Amid concerns that financial infrastructure firms — such as clearing and settlement organizations — aren’t adequately managing risks, and may not have enough liquid assets to cover potential losses, global standards-setters are consulting on proposed new industry guidance.
In a joint report, the International Organization of Securities Commissions (IOSCO) and the BIS Committee on Payments and Market Infrastructures (CPMI) flagged “serious concerns” with the management of general business risks by financial market infrastructures — risks that arise from their own operations, not from the default of a participating firm — and the liquid assets they hold to backstop possible losses.
In particular, their assessment of financial infrastructure firms, and their implementation of global standards, raised six serious issues. Among them are concerns about infrastructures determining the assets that are needed to cover potential losses from different risks, along with issues in their planning for insolvency (such as their recovery and orderly wind-down planning), and with their plans for raising additional equity in the event of capital shortfalls.
In response, the groups are also proposing new guidance, which is now out for public consultation, that aims to address these concerns.
Among other things, the proposals provide guidance on identifying and managing risks, determining the minimum amount of assets needed to guard against losses, along with governance and transparency issues.
For instance, the proposed guidance recommends that infrastructure firms have a framework for comprehensively managing risk, which ensures that they appropriately identify general business risks — including legal, custody, investment, and operational risks — estimates potential losses, and mitigates and manages actual losses.
It also calls for firms to identify scenarios where these losses are so great that their viability is threatened, and said that they should prepare appropriate plans for recovery, or orderly wind-down, in those scenarios.
At a minimum, firms should have adequate assets to enable them to carry out these plans. They should also have enough assets to deal with unexpected losses without triggering their full recovery plans, it said, as well as plans for raising additional equity, if needed.
The deadline for providing feedback on the proposed guidance is Feb. 6.