CIRCULAR, CIR/MRD/DRMNP/26/2013, dated September
04, 2013
To
All Clearing
Corporations and Depositories
Background
1. To promote
and sustain an efficient and robust global financial infrastructure, the
Committee on Payments and Settlement Systems (CPSS) and the International
Organization of Securities Commissions (IOSCO) published the Principles for
financial market infrastructures (PFMIs) on April 2012. They replace the
three existing sets of international standards set out in the Core Principles
for Systemically Important Payment Systems (CPSIPS); the Recommendations
for Securities Settlement Systems (RSSS); and the Recommendations for
Central Counterparties (RCCP). CPSS and IOSCO have strengthened and
harmonised these three sets of standards by raising minimum requirements,
providing more detailed guidance and broadening the scope of the standards to
cover new risk-management areas and new types of FMIs.
2. The PFMIs
comprise of 24 principles (Annex 1) for Financial Market Infrastructure
to provide for effective regulation, supervision and oversight of FMIs. They
are designed to ensure that the infrastructure supporting global financial
markets is robust and well placed to withstand financial shocks.
3. Full, timely
and consistent implementation of the PFMIs is fundamental to ensuring the
safety, soundness and efficiency of key FMIs and for supporting the resilience
of the global financial system. In addition, the PFMIs play an important part
in the G20's mandate that all standardized over-the-counter (OTC) derivatives
should be centrally cleared. Global central clearing requirements reinforce the
importance of strong safeguards and consistent oversight of derivatives CCPs in
particular.
Financial Market
Infrastructure (FMI)
4. The
Principles apply to systematically important financial market infrastructures entities
such as Central Counterparty (CCP), Central Securities Depository (CSD)/
Securities Settlement System (SSS), Payment and Settlement systems, and Trade
Repository (TR) which are responsible for providing clearing, settlement and
recording of monetary and other financial transactions.. The principles are
international standards set forth to –
a. Enhance safety and efficiency in
payment, clearing, settlement, and recording arrangements,
b. Reduce systemic risk.
c. Foster transparency and financial
stability and
d. Promote protection of participants
and investors.
5. Financial
Market Infrastructure (FMI) are critically important institutions responsible
for providing clearing, settlement and recording of monetary and other
financial transactions. The different categories of FMIs, as identified under
PFMIs, are listed below –
Payment Systems
(PSS)
A payment system
is a set of instruments, procedures, and rules for the transfer of funds
between or among participants. The system includes the participants and the
entity operating the arrangement. Payment systems are typically based on an
agreement between or among participants and the operator of the arrangement,
and the transfer of funds is effected using an agreed-upon operational
infrastructure.
Central
Securities Depositories (CSD)
Central
securities depository provides securities accounts, central safekeeping services,
and asset services, which may include the administration of corporate actions
and redemptions, and plays an important role in helping to ensure the integrity
of securities issues (that is, ensure that securities are not accidentally or
fraudulently created or destroyed or their details changed). A CSD can hold securities
either in physical form (but immobilised) or in dematerialised form (that is,
they exist only as electronic records). A CSD may maintain the definitive
record of legal ownership for a security; in some cases, however, a separate
securities registrar will serve this notary function.
Securities
Settlement Systems (SSS)
A securities
settlement system enables securities to be transferred and settled by book
entry according to a set of predetermined multilateral rules. Such systems
allow transfers of securities either free of payment or against payment. When
transfer is against payment, many systems provide delivery versus payment
(DvP), where delivery of the security occurs if and only if payment occurs. An
SSS may be organised to provide additional securities clearing and settlement
functions, such as the confirmation of trade and settlement instructions.
Central
Counterparties (CCP)
A central
counterparty 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 and thereby ensuring the performance of open contracts. A
CCP becomes counterparty to trades with market participants through novation,
an open-offer system, or through an analogous legally binding arrangement. CCPs
have the potential to significantly reduce risks to participants through the
multilateral netting of trades and by imposing more effective risk controls on
all participants. For example, CCPs typically require participants to provide
collateral (in the form of initial margin and other financial resources) to
cover current and potential future exposures. CCPs may also mutualise certain
risks through devices such as default funds. As a result of their potential to
reduce risks to participants, CCPs also can reduce systemic risk in the markets
they serve.
Trade
Repositories (TR)
A trade
repository is an entity that maintains a centralised electronic record (database)
of transaction data. TRs have emerged as a new type of FMI and have recently
grown in importance, particularly in the OTC derivatives market. By
centralising the collection, storage, and dissemination of data, a well designed
TR that operates with effective risk controls can serve an important role in
enhancing the transparency of transaction information to relevant authorities and
the public, promoting financial stability, and supporting the detection and
prevention of market abuse. An important function of a TR is to provide
information that supports risk reduction, operational efficiency and effectiveness,
and cost savings for both individual entities and the market as a whole. Such
entities may include the principals to a trade, their agents, CCPs, and other
service providers offering complementary services, including central settlement
of payment obligations, electronic novation and affirmation, portfolio compression
and reconciliation, and collateral.
Adoption of
Principles of Financial Market Infrastructures
6. All CPSS and
IOSCO members are required to strive to adopt the PFMIs and implement them in
their respective jurisdictions.
7. SEBI as a
member of IOSCO is committed to the adoption and implementation of the new
CPSS-IOSCO standards of PFMIs in its regulatory functions of oversight,
supervision and governance of the key financial market infrastructures under
its purview.
8.
Depositories and Clearing Corporations regulated by SEBI are FMIs in terms of the
criteria described above. These systemically important financial infrastructures
provide essential facilities and perform systemically critical functions in the
market and shall hence be required to comply with the principles of financial
market infrastructures specified by CPSS-IOSCO as applicable to them. The list
of SEBI regulated FMIs is provided in Annexure 2.
9.
All FMIs in the securities market shall be monitored and assessed against the PFMIs
on a periodic basis.
10.
This circular is being issued in exercise of powers conferred under Section 11 (1)
of the Securities and Exchange Board of India Act, 1992 to protect the interests
of investors in securities and to promote the development of, and to regulate
the securities market.
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