Disclosure framework for securities settlement systems
10 March 1997
Central banks, securities regulators and market operators have been working together in a unique exercise to increase the understanding of risks associated with securities settlement systems. They have developed a "disclosure framework" that they are encouraging the operators of settlement systems to complete. The framework document - in effect a questionnaire covering key aspects of how securities settlement systems work - should help participants in the systems to obtain the information they need to understand where they may be exposed to risk.
Who produced the disclosure framework?
The disclosure framework has been drawn up by a working group set up jointly by the G-10 central banks' Committee on Payment and Settlement Systems (CPSS), and the International Organization of Securities Commissions (IOSCO), as part of continuing cooperation between the two bodies on issues of shared concern. To ensure the document is relevant for as many systems as possible, members of the working group included not just central banks and securities regulators, but also private and public sector operators of securities systems. Between them, the members represented institutions from 16 countries, including both developed and emerging markets. Launching the document, William J. McDonough (Chairman of the CPSS) and Anthony Neoh (Chairman of IOSCO's Technical Committee) noted that "the benefits of a broad, collective approach to developing the disclosure framework are underscored by the increasing volume, diversity and complexity of global securities trading".
What is the purpose of the disclosure framework?
In recent years the importance of managing the risks involved in settlement processes has come to be increasingly understood. Securities settlement systems have had to adapt to cope with a growing volume of transactions and a demand for faster and more efficient settlement. At the same time, cross-border transactions have become more common and in several cases links between different settlement systems have been created. As transactions have become more complex, so has risk management become more difficult. Responsibility for proper risk management lies with the system participants themselves, who need to consider the types of risks that arise, their scale and how they can be kept within prudent limits. The CPSS and IOSCO believe that greater transparency about how settlement arrangements work is a vital element of this process, and the disclosure framework is therefore designed to help participants clarify their thinking about the sorts of information they need and to encourage system operators to provide that information in an accessible form.
What does the disclosure framework contain?
The document encourages securities settlement system operators to provide a full description of their system insofar as matters affecting possible risks are concerned and thus it includes questions on a wide range of topics including the system's rules, membership arrangements, relationships with other organisations (including links with other securities settlement systems), risk control policies and operational risks. Naturally, particular attention is paid to the settlement process itself and the document explores in detail the method of transferring securities, how the related payments are made, any securities lending arrangements and the procedures for handling defaults.
How will the disclosure framework be used?
It is up to system operators and their regulators in individual countries to decide whether and how to use the framework. Besides being generally publicised to the market, the document is being sent to major financial regulatory and supervisory bodies encouraging them to ask system operators to complete the document and make it available to participants in their market place. Operators are also being encouraged to send copies of their responses to the Bank for International Settlements and IOSCO, who will act as clearing houses to make the information available internationally. Mr. McDonough and Mr. Neoh noted that "the contribution of the disclosure framework will naturally depend on the positive cooperation of securities settlement operators in devoting resources to its completion. In the view of the CPSS and IOSCO, as well as the system operators represented on the working group, the cost of these resources will be far outweighed by the risk management benefits."
Notes to editors
- The Committee on Payment and Settlement Systems (the CPSS), based at the Bank for International Settlements (the BIS), serves as a forum for the central banks of the G-10 countries to monitor and analyse developments in payment and settlement arrangements and to consider related policy issues. The Chairman of the CPSS is William J. McDonough, President of the Federal Reserve Bank of New York. The CPSS has published two previous reports on securities settlement arrangements: Delivery versus Payment in Securities Settlement Systems (1992) and Cross-Border Securities Settlements (1995).
- The International Organisation of Securities Commissions (IOSCO), based in Montreal, currently groups securities market regulators from 81 countries which have resolved to cooperate to promote high standards of regulation in order to maintain efficient and sound domestic and international securities markets. The Chairman of IOSCO's Technical Committee (the Committee under whose auspices the disclosure framework was produced) is Anthony Neoh, Chairman of the Securities and Futures Commission of Hong Kong. IOSCO has published a number of reports concerning securities settlement, including Clearing and Settlement in Emerging Markets - a Blueprint (1992) and Cooperation between Market Authorities and Default Procedures (1996).
- The Chairman of the working group that drew up the disclosure framework document was Adam Gilbert, Vice President, Payment Studies Function at the Federal Reserve Bank of New York. A list of the members of the group and the organisations they represent is contained in the document.
- The disclosure framework is on the BIS and IOSCO Web Sites (http://www.bis.org and http://www.iosco.org respectively) and copies can also be obtained from the BIS and IOSCO. Further enquiries about the document should be addressed to:
International Organisation of Securities
P.O. Box 171
800 Square Victoria, 42 étage,
Montreal, H4Z 1C8
Committee on Payment and Settlement
Bank for International Settlements,
|+1 514 875 2669
|+41 61 280 9100