Recommendations for Central Counterparties

November 2004

This is the third report prepared by the Task Force on Securities Settlement Systems, which was jointly established in December 1999 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). 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.

In March 2004, the CPSS and the Technical Committee of IOSCO released a consultative version of this report for public comment. More than 40 comments were received from central bankers and securities regulators, as well as operators of and participants in CCPs. The Task Force benefited greatly from this input, and several recommendations have been changed significantly.

This report has 15 headline recommendations and accompanying explanatory text. The recommendations cover the major types of risks CCPs face. The report sets out the intended scope of application of these recommendations and their relationship with the Task Force report on Recommendations for Securities Settlement Systems (RSSS). The report also includes a methodology for assessing implementation of the recommendations, which identifies key issues and key questions and provides guidance on the assignment of an assessment category.

The CPSS and the Technical Committee of IOSCO encourage CCPs to conduct a self-assessment of their observance of the recommendations and to utilise the answers to the key questions as a basis for their public disclosure. National authorities responsible for the regulation and oversight of the CCPs are also expected to assess whether the CCPs in their jurisdiction have implemented the recommendations and to develop plans for implementation where necessary.

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 report in a timely manner. 

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