A report by the committee on financial market infrastructure (FMI) has said that financial market infrastructure should have an effective recovery plan as failure could affect the global financial system.

The committee is drawn from IOSCO, an international policy forum for securities regulators, and the BIS (the banker for the central banks of all countries).

SEBI is a member of IOSCO’s new board which was constituted on October 2 for the period 2014-16.

Broad-based

FMIs, include payment systems (banks), securities settlement systems, central securities depositories, central counterparties (clearing corporations) and trade repositories (exchanges), which play an essential role in the global financial system.

The final version of the report published late on Wednesday provides guidance to FMIs such as central counterparties (CCPs) on how to develop plans to recover from threats to their viability and financial strength.

It also guides regulators across the world in carrying out their responsibilities associated with the development and implementation of recovery plans.

Recovery tools

The report discusses recovery tools used to allocate uncovered losses caused by participant default; to address uncovered liquidity shortfalls; tools to replenish financial resources; for a CCP to re-establish a matched book; and tools to allocate losses not related to participant default. The committee said that the tools should create appropriate incentives for the FMI’s owners, participants and other stakeholders to control the amount of risk that they bring to or incur in the system, monitor the FMI’s risk-taking and risk-management activities, and assist in default management process.

The tools should also be designed to minimise the negative impact on direct and indirect participants and the financial system more broadly, said the report.

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