- November 19, 2014
- Posted by: admin
- Category: Current News
Financial Market Infrastructures (FMIs) can support the overall efficiency and effectiveness of financial markets by providing clearing and settlement of transactions in the financial markets, as well as the movement of money and securities. However, without proper management, they can be the very source of systemic disruptions in the markets they serve. Weakness in FMIs expose participants in the financial system to systemic risk and should, therefore, be supervised and overseen diligently.
Following the events of the Global Financial Crisis of 2008 and the lessons learnt thereafter, the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) resolved to review and update the standards for FMIs. In April 2012, after a thorough consultative process, the two international standard setting bodies published the Principles for Financial Market Infrastructures (PFMIs).
At the request of the Bank of Botswana (BOB), MEFMI conducted an in-country workshop on the implementation of these principles for staff in the Payment Systems Department as well as other functional areas of the Bank. This workshop was held for two days from 20 to 21 October 2014. In addition, a one day workshop was also conducted for Botswana’s payment systems market players. This took place on 22 October 2014.
Both workshops aimed to provide training on the PFMIs for the Bank’s Payment Systems team and to also sensitise industry players in Botswana on their application and implementation. The objective was to impart knowledge to the regulators and guide the market on the actions required on their part. The workshops took place at the BOB headquarters in Gaborone.
Participants were drawn from the departments of Payment Systems, Bank Supervision, Finance Department (which is the back office of Financial Markets Department), Internal Audit and Risk Management. Market players were represented by amongst other the Botswana Stock Exchange, Smart switch, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), the Electronic clearing house, all commercial banks, various mobile network operators, the telecom regulator and other financial intermediaries.
The workshop was officially opened by the Director of the Payment Systems Department, at the Bank of Botswana, Ms. Rakhudu Ewetse. In her opening remarks, the director applauded MEFMI for its prompt response to BOB’s request to have the training and commended the seamless preparations for the workshop. She mentioned that it was reassuring for the Bank to know that they could count on MEFMI to provide sustained technical capacity in the region as and when required.
She informed the team that the Bank had taken cognizance of the PFMIs and was using them as a point of reference during oversight and inspection exercises although the principles have not been formally adopted. Furthermore, the BOB has circulated a PFMI self-assessment template to the FMIs to raise awareness and ensure that the industry is responsive to them. She said the training would help both the Central Bank and industry understand the salient issues of the principles and was expecting that the outcome of the training would be a road map that would guide the Bank in incorporating them into their payment systems oversight policy.
The PFMIs were introduced in 2012 by the CPSS and IOSCO to harmonise and where applicable strengthen the three sets of principles that applied to Payment Systems (PS), Securities Settlement Systems (SSS) and Central Counter Parties (CCPs). The standards consist of 24 principles for FMIs and five (5) responsibilities for Central Banks and market authorities. The 24 principles are covered under 9 broad areas, namely; General organisation of the FMI, Credit and liquidity risk management, Settlement, Central Securities Depository (CSDs) and Exchange of value settlement systems, Default management, General business and operational risk management, Access, Efficiency and transparency.
Market forces alone cannot be relied upon to fully achieve the public policy objectives of safety and efficiency because FMIs and their participants do not necessarily bear all the risks or costs associated with their activities. There is need therefore, to have a set of standards that is internationally accepted in guiding FMIs and the markets they serve. The PFMIs draw on the collective experience of many central bankers and market regulators. All relevant authorities are expected to apply them to relevant FMIs and should strive to incorporate them into their legal and regulatory framework to the fullest extent permissible within their jurisdictions.
For an FMI to fully benefit from the principles, it is important for it to clearly understand the environment in which it works. This does not only relate to the system(s) it operates but also how the FMI interacts with the different players in the market. It is critical for market players to apply the principles according to their market circumstances. Considerable focus should be placed on plausibility when identifying risks – especially operational risk.
These standards should not be viewed on a standalone basis but should be applied holistically because of the significant interaction between each of the principles; some principles build upon each other while others complement each other.
Controls provide safety nets but authorities should stay aware of the fact that risks change over time and controls should be monitored to ensure they are still adequate. A risk management framework is only robust if it is consistent and comprehensive. Staff should be aware of how the existing risk management framework applies to their routine tasks or responsibilities. The importance of on-going training, qualified and experienced personnel cannot be over emphasised. Staff need the skills to be able to effectively and consistently apply the principles as well as assess their compliance accordingly.
Governance arrangements relating to board composition, appointments and tenure should be well documented. The board should be composed of suitable members with an appropriate mix of skills, experience, and knowledge of the entity. Board members should also have a clear understanding of their roles in corporate governance, be able to devote sufficient time to their roles, ensure that their skills remain up-to-date, and have appropriate incentives to fulfil their roles. Members should be able to exercise objective and independent judgment.
The assessment methodology for the PFMIs provides guidance for assessing and monitoring the observance of the principles and responsibilities. These guidelines provide step by step procedures for national authorities to assess compliance with the principles by the FMIs under their supervision or oversight. Market authorities are encouraged to perform self-assessments for the FMIs within their jurisdictions and to pursue peer assessments at a regional level.
Challenges in implementing the principles….
The new principles are more complex than the previous standards. It took a relatively long time for authorities, market players and assessors to clearly understand the previous standards and hence a similar scenario is expected with regards to the PFMIs
Greater consistency and comparability should be facilitated with the assessment methodology. Inherent differences exist across countries and their FMIs. These may be environmental, legal, specificities of the design or organisation of the FMIs, the level of sophistication of financial markets and many others. Furthermore there is different understanding of the criteria used to designate a system as systemically important. Local authorities may not deem a cheque clearing system as systemically while an external assessor classifies it as such because it handles large value transactions.
Assessing governance and general business risk for public sector-owned and operated FMIs is challenging. Furthermore, it is very difficult to assess that compliance with the principles on default management is adequate unless the underlying arrangements have been tested in practice, preferably in real-life situations
The training which was attended by 65 participants, 39 or 60%, of them being female, helped participants to understand how the Central Bank can comprehensively use these principles and how to seamlessly migrate from the old principles to the new principles.
The workshop also helped the participants to devise means to incorporate the PFMIs in the existing oversight policy and highlight critical issues to identify when carrying out self-assessments. The workshop also helped to highlight major areas that need improvement in BOB’s payment system oversight practice.