Central Counterparties Fail to Live Up to PFMI Expectations
- The Committee On Payments and Market Infrastructures found that most firms had made no progress in the past three years
The Committee On Payments Payments One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl Read this Term and Market Infrastructures (CPMI) released its level three assessment of central counterparties (CCP) operating under the principles for financial market infrastructures (PFMI) this Wednesday. While the assessment was a peer-benchmarking exercise and not a supervisory one, it did reveal several key areas that CCPs need to improve on in order to meet regulatory requirements.
PFMI regulation stretches back to 2011 when the CPMI first issued a consultation paper. Run in conjunction with the International Organization of Securities Commissions (IOSCO), the guidelines set out in PFMI aim to ensure that payment, clearing, and settlement systems are able to withstand financial shocks and maintain their support of global markets.
The recent level three assessment surveyed 19 CCPs. It found that in the 18-months since the last assessment, limited progress has been made on Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term requirements. CCPs did not run a sufficiently wide-range of liquidity stress test scenarios, with many running stress tests that were limited only to settlement banks, nostro agents, custodian banks and liquidity providers.
Central counterparties unprepared for the worst, hoping for the best
The CPMI added that there were cracks in some CCPs ability to meet the financial coverage targets set out by PFMI. Although many firms have put in place strategies to meet those targets, the CPMI noted that many of those strategies were not, and would not, achieve outcomes consistent with requirements of PFMI.
Recovery planning was perhaps the weakest area of the firms surveyed. While some CCPs have put in place strategies to address uncovered liquidity shortfalls or uncovered credit losses, many had not. In some cases, firms were only beginning to put together internal rules and systems that would enable them to build a recovery planning strategy.
Overall, the CPMI found that there has been little to no progress on the part of many firms since an initial level 3 assessment in 2015. Given this, the organization has raised fears that were the financial shock PFMI aims to prevent to occur, many CCPs would be unable to function. Whether CCPs think the same way, however, is another matter.
The Committee On Payments Payments One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl Read this Term and Market Infrastructures (CPMI) released its level three assessment of central counterparties (CCP) operating under the principles for financial market infrastructures (PFMI) this Wednesday. While the assessment was a peer-benchmarking exercise and not a supervisory one, it did reveal several key areas that CCPs need to improve on in order to meet regulatory requirements.
PFMI regulation stretches back to 2011 when the CPMI first issued a consultation paper. Run in conjunction with the International Organization of Securities Commissions (IOSCO), the guidelines set out in PFMI aim to ensure that payment, clearing, and settlement systems are able to withstand financial shocks and maintain their support of global markets.
The recent level three assessment surveyed 19 CCPs. It found that in the 18-months since the last assessment, limited progress has been made on Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term requirements. CCPs did not run a sufficiently wide-range of liquidity stress test scenarios, with many running stress tests that were limited only to settlement banks, nostro agents, custodian banks and liquidity providers.
Central counterparties unprepared for the worst, hoping for the best
The CPMI added that there were cracks in some CCPs ability to meet the financial coverage targets set out by PFMI. Although many firms have put in place strategies to meet those targets, the CPMI noted that many of those strategies were not, and would not, achieve outcomes consistent with requirements of PFMI.
Recovery planning was perhaps the weakest area of the firms surveyed. While some CCPs have put in place strategies to address uncovered liquidity shortfalls or uncovered credit losses, many had not. In some cases, firms were only beginning to put together internal rules and systems that would enable them to build a recovery planning strategy.
Overall, the CPMI found that there has been little to no progress on the part of many firms since an initial level 3 assessment in 2015. Given this, the organization has raised fears that were the financial shock PFMI aims to prevent to occur, many CCPs would be unable to function. Whether CCPs think the same way, however, is another matter.