Importance of the oversight function for financial market infrastructures: General framework and objectives

Transcription

1 Importance of the oversight function for financial market infrastructures: General framework and objectives Workshop on payments systems oversight Kingston, Jamaica 5 December 2012 Klaus Löber CPSS Secretariat Bank for International Settlements * Views expressed are those of the author and not necessarily those of the BIS 1

2 Outline The role of the Committee on Payment and Settlement Systems (CPSS) Concept: What is oversight? Purpose: Why is oversight performed? Scope: What should be overseen? Method: How should it be done?

3 The Committee on Payment and Settlement Systems (CPSS) The CPSS serves as a forum for central banks to monitor and analyse developments in the field of FMIs and to set common policies and recommendations Central bank membership (24) Canada Sweden ECB Russia Japan USA UK Germany Turkey Korea Mexico Switzerland Netherlands India China Brazil Belgium Saudi Arabia Hong Kong France South Africa Singapore Italy Australia From G10 (1990) to G10-plus (late 1990s) to approximately G20 (2009) Originally reported to G10 Governors, now reports to Global Economy Governors (also approximately G20) Secretariat based at the BIS in Basel, Switzerland Part of the Basel process (also including BCBS, FSB, IAIS, IADI, ) 3

4 Role of the committee Two key functions: Standard Setting (including setting common policies and recommendations) eg. Principles for financial market infrastructures (2012) Settlement risk in foreign exchange transactions (1996) Central bank oversight of payment and settlement systems (2005) Descriptive/Analytical (sharing information, carrying out analysis, discussing issues, increasing mutual understanding ) eg. Role of central bank money in payment systems (2003) New developments in large value payment systems (2005) The interdependencies of payment and settlement systems (2008) Innovations in retail payments (2012) 4

5 What is oversight? Oversight of payment and settlement systems is a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against the objectives and, where necessary, inducing change. Oversight of payment and settlement systems, BIS,

6 Two old CPSS definitions A central bank task, principally intended to promote the smooth functioning of payment systems and to protect the financial system from possible domino effects which may occur when one or more participants in the payment system incur credit or liquidity problems. Payment systems oversight aims at a given system (e.g. a funds transfer system) rather than individual participants Glossary of terms, BIS, March 2003 A public policy activity principally intended to promote the safety and efficiency of payment systems and in particular to reduce systemic risk Core principles, BIS, January

7 A form of regulation FINANCIAL SYSTEM INSTITUTIONS SUPERVISION MARKETS SURVEILLANCE INFRASTRUCTURES OVERSIGHT All can be described as regulatory activities in a very broad sense of involvement by the authorities 7

8 Oversight is a regulatory activity: Induce change Policy (setting) Monitor Assess Regulating infrastructures, not their participants 8

9 Focus on risks Market Risk Credit Risk Liquidity Risk Legal Risk Risks Operational Risk FX Settlement Risk Systemic Risk 9

10 Oversight process Formulation of the oversight policy stance Oversight is an iterative process Collecting and assessing relevant information Enforcement Monitoring and analysing relevant developments (legal, technical, business environment) and risks Setting standards (binding or nonbinding) Formulating policy framework Regular oversight activities Ad-hoc assessments Collection of data/information Identification of potential weaknesses Recommendations to operators Inducing change Binding legal instruments Informal tools (e.g. moral suasion) Voluntary agreements Cooperation with other authorities 10

11 Financial Market Infrastructures (FMIs) Facilitate recording, clearing and settlement of monetary and other financial transactions Strengthen the markets they serve Mitigate systemic risk FMIs play a critical role in fostering financial stability On the other hand, FMIs also concentrate risk not the least through interdependencies. if this risk is not properly managed, FMIs can be sources of: Credit losses Liquidity and collateral dislocations Financial shocks FMIs could be major channels through which shocks are transmitted across domestic and international financial markets International standards for FMIs have been established over the years to address these risks 11

12 Why is oversight carried out? Criticality of safety and effciiency of FMIs for financial markets, because of the impact of: Intransparency and inefficiencies Market failures Concentration and lack of substitutability Network effects and interdependencies Systemic risk However, some implications: Primary responsibility of FMIs for their activities Moral hazard Financial costs 12

13 Who should perform oversight? a central bank function Central bank advantages: Expertise and experience Operator and user perspective Relevance for financial and monetary stability Relevance for lender-of-last-resort role But some implications: Regulatory overlap with other authorities (supervisors, competition authorities, etc.) Potential conflicts of interest Reputational risk 13

14 Central bank rationale Ensure the safety and efficiency of financial market infrastructure Contribute to financial stability Contribute to the smooth implementation of monetary policy Maintain the public confidence in the currency 14

15 Public policy objectives Main public policy objectives in view of limiting systemic risk and fostering transparency and financial stability (see PFMIs): Safety Robust management of risks such as: legal, credit, liquidity, general business, operational risks etc. Efficiency Best use of resources by financial market infrastructures and their participants in view of performing effectively their functions and the wider market they serve 15

16 Scope of oversight - which systems? PFMIs: Systemically relevant payment systems (large value vs. retail) Central securities depositories and securities settlement systems Central counterparties Trade repositories What about: Critical service providers? Other retail payment systems? Payments instruments/schemes? Quasi-systems (correspondent banks and custodians)? 16

17 Development and scope of the oversight role G-10 Group of Experts on Payment Systems G-10 Ad hoc Committee on Interbank Netting Schemes (Lamfalussy) G-10 Committee on Payment and Settlement Systems (Allsopp) Report on Settlement Risks in FX CPSS Core Principles for SIPS CPSS/IOSCO Recommendations for SSS CPSS Report on Oversight CPSS/IOSCO Recommendations for CCPs FX settlement risk CPSS-IOSCO guidance on OTC derivatives Interdependencies CPSS-IOSCO PFMIs CLS Lehman Herstatt

18 Large-Value Payment Systems Backbone of the financial markets RTGS or DNS, multicurrency: CLS Retail Payment Systems used for the bulk of payments between individuals and corporates may have a role with respect to the safety and efficiency of the financial system and citizens confidence in the currency may be systemically relevant (PFMIs) Policy issues for central banks in retail payments (BIS, 2003) Each central bank should examine developments in its markets in order to form a view on whether [policy] issues arise. Where such issues are judged to arise, [central banks] may decide to take action

19 Clearing and settlement infrastructure CSDs, SSSs and CCPs Embedded payment arrangements Central banks have a strong interest in CCPs and SSSs due to their relevance for financial stability, monetary policy and the smooth operation of payments systems Frequent need to cooperate with other competent authorities (e.g. securities regulators), at national or cross-border level 19

20 Trade repositories (TRs) TRs are data warehouses that record trade-related data, and which are connected to CCPs by a relationship of data feed TRs not comparable with CCPs in terms of systemic risk implications, but their safety, resilience and efficiency is significant from a financial stability perspective in view of the reliance of a large number of market participants, public authorities and market infrastructures on the availability and accuracy of the data Need for a framework for the operation of trade repositories (i.a. access/participation, disclosure of data, protection of data, legal certainty/status of registered contracts) 20

21 Payment instruments Arrangements rather than system Non-cash payment instruments (means to transfer (retail) funds between accounts), e.g. cards, credit transfer schemes, e-money schemes, mobile payments, remittance services, cheques Essential part of payment infrastructure Low risks, but important for both maintaining confidence in the currency and promoting an efficient economy Frequently focus on security 21

22 Third-party service providers provide key services to FMIs critical for the functioning of the financial markets (e.g. SWIFT) Annex F to the PFMIs Risk identification and manadement Information security Reliability and resilience Technilogy planning Communication with users 22

23 Quasi-systems Correspondent banks and custodian banks key components of an economy s payment and settlement arrangements potential for strong concentration, giving rise to possible financial and operational risks C D A B Central bank or FMI 23

24 A question of territory RTGS CLS = central bank overseer Large value payment system Retail payment system Securities settlement system = consumer protection agency = banking supervisor = securities regulator Central counterparty Quasi system Individual institutions (eg banks) Direct debit conditions Bank charges Bank s capital and liquidity Risk Efficiency 24

25 How to conduct oversight - PFMI Responsibilities A - E Responsibility A: FMIs should be subject to appropriate and effective regulation, supervision, and oversight by a relevant authority Responsibility B: Authorities should have the powers and resources to carry out effectively their responsibilities in regulating, supervising, and overseeing FMIs Responsibility C: Authorities should clearly define and disclose their regulatory, supervisory, and oversight policies with respect to FMIs Responsibility D: Authorities should adopt and consistently apply the PFMI Responsibility E: Relevant authorities should cooperate, both domestically and internationally, as appropriate, in promoting the safety and efficiency of FMIs 25

26 Central bank oversight of payment and settlement systems, CPSS, May 2005 Described how CPSS central banks currently do oversight Set out five general principles for oversight (GOPs): GOP A: GOP B: GOP C: GOP D: GOP E: Transparency Use of international standards Effective powers and capacity Consistency Cooperation with other authorities Set out five additional principles for international cooperative oversight (eg for CLS, SWIFT) 26

27 Evolution of the central bank responsibilities in the new principles CSIPS RSSS RCCP GOP Responsibility A: A B Responsibility B: C C Responsibility C: A A Responsibility D: B, C D Responsibility E: D E 27

28 Responsibility A: Regulation, supervision and oversight of FMIs Authorities should clearly define and publicly disclose the criteria used to identify FMIs that should be subject to regulation, supervision, and oversight FMIs that have been identified using these criteria should be regulated, supervised, and overseen by a central bank, market regulator, or other relevant authority Typically requires setting out responsibilities, objectives and criteria for determining who the standards apply to Necessity to clarify roles in case of multiple authorities 28

29 Responsibility B: Regulatory, supervisory and oversight powers and resources Authorities should have powers or other authority consistent with their relevant responsibilities, including: ability to obtain timely information ability to induce change or enforce corrective action Authorities should have sufficient resources to fulfil their responsibilities Powers could be statutory or non-statuotory Safeguards to ensure confidentiality Who has to provide information (e.g. outsourcees)? Adequate funding, qualified and experienced personel - complexity Organisational structure - separation of functions? 29

30 Formal responsibilities Should the central bank have statutory responsibilities and powers, i.e. set out in law, explicitly and perhaps in some detail? Possible advantages transparency binding effects Possible disadvantages less flexibility to adapt Enforcement tools Formal legal instruments (guidelines, regulations, instructions) Sanctions (financial, criminal, closure of systems) Informal tools (e.g. moral suasion) Cooperation with other authorities Voluntary agreements Are non-binding instruments enough? 30

31 Responsibility C: Disclosure of policies with respect to FMIs Authorities should clearly define their policies with respect to FMIs, which include the authorities objectives, roles, and regulations Authorities should publicly disclose their relevant policies with respect to the regulation, supervision, and oversight of FMIs Transparency supports consistency, accountability and effectiveness Typically involves a public document setting out the policies (see responsibility A) 31

32 Transparency of assessments? PFMI Responsibility C is silent about this Advantages: Useful information to help markets to make its own judgment A useful oversight power for the central bank Promotes central bank accountability Disadvantages: Confidentiality of information Competition issues May create adverse effects on market confidence 32

33 Responsibility D: Application of the principles for FMIs Authorities should adopt the PFMIs Authorities should ensure that these principles are, at a minimum, applied to all systemically important PSs, CSDs, SSSs, CCPs, and TRs Authorities should apply these principles consistently within and across jurisdictions, including across borders, and to each type of FMI covered by the principles Commitment by CPSS and IOSCO members to apply PFMIs Minimum scope Consistency of application (also to central bank operated FMIs) 33

34 Consistency Important where systems are in competition with each other Central banks should indicate criteria for comparability (e.g. types of instruments, value, types of participants, risk attributes) Consistency also needed where a central bank operates a system itself to avoid competition issues and conflict of interests (e.g. by organisational separation) 34

35 Responsibility E: Cooperation with other authorities Relevant authorities should cooperate with each other in fulfilling their respective mandates with respect to FMIs both domestically and internationally to foster efficient and effective communication and consultation in order to support each other Cooperation needs to be effective in normal circumstances Cooperation should be adequately flexible to facilitate effective communication, consultation, or coordination, as appropriate, during periods of market stress, crisis situations, and the potential recovery, wind-down, or resolution of an FMI 35

36 Responsibility E: Cooperation with other authorities Cooperation may take a variety of forms. The form, degree of formalization and intensity of cooperation should promote the efficiency and effectiveness of the cooperation, and should be appropriate to the nature and scope of each authority s responsibility for the supervision or oversight of the FMI and commensurate with the FMI s systemic importance in the cooperating authorities various jurisdictions. Cooperative arrangements should be managed to ensure the efficiency and effectiveness of the cooperation with respect to the number of authorities participating in such arrangements MoUs Formal colleges Information sharing arrangements 36

37 Co-operation Between central banks in the context of cooperative oversight of crossborder and multicurrency systems Between central banks at international level (I.e. CPSS) to define and implement oversight requirements for global infrastructures With securities regulators at international level (e.g CPSS-IOSCO) to define common standards With other regulators (MoUs, colleges) to reconcile the infrastructure and the institution perspective With financial stability authorities to foster the macroprudential perspective on systemic risks With resolution authorities to ensure safe and effective resolution of FMIs Aim to: align conflicting objectives promote consistency of oversight requirements and approaches and avoid duplication and overlaps access to comprehensive and timely information on factors that may impact on the safety and resilience of infrastructures clarification of responsibilities and procedures for cooperation among authorities during crisis situations 37

38 Responsibility E: Cooperation with other authorities If an authority has identified an actual or proposed operation of a crossborder or multicurrency FMI in its jurisdiction, the authority should, as soon as it is practicable, inform other relevant authorities that may have an interest in the FMI s observance of the CPSS-IOSCO Principles for financial market infrastructures Notification duty (in advance where possible) 38

39 Responsibility E: Cooperation with other authorities When assessing an FMI s payment and settlement arrangements and its related liquidity risk-management procedures in any currency for which the FMI s settlements are systemically important against the principles, the authority or authorities with primary responsibility with respect to the FMI should consider the views of the central banks of issue. If a central bank of issue is required under its responsibilities to conduct its own assessment of these arrangements and procedures, the central bank should consider the views of the authority or authorities with primary responsibility with respect to the FMI Role of the central bank of issue for settlement and liquidity arrangement in its currency Duty to consider, not to jointly agree What can be done in case of disagreement (e.g. discourage of use of FMI)? 39

40 Responsibility E: Cooperation with other authorities For an FMI where cooperative arrangements are appropriate, at least one authority should accept responsibility for establishing efficient and effective cooperation among all relevant authorities. In international cooperative arrangements where no other authority accepts this responsibility, the presumption is the authority or authorities with primary responsibility in the FMI s home jurisdiction should accept this responsibility At least one authority should ensure that the FMI is periodically assessed against the principles and should, in developing these assessments, consult with other authorities that conduct the supervision or oversight of the FMI and for which the FMI is systemically important appoint an authority with primary responsibility consider appropriate cooperative arrangements assessment of the system as a whole by that authority, in consultation with the other authorities 40

41 Cooperative oversight and the concept of lead overseer Basis: Lamfalussy principles for cooperative oversight of cross-border and multicurrency netting and settlement systems One central bank (the lead overseer) assumes primary oversight responsibility The lead overseer consults the (most representative) other central banks with a valid interest The settlement procedures are overseen jointly by the lead overseer and the central banks of issue of relevant currencies Central banks involved in cooperative oversight undertake efforts to reach consensus 41

42 Responsibility E: Cooperation with other authorities Relevant authorities should provide advance notification, where practicable and otherwise as soon as possible thereafter, regarding pending material regulatory changes and adverse events with respect to the FMI that may significantly affect another authority s regulatory, supervisory, or oversight interests Relevant authorities should coordinate to ensure timely access to trade data recorded in a TR cf. the work being conducted by the CPSS and IOSCO on access to data by competent authorities 42

43 Challenges for oversight Market infrastructure changes: increased attention of overseers to the clearing and settlement infrastructures or security of payments Developing oversight framework: evolving legal and regulatory environment, i.e new legislation and international standards Need for co-operation and sharing of information: between central banks, securities regulators, supervisors and other relevant authorities for emerging cross-border and global FMIs 43