Principles of the Financial Market Infrastructures (PFMIs)
Principles of the Financial Market Infrastructures (PFMIs)
- SEBI vide its Circulars No.CIR/MRD/DRMNP/26/2013 dated September 04, 2013 and No. SEBI/HO/CDMRD/DMP/CIR/P/2016/137 dated December 16, 2016 stated that as a member of IOSCO, SEBI is committed for adoption and implementation of the CPSS-IOSCO Principles for Financial Market Infrastructures (FMIs) in its regulatory functions of oversight, supervision and governance of the key FMIsunder its purview. The PFMIs issued on April 2012 comprise of 24 principles (Annexure 1), which are designed to ensure that the infrastructure supporting global financial markets is robust and well placed to withstand financial shocks.
- 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. Global central clearing requirements reinforce the importance of strong safeguards and consistent oversight of derivatives CCPs in particular.
Financial Market Infrastructure (FMI) - The Principles apply to systematically important FMIentities such as Central Counterparty (CCP), Central Securities Depository (CSD)/ Securities Settlement System (SSS), Payment and Settlement Systems (PSS) 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 –
3.1.Enhance safety and efficiency in payment, clearing, settlement, and recording arrangements,
3.2.Reduce systemic risk.
3.3.Foster transparency and financial stability and
3.4.Promote protection of participants and investors. - The different categories of FMIs, as identified under PFMIs, are listed below:
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.
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 existonly 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.
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.
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 ofdata, 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 includethe 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.
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