similar services due to differing
legal powers or constraints, or due to a dominant market position of
the Federal Reserve deriving from such differences. If no reasonable
modifications would mitigate the adverse competitive effects, the Board
will determine whether the anticipated benefits are significant enough
to proceed with the change despite the adverse effects. The final
policy provides that Reserve Bank systems will be treated similarly to
private-sector systems and thus will have no material adverse effect on
the ability of other service providers to compete effectively with the
Federal Reserve Banks in providing payments and securities settlement
services.
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\7\These procedures are described in the Board's policy
statement ``The Federal Reserve in the Payments System,'' as revised
in March 1990 (55 FR 11648, March 29, 1990).
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V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Ch. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the policy
statement under the authority delegated to the Board by the Office of
Management and Budget. The Federal Reserve may not conduct or sponsor,
and an organization is not required to respond to, this information
collection unless it displays a currently valid OMB control number. An
OMB control number will be assigned upon approval of the new
information collection.
The collection of information that will be implemented by this
notice is found in Part I of the Board's PSR policy. This information
is required to evidence compliance with the requirements of the PSR
policy. The respondents are systemically important systems, as defined
in the PSR policy.
The Board expects that systemically important systems, subject to
the Board's authority, to complete initial comprehensive self-
assessments and thereafter, review and update self-assessments
biennially or as otherwise provided in the PSR policy. The Board also
expects that these self-assessments be reviewed and approved by the
system's senior management and board of directors. Upon approval and in
order to achieve broad disclosure, the systems should publish self-
assessments on their public Web sites. In order to help minimize the
burden the Board is implementing guidelines to assist system operators
in developing self-assessments consistent with the Board's
expectations.
None of the commenters discussed the burden estimates for the
initial reporting and disclosure requirements associated with this
policy statement. The Board continues to believe that the estimated
burden for the one-time initial assessment to be 310 hours per system
(ranging from 200 to 400 hours). The Board estimates that currently
about three private-sector systems are systemically important and
subject to the Board's authority; therefore, the total burden to
complete the one-time initial self-assessments for systems under the
Board's authority is estimated to be 930 hours.
Following the initial assessment, the Board estimates that the
burden will decrease for a system to conduct a biennial review and
report and disclose updates to its self-assessment. The Board continues
to believe the estimated burden for the biennial reviews and updates
associated with this policy to be 70 hours per system (ranging from 50
to 100 hours). The total burden for the approximately three private-
sector systems under the Board's authority would be an estimated 210
hours (an average of 105 hours per system, per year). The total annual
burden for this information collection is estimated to be 1,140 hours.
The Federal Reserve has a continuing interest in the public's
opinions of our collections of information. At any time, comments
regarding the burden estimate, or any other aspect of this collection
of information, including suggestions for reducing the burden,
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may be sent to: Secretary, Board of Governors of the Federal Reserve
System, 20th and C Streets, NW., Washington, DC 20551; and to the
Office of Management and Budget, Paperwork Reduction Project,
Washington, DC 20503.
VI. Federal Reserve Policy on Payments System Risk
Introduction
Risks In Payments and Settlement Sytems
I. Risk Management In Payments and Settlement Systems
A. Scope
B. General Policy Expectations
C. Systemically Important Systems
1. Principles for Systemically Important Payments Systems
2. Minimum Standards for Systemically Important Securities
Settlement Systems and Central Counterparties
3. Self-Assessments by Systemically Important Systems
II. Federal Reserve Daylight Credit Policies [No Change]
A. Daylight Overdraft Definition and Measurement
B. Pricing
C. Net Debit Caps
D. Collateral
E. Special Situations
F. Monitoring
G. Transfer-Size Limit on Book-Entry Securities
Introduction
Payments and settlement systems are critical components of the
nation's financial system. The smooth functioning of these systems is
vital to the financial stability of the U.S. economy. Given the
importance of these systems, the Board has developed this policy to
address the risks that payments and settlement activity present to the
financial system and to the Federal Reserve Banks (Reserve Banks).
In adopting this policy, the Board's objectives are to foster the
safety and efficiency of payments and settlement systems. These policy
objectives are consistent with (1) the Board's long-standing objectives
to promote the integrity, efficiency, and accessibility of the payments
mechanism; (2) industry and supervisory methods for risk management;
and (3) internationally accepted risk management principles and minimum
standards for systemically important payments and settlement
systems.\1\
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\1\ 1 For the Board's long-standing objectives in the payments
system, see ``The Federal Reserve in the Payments System,''
September 2001, FRRS 9-1550, available at http://www.federalreserve.gov/paymentsystems/pricing/frpaysys.htm.
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Part I of this policy sets out the Board's views, and related
principles and minimum standards, regarding the management of risks in
payments and settlement systems, including those operated by the
Reserve Banks. In setting out its views, the Board seeks to encourage
payments and settlement systems, and their primary regulators, to take
the principles and minimum standards in this policy into consideration
in the design, operation, monitoring, and assessing of these systems.
The Board also will be guided by this part, in conjunction with
relevant laws and other Federal Reserve policies, when exercising its
authority over certain systems or their participants, when providing
payment and settlement services to systems, or when providing intraday
credit to Federal Reserve account holders.
Part II of this policy governs the provision of intraday or
``daylight'' overdrafts in accounts at the Reserve Banks and sets out
the general methods used by the Reserve Banks to control their intraday
credit exposures.\2\ Under this part, the Board expects depository
institutions to manage their Federal Reserve accounts effectively and
minimize their use of Federal Reserve daylight credit.\3\ Although some
intraday credit may be necessary, the Board expects that, as a result
of this policy, relatively few institutions will consistently rely on
intraday credit supplied by the Federal Reserve to conduct their
business.
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\2\ To assist depository institutions in implementing this part
of the Board's payments system risk policy, the Federal Reserve has
prepared two documents, the ``Overview of the Federal Reserve's
Payments System Risk Policy'' and the ``Guide to the Federal
Reserve's Payments System Risk Policy,'' which are available on line
at www.federalreserve.gov/paymentsystems/PSR or from any Reserve
Bank. The ``Overview of the Federal Reserve's Payments System Risk
Policy'' summarizes the Board's policy on the provision of daylight
credit, including net debit caps and daylight overdraft fees. The
overview is intended for use by institutions that incur only small
and infrequent daylight overdrafts. The ``Guide to the Federal
Reserve's Payments System Risk Policy'' explains in detail how these
policies apply to different institutions and includes procedures for
completing a self-assessment and filing a cap resolution, as well as
information on other aspects of the policy.
\3\ The term ``depository institution,'' as used in this policy,
refers not only to institutions defined as ``depository
institutions'' in 12 U.S.C. 461(b)(1)(A), but also to U.S. branches
and agencies of foreign banking organizations, Edge and agreement
corporations, trust companies, and bankers' banks, unless the
context indicates a different reading.
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Through this policy, the Board expects financial system
participants, including the Reserve Banks, to reduce and control
settlement and systemic risks arising in payments and settlement
systems, consistent with the smooth operation of the financial system.
This policy is designed to fulfill that aim by (1) making financial
system participants and system operators aware of the types of basic
risks that arise in the settlement process and the Board's expectations
with regard to risk management, (2) setting explicit risk management
expectations for systemically important systems, and (3) establishing
the policy conditions governing the provision of Federal Reserve
intraday credit to account holders. The Board's adoption of this policy
in no way diminishes the primary responsibilities of financial system
participants generally and settlement system operators, participants,
and Federal Reserve account holders more specifically, to address the
risks that may arise through their operation of, or participation in,
payments and settlement systems.
Risks in Payments and Settlement Systems
The basic risks in payments and settlement systems are credit risk,
liquidity risk, operational risk, and legal risk. In the context of
this policy, these risks are defined as follows.\4\
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\4\ These definitions of credit risk, liquidity risk, and legal
risk are based upon those presented in the Core Principles for
Systemically Important Payment Systems (Core Principles) and the
Recommendations for Securities Settlement Systems (Recommendations
for SSS). The definition of operational risk is based on the Basel
Committee on Banking Supervision's ``Sound Practices for the
Management and Supervision of Operational Risk,'' available at
http://www.bis.org/publ/bcbs96.htm. Each of these definitions is
largely consistent with those included in the Recommendations for
Central Counterparties (Recommendations for CCP).
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Credit Risk. The risk that a counterparty will not settle an
obligation for full value either when due, or anytime thereafter.
Liquidity Risk. The risk that a counterparty will not settle an
obligation for full value when due.
Operational Risk. The risk of loss resulting from inadequate or
failed internal processes, people, and systems, or from external
events. This type of risk includes various physical and information
security risks.
Legal Risk. The risk of loss because of the unexpected application
of a law or regulation or because a contract cannot be enforced.
These risks arise between financial institutions as they settle
payments and other financial transactions and must be managed by
institutions, both
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individually and collectively.\5\ \6\ Multilateral payments and
settlement systems, in particular, may increase, shift, concentrate, or
otherwise transform risks in unanticipated ways. These systems also may
pose systemic risk to the financial system where the inability of a
system participant to meet its obligations when due may cause other
participants to be unable to meet their obligations when due. The
failure of one or more participants to settle their payments or other
financial transactions, in turn, could create credit or liquidity
problems for other participants, the system operator, or depository
institutions. Systemic risk might lead ultimately to a disruption in
the financial system more broadly or undermine public confidence in the
nation's financial infrastructure.
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\5\ The term ``financial institution,'' as used in this policy,
includes a broad array of types of organizations that engage in
financial activity, including depository institutions and securities
dealers.
\6\ Several existing regulatory and bank supervision guidelines
and policies also are directed at institutions' management of the
risks posed by interbank payments and settlement activity. For
example, Federal Reserve Regulation F (12 CFR 206) directs insured
depository institutions to establish policies and procedures to
avoid excessive exposures to any other depository institutions,
including exposures that may be generated through the clearing and
settlement of payments.
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These risks stem, in part, from the multilateral and time-sensitive
credit and liquidity interdependencies among financial institutions.
These interdependencies often create complex transaction flows that, in
combination with a system's design, can lead to significant demands for
intraday credit, either on a regular or extraordinary basis. Some level
of intraday credit is appropriate to ensure the smooth functioning of
payments and settlement systems. To the extent that financial
institutions or the Reserve Banks are the direct or indirect source of
such intraday credit, they may face a direct risk of loss if daylight
credit is not extinguished as planned. In addition, measures taken by
Reserve Banks to limit their intraday credit exposures may shift some
or all of the associated risks to private-sector systems.
The smooth functioning of payments and settlement systems is also
critical to certain public policy objectives in the areas of monetary
policy and banking supervision. The effective implementation of
monetary policy, for example, depends on both the orderly settlement of
open market operations and the efficient distribution of reserve
balances throughout the banking system via the money market and
payments system. Likewise, supervisory objectives regarding the safety
and soundness of depository institutions must take into account the
risks payments and settlement systems pose to depository institutions
that participate directly or indirectly in, or provide settlement,
custody, or credit services to, such systems.
Part I: Risk Management In Payments and Settlement Systems
This part sets out the Board's views regarding the management of
risk in payments and settlement systems, including those operated by
the Reserve Banks. The Board will be guided by this part, in
conjunction with relevant laws and other Federal Reserve policies, when
exercising its authority in (1) supervising state member banks, Edge
and agreement corporations, bank holding companies, and clearinghouse
arrangements, including the exercise of authority under the Bank
Service Company Act, where applicable,\7\ (2) setting or reviewing the
terms and conditions for the use of Federal Reserve payments and
settlement services by system operators and participants, (3)
developing and applying policies for the provision of intraday
liquidity to Reserve Bank account holders, and (4) interacting with
other domestic and foreign financial system authorities on payments and
settlement risk management issues. The Board's adoption of this policy
is not intended to exert or create new supervisory or regulatory
authority over any particular class of institutions or arrangements
where the Board does not currently have such authority.
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\7\ 12 U.S.C. 1861 et seq.
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Where the Board does not have exclusive authority over systems
covered by this policy, it will work with other domestic and foreign
financial system authorities to promote effective risk management in
payments and settlement systems, as appropriate. The Board encourages
other relevant authorities to consider the principles and minimum
standards embodied in this policy when evaluating the risks posed by
and to payments and settlement systems and individual system
participants that they oversee, supervise, or regulate. In working with
other financial system authorities, the Board will be guided, as
appropriate, by Responsibility D of the Core Principles, Recommendation
18 of the Recommendations for SSS, Recommendation 15 of the
Recommendations for CCP, the ``Principles for Cooperative Central Bank
Oversight of Cross-border and Multi-currency Netting and Settlement
Schemes,'' and the Principles for International Cooperative Oversight
(Part B) of the Committee on Payment and Settlement Systems (CPSS)
report, ``Central Bank Oversight of Payment and Settlement Systems.''
\8\ The Board believes these international principles provide an
appropriate framework for cooperating and coordinating with other
authorities to address risks in domestic, cross-border, multi-currency,
and, where appropriate, offshore payments and settlement systems.
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\8\ Payments and settlement systems within the scope of this
policy may be subject to oversight or supervision by multiple public
authorities, as a result of the legal framework or the system's
operating structure (e.g., multi-currency or cross-border systems).
As such, the Federal Reserve, other central banks, securities
regulators, or other financial system authorities may need to find
practical ways to cooperate in order to discharge fully their own
responsibilities. In some cases, multiple authorities may have
responsibility for a multi-currency, cross-border, or other
arrangement. In these situations, financial authorities need to be
sensitive to the potential for duplicative or conflicting
requirements, oversight gaps, or unnecessary costs and burdens
imposed on the system. The ``Principles for Cooperative Central Bank
Oversight and Multi-currency Netting and Settlement Schemes,''
published in 1990, are set out in the ``Report of the Committee on
Interbank Netting Schemes of the Central Banks of the Group of Ten
Countries'' (Lamfalussy Minimum Standards). The CPSS report,
``Central Bank Oversight of Payment and Settlement Systems''
(Oversight Report), Part B, ``Principles for international
cooperative oversight,'' published in 2005, provides further
information on the practical application of the Lamfalussy
Cooperative Oversight Principles. The Lamfalussy Minimum Standards
and the Oversight Report are available at http://www.bis.org/cpss/cpsspubl.htm.
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A. Scope
This policy applies to public- and private-sector payments and
settlement systems that expect to settle a daily aggregate gross value
of U.S. dollar-denominated transactions exceeding $5 billion on any day
during the next 12 months.9 10 For purposes of this policy,
a payments or settlement system is considered to be a multilateral
arrangement (three or more participants) among financial institutions
for the purposes of clearing, netting, and/or
[[Page 2523]]
settling payments, securities, or other financial transactions among
themselves or between each of them and a central party, such as a
system operator or central counterparty.\11\ \12\ \13\ A system
generally embodies one or more of the following characteristics: (1) A
set of rules and procedures, common to all participants, that govern
the clearing (comparison and/or netting) and settlement of payments,
securities, or other financial transactions, (2) a common technical
infrastructure for conducting the clearing or settlement process, and
(3) a risk management or capital structure where any credit losses are
ultimately borne by system participants rather than the system
operator, a central counterparty or guarantor, or the system's
shareholders.
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\9\ The $5 billion threshold was designed to apply to cash
markets and may not be a useful benchmark for settlement systems,
such as central counterparties, operating in derivatives markets.
The appropriate financial system authorities in derivatives markets
may therefore have different benchmarks and standards relevant to
such systems.
\10\ The `next' twelve-month period is determined by reference
to the date a determination is being made as to whether the policy
applies to a particular system. Aggregate gross value of U.S dollar-
denominated transactions refers to the total dollar value of
individual U.S. dollar transactions settled in the system, which
also represents the sum of total U.S. dollar debits (or credits) to
all participants prior to or in absence of any netting of
transactions.
\11\ A system includes all of the governance, management, legal,
and operational arrangements used to effect settlement as well as
the relevant parties to such arrangements, such as the system
operator, system participants, and system owners.
\12\ The types of systems that may fall within the scope of this
policy include, but are not limited to, large-value funds transfer
systems, automated clearinghouse (ACH) systems, check
clearinghouses, and credit and debit card settlement systems, as
well as central counterparties, clearing corporations, and central
securities depositories. For purposes of this policy, the system
operator manages or directs the operations of the system.
\13\ For the purposes of this policy, a ``settlement system''
includes a payment-versus-payment settlement system for foreign
exchange transactions, a securities settlement system, and a system
operating as a central counterparty. The CPSS defines ``payment-
versus-payment'' as ``* * *a foreign exchange settlement system
which ensures that a final transfer of one currency occurs if and
only if a final transfer of the other currency or currencies takes
place.'' The CPSS and the Technical Committee of the International
Organization of Securities Commissions (IOSCO) define a ``securities
settlement system'' as the full set of institutional arrangements
for confirmation, clearance, and settlement of securities trades and
safekeeping of securities and a ``central counterparty'' as an
entity that interposes itself between counterparties to contracts
traded in one or more financial markets, becoming the buyer to every
seller and the seller to every buyer.
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These systems may be organized, located, or operated within the
United States (domestic systems), outside the United States (offshore
systems), or both (cross-border systems) and may involve other
currencies in addition to the U.S. dollar (multi-currency systems). The
policy also applies to any system based or operated in the United
States that engages in the settlement of non-U.S. dollar transactions
if that system would be otherwise subject to the policy.\14\
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\14\ The daily gross value threshold will be calculated on a
U.S. dollar equivalent basis.
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This policy does not apply to bilateral relationships between
financial institutions and their customers, such as traditional
correspondent banking, including traditional government securities
clearing services. The Board believes that these relationships do not
constitute ``a system'' for purposes of this policy and that relevant
safety and soundness issues associated with these relationships are
more appropriately addressed through the bank supervisory process.
B. General Policy Expectations
The Board encourages payments and settlement systems within the
scope of this policy and expects systems subject to its authority to
implement a risk management framework appropriate for the risks the
system poses to the system operator, system participants, and other
relevant parties as well as the financial system more broadly. A risk
management framework is the set of objectives, policies, arrangements,
procedures, and resources that a system employs to limit and manage
risk. While there are a number of ways to structure a sound risk
management framework, all frameworks should
Clearly identify risks and set sound risk management
objectives;
Establish sound governance arrangements;
Establish clear and appropriate rules and procedures; and,
Employ the resources necessary to achieve the system's
risk management objectives and implement effectively its rules and
procedures.
In addition to establishing a risk management framework that
includes these key elements, the Board expects systems subject to its
authority that it determines are systemically important to meet the
policy expectations set out in Section C (Core Principles,
Recommendations for SSS, or Recommendations for CCP, as applicable).
Identify Risks and Set Sound Risk Management Objectives. The first
element of a sound risk management framework is the clear
identification of all risks that have the potential to arise in or
result from the system's settlement process and the development of
clear and transparent objectives regarding the system's tolerance for
and management of such risks.
System operators should identify the forms of risk present in their
system's settlement process as well as the parties posing and bearing
each risk. In particular, system operators should identify the risks
posed to and borne by themselves, the system participants, and other
key parties such as a system's settlement banks, custody banks, and
third-party service providers. System operators should also analyze
whether risks might be imposed on other external parties and the
financial system more broadly.
In addition, system operators should analyze how risk is
transformed or concentrated by the settlement process. System operators
should also consider the possibility that attempts to limit one type of
risk could lead to an increase in another type of risk. Moreover,
system operators should be aware of risks that might be unique to
certain instruments, participants, or market practices. System
operators should also analyze how risks are correlated among
instruments or participants.\15\
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\15\ Where systems have inter-relationships with or dependencies
on other systems (e.g., cross-guarantees, cross-collateralization,
cross-margining, common operating platforms), system operators
should also analyze whether and to what extent any cross-system
risks exist and who bears them.
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Based upon its clear identification of risks, a system should
establish its risk tolerance, including the levels of risk exposure
that are acceptable to the system operator, system participants, and
other relevant parties. The system operator should then set risk
management objectives that clearly allocate acceptable risks among the
relevant parties and set out strategies to manage this risk. Risk
management objectives should be consistent with the objectives of this
policy, the system's business purposes, and the type of instruments and
markets for which the system clears and settles. Risk management
objectives should also be communicated to and understood by both the
system operator's staff and system participants.
System operators should reevaluate their risks in conjunction with
any major changes in the settlement process or operations, the
instruments or transactions settled, a system's rules or procedures, or
the relevant legal and market environments. Systems should revisit
their risk management objectives regularly to ensure that they are
appropriate for the risks posed by the system, continue to be aligned
with the system's purposes, remain consistent with this policy, and are
being effectively adhered to by the system operator and participants.
Sound Governance Arrangements. Systems should have sound governance
arrangements to implement and oversee their risk management frameworks.
The responsibility for sound governance rests with a system operator's
board of directors or similar body and with the system operator's
senior management. Governance structures and processes should be
transparent; enable the establishment of clear risk management
objectives; set and enforce clear lines of responsibility and
accountability for achieving these objectives; ensure that there is
appropriate oversight of the risk
[[Page 2524]]
management process; and enable the effective use of information
reported by the system operator's management, internal auditors, and
external auditors to monitor the performance of the risk management
process.\16\ Individuals responsible for governance should be qualified
for their positions, understand their responsibilities, and understand
their system's risk management framework. Governance arrangements
should also ensure that risk management information is shared in forms,
and at times, that allow individuals responsible for governance to
fulfill their duties effectively.
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\16\ The risk management and internal audit functions should
also be independent of those responsible for day-to-day functions.
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Clear and Appropriate Rules and Procedures. Systems should
implement rules and procedures that are appropriate and sufficient to
carry out the system's risk management objectives and that have a well-
founded legal basis. Such rules and procedures should specify the
respective responsibilities of the system operator, system
participants, and other relevant parties. Rules and procedures should
establish the key features of a system's settlement and risk management
design and specify clear and transparent crisis management procedures
and settlement failure procedures, if applicable.\17\
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\17\ Examples of key features that might be specified in a
system's rules and procedures are controls to limit participant-
based risks, such as membership criteria based on participants'
financial and operational health, limits on settlement exposures,
and the procedures and resources to hedge, margin, or collateralize
settlement exposures. Other examples of key features might be
business continuity requirements and loss allocation procedures.
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Employ Necessary Resources. Systems should ensure that the
appropriate resources and processes are in place to allow them to
achieve their risk management objectives and effectively implement
their rules and procedures. In particular, the system operator's staff
should have the appropriate skills, information, and tools to apply the
system's rules and procedures and achieve the system's risk management
objectives. System operators should also ensure that their facilities
and contingency arrangements, including any information system
resources, are sufficient to meet their risk management objectives.
The Board recognizes that payments and settlement systems differ
widely in terms of form, function, scale, and scope of activities and
that these characteristics result in differing combinations and levels
of risks. Thus, the exact features of a system's risk management
framework should be tailored to the risks of that system. The Board
also recognizes that the specific features of a risk management
framework may entail trade-offs between efficiency and risk reduction
and that payments and settlement systems will need to consider these
trade-offs when designing appropriate rules and procedures. In
considering such trade-offs, however, it is critically important that
systems take into account the costs and risks that may be imposed on
all relevant parties, including parties with no direct role in the
system. Furthermore, in light of rapidly evolving technologies and risk
management practices, the Board encourages all systems to consider
periodically making cost-effective risk-management improvements.
To determine whether a system's current or proposed risk management
framework is consistent with this policy, the Board will seek to
understand how a system achieves the four elements of a sound risk
management framework set out above. In this context, it may be
necessary for the Board to obtain information from system operators
regarding their risk management framework, risk management objectives,
rules and procedures, significant legal analyses, general risk
analyses, analyses of the credit and liquidity effects of settlement
disruptions, business continuity plans, crisis management procedures,
and other relevant documentation.\18\ It may also be necessary for the
Board to obtain data or statistics on system activity on an ad-hoc or
ongoing basis. All information provided to the Federal Reserve for the
purposes of this policy will be handled in accordance with all
applicable Federal Reserve policies on information security,
confidentiality, and conflicts of interest.
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\18\ To facilitate analysis of settlement disruptions, systems
may need to develop the capability to simulate credit and liquidity
effects on participants and on the system resulting from one or more
participant defaults, or other possible sources of settlement
disruption. Such simulations may need to include, if appropriate,
the effects of changes in market prices, volatilities, or other
factors.
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C. Systemically Important Systems
Financial stability depends, in part, on a robust and well-managed
financial infrastructure. If risks are not effectively managed by
systemically important systems, these systems have the potential to be
a major channel for the transmission of financial shocks across systems
and markets. Financial system authorities, including central banks,
have promoted sound risk management practices by developing
internationally accepted guidelines to encourage the safe design and
operation of payments and settlement systems, especially those
considered systemically important.
In particular, the Core Principles, Recommendations for SSS, and
Recommendations for CCP (the latter two collectively referred to as the
CPSS-IOSCO Recommendations) set forth risk management practices for
payments systems, securities settlement systems, and central
counterparties, respectively.19 20 The Federal Reserve
collaborated with participating financial system authorities in
developing these principles and minimum standards. In addition, the
Securities and Exchange Commission and Commodity Futures Trading
Commission participated in the development of the CPSS-IOSCO
Recommendations. The principles and minimum standards reflect broad
input and provide a balanced view of acceptable risk management
practices. The Core Principles and Recommendations for SSS are also
part of the Financial Stability Forum's Compendium of Standards that
have been widely recognized, supported, and endorsed by U.S.
authorities as integral to strengthening the stability of the financial
system. The Board believes that the implementation of the individual
principles and minimum standards by systemically important systems can
help promote safety and efficiency in the financial system and foster
greater financial stability in domestic and global economies.
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\19\ The Core Principles were developed by the CPSS; references
to ``principles'' in this policy are to the Core Principles. The
Core Principles draw extensively on the previous work of the CPSS,
most importantly the Lamfalussy Minimum Standards. The Core
Principles extend the Lamfalussy Minimum Standards by adding several
principles and broadening the coverage to include systemically
important payments systems of all types, including gross settlement
systems, net settlement systems, and hybrid systems, operated by
either the public or private sector. The Core Principles also
address the responsibilities of central banks in applying the Core
Principles.
\20\ The CPSS and IOSCO developed the CPSS-IOSCO Recommendations
as minimum standards and are referred to as such in this policy. The
full reports on the Core Principles and the CPSS-IOSCO
Recommendations are available at http://www.bis.org/publ/cpss43.htm,
http://www.bis.org/publ/cpss46.htm, and http://www.bis.org/publ/cpss64.htm.
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Systemically important systems that are subject to the Board's
authority are expected to meet the specific risk management principles
and minimum standards in this section, as appropriate, and the general
expectations of Section B because of their potential to cause major
disruptions in the financial system.\21\ To determine whether a
[[Page 2525]]
system is systemically important for purposes of this policy, the Board
may consider, but will not be limited to, one or more of the following
factors: \22\
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\21\ Systemically important payments systems are expected to
meet the principles listed in Section C.1. Securities settlement
systems of systemic importance are expected to meet the minimum
standards listed in Section C.2.a., and systemically important
central counterparties are expected to meet the minimum standards
listed in C.2.b. For a system not subject to its authority, the
Board encourages the system and its appropriate financial system
authority to consider these principles and minimum standards when
designing, operating, monitoring, and assessing the system, as
appropriate and applicable.
\22\ The Board will inform a system subject to its authority if
it considers it systemically important and therefore expected to
meet the principles or minimum standards in this policy. The Board
will also inform such systems if they are expected to exceed any of
the principles or minimum standards. The appropriate financial
system authorities responsible for supervising or regulating central
counterparties are encouraged to inform the central counterparties
as to whether they are expected to meet the Recommendations for CCP.
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Whether the system has the potential to create significant
liquidity disruptions or dislocations should it fail to perform or
settle as expected;
Whether the system has the potential to create large
credit or liquidity exposures relative to participants' financial
capacity;
Whether the system settles a high proportion of large-
value or interbank transactions;
Whether the system settles transactions for important
financial markets; \23\
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\23\ Important financial markets include, but are not limited
to, critical markets as defined in the ``Interagency Paper on Sound
Practices to Strengthen the Resilience of the U.S. Financial
System'' as the markets for federal funds, foreign exchange, and
commercial paper; U.S. Government and agency securities; and
corporate debt and equity securities. 68 FR 17809 (April 11, 2003).
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Whether the system provides settlement for other systems;
and,
Whether the system is the only system or one of a very few
systems for settlement of a given financial instrument.
Some systemically important systems, however, may present an
especially high degree of systemic risk, by virtue of their high volume
of large-value transactions or central role in the financial markets.
Because all systems are expected to employ a risk management framework
that is appropriate for their risks, the Board may expect these systems
to exceed the principles and minimum standards set out below. Finally,
the Board expects systemically important systems to demonstrate the
extent to which they meet the applicable principles or minimum
standards by completing self-assessments and disclosing publicly the
results of their analyses in a manner consistent with the guidelines
set forth in Section C.3.
1. Principles for Systemically Important Payments Systems
1. The system should have a well-founded legal basis under all
relevant jurisdictions.
2. The system's rules and procedures should enable participants to
have a clear understanding of the system's impact on each of the
financial risks they incur through participation in it.
3. The system should have clearly defined procedures for the
management of credit risks and liquidity risks, which specify the
respective responsibilities of the system operator and the participants
and which provide appropriate incentives to manage and contain those
risks.
4. The system should provide prompt final settlement on the day of
value, preferably during the day and at a minimum at the end of the
day.
5. A system in which multilateral netting takes place should, at a
minimum, be capable of ensuring the timely completion of daily
settlements in the event of an inability to settle by the participant
with the largest single settlement obligation.
6. Assets used for settlement should preferably be a claim on the
central bank; where other assets are used, they should carry little or
no credit risk and little or no liquidity risk.
7. The system should ensure a high degree of security and
operational reliability and should have contingency arrangements for
timely completion of daily processing.
8. The system should provide a means of making payments which is
practical for its users and efficient for the economy.
9. The system should have objective and publicly disclosed criteria
for participation, which permit fair and open access.
10. The system's governance arrangements should be effective,
accountable and transparent.
2. Minimum Standards for Systemically Important Securities Settlement
Systems and Central Counterparties
The CPSS-IOSCO Recommendations apply to the full set of
institutional arrangements for confirmation, clearance, and settlement
of securities transactions, including those related to market
convention and pre-settlement activities. As such, not all of these
standards apply to all systems. Moreover, the standards applicable to a
particular system also will vary based on the structure of the market
and the system's design.
While the Board endorses the CPSS-IOSCO Recommendations in their
entirety, its primary interest for purposes of this policy is in those
recommendations related to the settlement aspects of financial
transactions, including the delivery of securities or other financial
instruments against payment, and related risks. The Board expects that
systems engaged in the management or conduct of clearing and settling
financial transactions to meet the expectations set forth in the
applicable set of CPSS-IOSCO Recommendations.
a. Recommendations for Securities Settlement Systems
1. Securities settlement systems should have a well-founded, clear,
and transparent legal basis in the relevant jurisdictions.
2. Confirmation of trades between direct market participants should
occur as soon as possible after the trade execution, but no later than
the trade date (T+0). Where confirmation of trades by indirect market
participants (such as institutional investors) is required, it should
occur as soon as possible after the trade execution, preferably on T+0,
but no later than T+1.
3. Rolling settlement should be adopted in all securities markets.
Final settlement should occur no later than T+3. The benefits and costs
of a settlement cycle shorter than T+3 should be evaluated.
4. The benefits and costs of a central counterparty should be
evaluated. Where such a mechanism is introduced, the central
counterparty should rigorously control the risks it assumes.
5. Securities lending and borrowing (or repurchase agreements and
other economically equivalent transactions) should be encouraged as a
method for expediting the settlement of securities transactions.
Barriers that inhibit the practice of lending securities for this
purpose should be removed.
6. Securities should be immobilized or dematerialized and
transferred by book entry in central securities depository to the
greatest extent possible.
7. Central securities depositories should eliminate principal risk
linking securities transfers to funds transfers in a way that achieves
delivery versus payment.
8. Final settlement should occur no later than the end of the
settlement day. Intraday or real time finality should be provided where
necessary to reduce risks.
9. Central securities depositories that extend intraday credit to
participants, including central securities depositories that operate
net settlement systems, should institute risk controls that, at a
[[Page 2526]]
minimum, ensure timely settlement in the event that the participant
with the largest payment obligation is unable to settle. The most
reliable set of controls is a combination of collateral requirements
and limits.
10. Assets used to settle the ultimate payment obligations arising
from securities transaction should carry little or no credit or
liquidity risk. If central bank money is not used, steps must be taken
to protect central securities depository members from potential losses
and liquidity pressures arising from the failure of the cash settlement
agent whose assets are used for that purpose.
11. Sources of operational risk arising in the clearing and
settlement process should be identified and minimized through the
development of appropriate systems, controls and procedures. Systems
should be reliable and secure, and have adequate, scalable capacity.
Contingency plans and backup facilities should be established to allow
for the timely recovery of operations and completion of the settlement
process.
12. Entities holding securities in custody should employ accounting
practices and safekeeping procedures that fully protect customers'
securities. It is essential that customers' securities be protected
against the claims of a custodian's creditors.
13. Governance arrangements for central securities depositories and
central counterparties should be designed to fulfill public interest
requirement and to promote the objectives of owners and users.
14. Central securities depositories and central counterparties
should have objective and publicly disclosed criteria for participation
that permit fair and open access.
15. While maintaining safe and secure operations, securities
settlement systems should be cost-effective in meeting the requirements
of users.
16. Securities settlement systems should use or accommodate the
relevant international communication procedures and standards in order
to facilitate efficient settlement of cross-border transactions.
17. Central securities depositories and central counterparties
should provide market participants with sufficient information for them
to identify and evaluate accurately the risks and costs associated with
using the central securities depository or central counterparty
services.
18. Securities settlement systems should be subject to transparent
and effective regulation and oversight. Central banks and securities
regulators should cooperate with each other and with other relevant
authorities.
19. Central securities depositories that establish links to settle
cross-border trades should design and operate such links to reduce
effectively the risks associated with cross-border settlement.
b. Recommendations for Central Counterparties
1. A central counterparty should have a well founded, transparent,
and enforceable legal framework for each aspect of its activities in
all relevant jurisdictions.
2. A central counterparty should require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the central counterparty. A
central counterparty should have procedures in place to monitor that
participation requirements are met on an ongoing basis. A central
counterparty's participation requirements should be objective, publicly
disclosed, and permit fair and open access.
3. A central counterparty should measure its credit exposures to
its participants at least once a day. Through margin requirements,
other risk control mechanisms, or a combination of both, a central
counterparty should limit its exposures to potential losses from
defaults by its participants in normal market conditions so that the
operations of the central counterparty would not be disrupted and non-
defaulting participants would not be exposed to losses that they cannot
anticipate or control.
4. If a central counterparty relies on margin requirements to limit
its credit exposures to participants, those requirements should be
sufficient to cover potential exposures in normal market conditions.
The models and parameters used in setting margin requirements should be
risk-based and reviewed regularly.
5. A central counterparty should maintain sufficient financial
resources to withstand, at a minimum, a default by the participant to
which it has the largest exposure in extreme but plausible market
conditions.
6. A central counterparty's default procedures should be clearly
stated, and they should ensure that the central counterparty can take
timely action to contain losses and liquidity pressures and to continue
meeting its obligations. Key aspects of the default procedures should
be publicly available.
7. A central counterparty should hold assets in a manner whereby
risk of loss or of delay in its access to them is minimized. Assets
invested by a central counterparty should be held in instruments with
minimal credit, market, and liquidity risks.
8. A central counterparty should identify sources of operational
risk and minimize them through the development of appropriate systems,
controls, and procedures. Systems should be reliable and secure, and
have adequate, scalable capacity. Business continuity plans should
allow for timely recovery of operations and fulfillment of a central
counterparty's obligations.
9. A central counterparty should employ money settlement
arrangements that eliminate or strictly limit its settlement bank
risks, that is, its credit and liquidity risks from the use of banks to
effect money settlements with its participants. Funds transfers to a
central counterparty should be final when effected.
10. A central counterparty should clearly state its obligations
with respect to physical deliveries. The risks from these obligations
should be identified and managed.
11. Central counterparties that establish links either cross-border
or domestically to clear trades should evaluate the potential sources
of risks that can arise, and ensure that the risks are managed
prudently on an ongoing basis. There should be a framework for
cooperation and coordination between the relevant regulators and
overseers.
12. While maintaining safe and secure operations, central
counterparties should be cost-effective in meeting the requirements of
participants.
13. Governance arrangements for a central counterparty should be
clear and transparent to fulfill public interest requirements and to
support the objectives of owners and participants. In particular, they
should promote the effectiveness of a central counterparty's risk
management procedures.
14. A central counterparty should provide market participants with
sufficient information for them to identify and evaluate accurately the
risks and costs associated with using its services.
15. A central counterparty should be subject to transparent and
effective regulation and oversight. In both a domestic and an
international context, central banks and securities regulators should
cooperate with each other and with other relevant authorities.
3. Self-Assessments by Systemically Important Systems
Users and others outside the user community (such as prospective
users or other public authorities) commonly are interested in
understanding how systemically important payments and settlement
systems function in order to
[[Page 2527]]
manage their risks. At this time, different disclosure practices and
requirements for payments and settlement systems have resulted in
varying levels of information being disseminated to users and others.
Users and other persons may find it difficult to obtain access to
sufficient information to understand and assess a particular system's
approach to risk management against internationally accepted principles
and minimum standards. Broadening the availability of information
concerning a system's risk management controls, governance, and legal
framework, for example, can facilitate this understanding and analysis
and also assist those interested in a system in evaluating and managing
any risk exposure.\24\
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\24\ The Board considers self-assessments as only one resource
for users and other persons to consider when evaluating any risks
associated with a particular system. In order to effectively
identify and manage risks, a user or other interested person may
need to consider other relevant documentation such as the system's
rules, operating procedures, or organizational documents. These
materials may be publicly available or may need to be requested from
the system directly.
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The Board believes that the implementation of the applicable
principles and minimum standards by systemically important systems can
foster greater financial stability in payments and settlement systems.
The Board further believes that operators of systemically important
systems are well positioned to assess and demonstrate the extent to
which they have implemented the principles or minimum standards in this
policy. Therefore, in furtherance of its policy objectives, the Board
expects systemically important systems subject to its authority to
complete comprehensive, objective self-assessments against the
applicable principles or minimum standards in this policy and disclose
publicly the results of these efforts. Adopting this self-assessment
framework, however, does not preclude the Federal Reserve from
independently assessing compliance of systemically important systems
with relevant rules, regulations, and Federal Reserve policies.
The Board expects systemically important systems subject to its
authority to complete self-assessments based on the following
guidelines. First, systemically important systems are expected to
document the basis for their self-assessment and support any
conclusions regarding the extent to which they meet a particular
principle or minimum standard.\25\ System operators should use one of
the following assessment categories to describe the extent to which the
system meets a particular principle or minimum standard: Observed,
broadly observed, partly observed, or non-observed. The CPSS and CPSS-
IOSCO have developed implementation guidelines and assessment
methodologies that can assist system operators in structuring their
self-assessments and assigning an assessment category. Accordingly,
payment system operators are encouraged to consult Section 7 of the
Core Principles for guidance when developing their self-assessments and
in measuring the extent to which the system meets each principle.\26\
Likewise system operators for securities settlement systems and central
counterparties are encouraged to consult the assessment methodology for
the relevant minimum standards for further guidance on each minimum
standard and are encouraged to respond to the key questions included
therein.\27\ A system may consult the Board for assistance with respect
to the principles and minimum standards and the completion of its
assessment. Second, to further ensure system accountability for
accuracy and completeness, the Board expects the system's senior
management and board of directors to review and approve self-
assessments upon completion. Third, to achieve broad disclosure, the
system is expected to make its self-assessments readily available to
the public, such as by posting the self-assessment on the system's
public Web site. Finally, in order for self-assessments to reflect
correctly the system's current rules, procedures, and operations, the
Board expects a systemically important system to update the relevant
parts of its self-assessment following material changes to the system
or its environment. At a minimum, a systemically important system would
be expected to review its self-assessment every two years to ensure
continued accuracy.
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\25\ While the Board expects self-assessments to be robust, it
does not expect payments and settlement systems to disclose publicly
sensitive information that would expose system vulnerabilities or
otherwise put the system at risk (e.g., specific business continuity
plans).
\26\ The Core Principles include implementation guidelines and
an implementation summary for each principle. The guidelines provide
both detailed explanations of each principle and general examples of
ways to interpret and implement them.
\27\ In November 2002, CPSS-IOSCO published an Assessment
Methodology for the Recommendations for SSS, which is available at
http://www.bis.org/publ/cpss51.htm. In November 2004, CPSS-IOSCO
published the CCP Recommendations and an Assessment Methodology,
which are available at http://www.bis.org/publ/cpss64.htm. These
assessment methodologies for the CPSS-IOSCO Recommendations include
key questions to assist an assessor in determining to what extent a
system meets a particular minimum standard.
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As part of its ongoing oversight of systemically important payments
and settlement systems, the Federal Reserve will review published self-
assessments by systems subject to the Board's authority to ensure the
Board's policy objectives and expectations are being met.\28\ Where
necessary, the Federal Reserve will provide feedback to these systems
regarding the content of their self-assessments and their effectiveness
in achieving the policy objectives discussed above.\29\ The Board
acknowledges that payments and settlement systems vary in terms of the
scope of instruments they settle and markets they serve. It also
recognizes that systems may operate under different legal and
regulatory constraints and within particular market infrastructures or
institutional frameworks. The Board will consider these factors when
reviewing self-assessments and in evaluating how a systemically
important system addresses a particular principle or minimum standard
and complies with the policy generally. Where the Board does not have
exclusive authority over a systemically important system, it will
encourage appropriate domestic or foreign financial system authorities
to promote self-assessments by systemically important systems as a
means to achieve greater safety and efficiency in the financial system.
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\28\ Any review of an assessment by the Federal Reserve should
not be viewed as an approval or guarantee of the accuracy of a
system's self-assessment. Furthermore, the contents of a review of a
self-assessment would be subject to the Board's rules regarding
disclosure of confidential supervisory information. Therefore,
without the express approval of the Board, a system would not be
allowed to state publicly that its self-assessment has been
reviewed, endorsed, approved, or otherwise not objected to by the
Federal Reserve.
\29\ If the Federal Reserve materially disagrees with the
content of a system's self-assessment, it will communicate its
concerns to the system's senior management and possibly to its board
of directors, as appropriate. The Federal Reserve may also discuss
its concerns with other relevant financial system authorities, as
appropriate.
By order of the Board of Governors of the Federal Reserve
System, January 11, 2007.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. E7-589 Filed 1-18-07; 8:45 am]
BILLING CODE 6210-01-P