The Committee On Payments 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 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.
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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.