CPSS-IOSCO Task Force Beyond the November 2001 Report

1. CPSS-IOSCO Task ForceBeyond the November 2001 Report P. Parkinson ACSDA Seminar Lima, Peru November 15, 2002

2. Exhibit 1The November 2001 Report Recommendations for Securities Settlement Systems* Twenty recommendations that address -- the legal framework -- risk management (especially by CSDs, CCPs) -- governance and access -- efficiency and communications procedures -- transparency and oversight Minimum standards Intended to be applied universally Implementation of Recommendations To be promoted through assessments of observance -- self-assessments by national authorities -- FSAPs -- other (CSDs, CCPs, system participants) Consistent assessments to be fostered by development of an assessment methodology by CPSS-IOSCO Task Force * www.bis.org/publ/cpss46.htm www.bis.org/publ/cpss46es.htm (Spanish)

3. Exhibit 2Forthcoming Assessment Methodology Determination of the Scope of an Assessment by National Authorities Assignment of Rating Categories Follow-up to Assessments

4. Exhibit 3Scope of an Assessment by National Authorities • Multiple Systems (SSSs) • Example: In U.S., separate CSDs, CCPs for U.S. government securities, other securities • Priority: SSS that processes highest average daily value of trades • Other considerations: use of system for monetary policy operations • Exchange-Traded Derivatives • Recommendations were not really designed with derivatives clearing in mind • May or may not be covered • If CCP for derivatives also clears securities trades may need to evaluate management of derivatives risks • If CCP for derivatives is separate from securities CCP, recommendations need not be applied to derivatives CCP (national discretion) • Functional Approach • Recommendations focus on functions performed, not institutions that perform them • CCP recommendations should be applied to stock exchanges that guaranty trades • CSD recommendations may need to be applied to custodians that internalize a significant share of settlements

5. Exhibit 4Assignment of Rating Categories • Rating Categories • Observed • Broadly observed • Partly observed • Non-observed • Not applicable • Key Issues and Key Questions • Key issues cover the “headline” recommendations and the “below-the-line” discussions • For each key issue the answer to the corresponding key question should indicate whether the issue has been addressed • Assignment of Rating Categories • Specific guidance on how answers to key questions should translate into assignment of a rating category • Guidance not intended to be applied in a purely mechanical fashion • But, if assessor assigns a different rating category than indicated, should explain clearly why that rating was more appropriate • Assessors expected to take a conservative approach

6. Exhibit 5Example – Recommendation 3Settlement Cycles • Observed a. rolling settlement occurs no later than T+3 b. fails are not a significant source of added risk or risks from fails are effectively mitigated c. if T+3, a cost benefit analysis of a shorter settlement cycle is performed 2. Broadly Observed a. 1a and 1b are satisfied b. but 1c is not satisfied • Partly Observed a. 1a is satisfied b. but 1b is not satisfied • Non-Observed a. settlement on an account basis or on a rolling basis longer than T+3

7. Exhibit 6Follow-up to Assessments • Identification of Actions to Achieve Observance • Where a recommendation is not observed, the assessment should identify actions to achieve observance • If improvements are already under way, that should be noted but not reflected in the rating • Together with SSS operators (including the CSD), authorities will need to develop plans to remedy any deficiencies identified by self-assessments 2. Formal Action Plan • May be necessary if deficiencies are severe • No simple recipe for setting priorities • Should specify timetable, who is responsible for instituting necessary steps • Authorities to take lead in pursuing legislation, regulatory or supervisory changes • Where deficiencies involve the CSD, it may be asked to take the lead

8. Exhibit 7Future work of CPSS-IOSCO Task ForceRisk Management Standards for CCPs • CPSS-IOSCO Recommendation 4 • Calls for a CCP to vigorously control the risks that it assumes • “Below-the-line” text discusses risk control issues but does not set out detailed or comprehensive standards for CCP risk management • Refers to private sector efforts to develop risk management standards • Private Sector Efforts • European Association of Clearing Houses (EACH) released standards in March 2001 • CCP-12 was expected to revise and foster international acceptance of EACH standards • CCP-12 work seems to have lost momentum • CPSS and IOSCO expected to ask Task Force to develop international standards for CCP risk management in 2003