Regulators Spotlight Financial Market Infrastructures
International regulators are recommending that financial market infrastructures (FMIs) map out plans to recover from threats to their viability that might interfere with their ability to provide critical services to the markets that they service.
The International Organization of Securities Commissions (Iosco), in a report released on August 12, notes that FMIs should have a set of recovery tools that allows the FMI to allocate uncovered losses, cover liquidity shortfalls, and replenish its financial resources in order to continue to provide services.
The recovery plans should identify the FMI’s critical services and address any underlying structural weaknesses. CCPs should have tools in place to allow them to re-establish a matched book, including mechanisms that incentivize a successful auction of unmatched contracts.
The U.S. Commodity Futures Trading Commission on August 16 adopted a final rule on enhanced risk management for systemically important derivatives clearing organizations (Sidcos).
The rule requires a Sidco that is involved in activities with a complex risk profile or that is systemically important in multiple jurisdictions to meet its financial obligations notwithstanding a default by the two clearing members that have the largest combined exposure for the Sidco in extreme but plausible market conditions (a Cover Two requirement).
The rule also require a Sidco’s business and disaster recovery plans to enable it to recover its operations and resume daily processing, clearing and settlement no later than two hours following a disruption.
In the United States, the Financial Stability Oversight Council has the authority to designate financial market utilities (“FMUs”) that it determines are, or are likely to become, systemically important.
FMUs form a critical part of the financial infrastructure, as they support and facilitate the transfer, clearing or settlement of financial transactions, and their smooth operation is integral to the soundness of the financial system. However, their function and interconnectedness also concentrate a considerable amount of risk in the financial system due, in large part, to the interdependencies, either directly through operational, contractual or affiliation linkages, or indirectly through payment, clearing, and settlement processes.
The CFTC, SEC and Finra have issued a staff advisory on business continuity and disaster recovery planning.
The advisory follows a joint review by regulators in the aftermath of Hurricane Sandy, which caused widespread damage to Northeastern states and closed U.S. equity and options markets for two days in October 2012.
“With this joint effort, we were able to leverage the experience of the entire industry to spread knowledge of best practices and identify areas that need improvement to help our firms be better prepared and better able to respond to disasters,” said Gary Barnett, director of the CFTC’s Division of Swap Dealer and Intermediary Oversight.
Drawing on examination observations, the advisory suggests effective practices in the following areas: preparation for widespread disruption; planning for alternative locations; telecommunications services and technology; communication plans; regulatory and compliance considerations; reviewing and testing.
On the same day as the Iosco report was released, The Financial Stability Board, issued guidance on the resolution of FMIs and systemically-important FMI participants.
“Resolution of firms from non-bank financial sectors has lagged behind the progress made in relation to banks,” said Mark Carney, chair of the FSB. “In light of the move towards mandatory clearing of OTC derivatives, robust resolution regimes for CCPs are particularly important to ensure that greater reliance on CCPs does not result in a new category of too-big-to-fail institution.”
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