Recommendations for Central Counterparties

Mar 2004

Note: This document has been superseded by CPSS Publication n. 64 - "Recommendations for Central Counterparties" (November 2004)

Foreword

This is the third report prepared by the Task Force on Securities Settlement Systems, which was jointly established by the Committee on Payment and Settlement Systems (CPSS) of the central banks of the Group of Ten countries and the Technical Committee of the International Organization of Securities Commissions (IOSCO) in December 1999. Recommendations for Central Counterparties aims to set out comprehensive standards for risk management of a central counterparty (CCP). CCPs occupy an important place in securities settlement systems (SSSs). A CCP interposes itself between counterparties to financial transactions, becoming the buyer to the seller and the seller to the buyer. A well designed CCP with appropriate risk management arrangements reduces the risks faced by SSS participants and contributes to the goal of financial stability. CCPs have long been used by derivatives exchanges and a few securities exchanges. In recent years, they have been introduced into many more securities markets, including cash markets and over-the-counter markets. Although a CCP has the potential to reduce risks to market participants significantly, it also concentrates risks and responsibilities for risk management. Therefore, the effectiveness of a CCP's risk control and the adequacy of its financial resources are critical aspects of the infrastructure of the markets it serves. In the light of the growing interest in developing CCPs and expanding the scope of their services, the CPSS and the Technical Committee of IOSCO concluded that international standards for CCP risk management are a critical element in promoting the safety of financial markets.

The present consultative report includes 14 headline recommendations and accompanying explanatory text that cover the major types of risks CCPs face. The report also includes a methodology for assessing implementation of the recommendations, which identifies key issues and key questions and provides guidance on assignment of an assessment category.

The CPSS and IOSCO are now releasing the recommendations in this report for consultation, and are seeking public comments from all interested parties by 9 June 2004. We believe that wide participation in the public consultation process would be beneficial, and we therefore encourage any interested parties to submit their comments to the Task Force. The Task Force will review the comments and develop the final recommendations based upon the information gained in the consultative process.

The CPSS and the Technical Committee of IOSCO are grateful to the members of the Task Force and its Co-Chairmen, Patrick Parkinson of the Board of Governors of the Federal Reserve System and Shane Tregillis of the Monetary Authority of Singapore, for their excellent work in preparing this consultative report in a timely manner. We are looking to them to take the lead in completing this important initiative.

Tommaso Padoa-Schioppa, Chairman Andrew Sheng, Chairman
Committee on Payment and Settlement Systems Technical Committee, IOSCO