London, 18 October 2016 – The World Federation of Exchanges ("WFE"), which represents more than 200 market infrastructure providers including exchanges and CCPs, today published its response to the CPMI-IOSCO Consultative Report: Resilience and Recovery of Central Counterparties (CCPs) – Further Guidance on the Principles for Financial Market Infrastructure (PFMI).
A summary of the WFE response can be found below:
The WFE has previously expressed support for initiatives such as the CPMI-IOSCO PFMI, and in particular the principles-based approach through which they have been issued.The flexible approach of these principles allows CCPs to continue to employ prudent risk management practices, while allowing sufficient flexibility to fit the national/regional legal and regulatory requirements in which they operate.
The WFE acknowledges the objective of bringing further clarity to the existing PFMI standards, but is concerned that the proposed further guidance creates a more prescriptive set of risk management requirements for CCPs to follow.This is likely to compromise the effectiveness of the standards, and the ability of CCPs to operate effectively in the event of another financial crisis.
As such, the WFE advocates for:
- Governance and disclosure arrangements that are appropriate and proportionate.
- A level of flexibility in the use of risk management tools, to ensure they can appropriately function in stressed times, as well as take into account local nuances.
- An appropriate funding requirement to ensure member and CCP contributions are risk based, with incentives that are balanced and aligned.
- An acknowledgement of other relevant legislation (for example, Basel III requirements), to mitigate against unintended consequences that may have an adverse effect on the functioning of the market, or the ability to manage risk.
Nandini Sukumar, CEO, WFE, said: "The WFE welcomes well-designed international efforts to enhance and strength the resilience of the financial system post-crisis, and supports further initiatives which encourage that objective.It is our concern, however, that this guidance moves away from the principles-based approach that we advocate for, towards a more prescriptive set of requirements, which has the potential to undermine the ability of a CCP to dynamically manage risk in the future. We believe standards that can 'flex' - according to jurisdiction, market structure and product – are more likely to result in the shared objectives of achieving fair, robust and resilient markets, in which investors can have confidence."