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Financial Market Infrastructure (FMI)

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Financial Market Infrastructure (FMI) refers to critically important institutions responsible for providing clearing, settlement and recording of monetary and other financial transactions.


Types of FMIs

The different categories of FMIs, as identified under Principles for financial market infrastructures [PFMIs], are-

1. Payment Systems (PSS)

A payment system is a set of instruments, procedures, and rules for the transfer of funds between or among participants. The system includes the participants and the entity operating the arrangement. Payment systems are typically based on an agreement between or among participants and the operator of the arrangement, and the transfer of funds is effected using an agreed-upon operational infrastructure.

2. Central Securities Depositories (CSD)

Central securities depository provides securities accounts, central safekeeping services, and asset services, which may include the administration of corporate actions and redemptions, and plays an important role in helping to ensure the integrity of securities issues (that is, ensure that securities are not accidentally, or fraudulently created or destroyed or their details changed). A CSD can hold securities either in physical form (but immobilised) or in dematerialised form (that is, they exist only as electronic records). A CSD may maintain the definitive record of legal ownership for a security; in some cases, however, a separate securities registrar will serve this notary function.

3. Securities Settlement Systems (SSS)

A securities settlement system enables securities to be transferred and settled by book entry according to a set of predetermined multilateral rules. Such systems allow transfers of securities either free of payment or against payment. When transfer is against payment, many systems provide delivery versus payment (DvP), where delivery of the security occurs if and only if payment occurs. An SSS may be organised to provide additional securities clearing and settlement functions, such as the confirmation of trade and settlement instructions.

4. Central Counterparties (CCP)

A central counterparty interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts. A CCP becomes counterparty to trades with market participants through novation, an open-offer system, or through an analogous legally binding arrangement. CCPs have the potential to significantly reduce risks to participants through the multilateral netting of trades and by imposing more effective risk controls on all participants. For example, CCPs typically require participants to provide collateral (in the form of initial margin and other financial resources) to cover current and potential future exposures. CCPs may also mutualise certain risks through devices such as default funds. As a result of their potential to reduce risks to participants, CCPs also can reduce systemic risk in the markets they serve.

5. Trade Repositories (TR)

A trade repository is an entity that maintains a centralised electronic record (database) of transaction data. TRs have emerged as a new type of FMI and have recently grown in importance, particularly in the OTC derivatives market. By centralising the collection, storage, and dissemination of data, a well-designed TR that operates with effective risk controls can serve an important role in enhancing the transparency of transaction information to relevant authorities and the public, promoting financial stability, and supporting the detection and prevention of market abuse. An important function of a TR is to provide information that supports risk reduction, operational efficiency and effectiveness, and cost savings for both individual entities and the market as a whole. Such entities may include the principals to a trade, their agents, CCPs, and other service providers offering complementary services, including central settlement of payment obligations, electronic novation and affirmation, portfolio compression and reconciliation, and collateral.


Systemically important Financial Market Infrastructures (S-FMI)

In April 2012, the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) published the standards report Principles for financial market infrastructures (PFMIs). The new standards replaced the three existing sets of international standards set out in the Core principles for systemically important payment systems (CPSS, (2001)); the Recommendations for securities settlement systems (CPSS-IOSCO, (2001)); and the Recommendations for central counterparties (CPSS-IOSCO, (2004)). The new standards (called principles) are designed to ensure that the essential infrastructure supporting global financial markets is even more robust and thus even better placed to withstand financial shocks than at present. Principles for financial market infrastructures contain a single, comprehensive set of 24 principles designed to apply to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively called financial market infrastructures or FMIs). These FMIs collectively record, clear and settle transactions in financial markets. Financial Market Infrastructures (FMIs) that are determined by national authorities to be systemically important are expected to observe these principles.

As against Systemically important financial Institutions (SIFIs), the concept of S-FMIs focuses on infrastructure service providers like stock exchanges, depositories or clearing corporations, whereas SIFIs would refer to individual mutual funds or banks or some such individual service providers.


S-FMIs in India

Though the expression “Financial Market Infrastructure” is not specifically defined in the Payment and Settlement Systems (PSS) Act, the definition of payment systems in the PSS Act includes all categories of FMIs as indicated in the PFMI report except for the Trade Repository.

An authorized payment system would be categorised as an FMI as and when it reaches systemic importance which could be based on various parameters such as (i) volume and value of transactions; (ii) share in the overall payment systems; (iii) markets in which it is operating; (iv) degree of interconnectedness and interdependencies; (v) criticality in terms of concentration of payment activities etc. The Reserve Bank maintains a separate list of authorized payment systems which are declared as FMIs and are made public. As in June 2017, its list includes, Real Time Gross Settlement System (RTGS), Securities Settlement Systems (SSS), Clearing Corporation of India Ltd (CCIL) and Negotiated Dealing System- Order Matching (NDS-OM). More details may be seen here.

SEBI vide its circular dated September 04, 2013 clarified that SEBI as a member of IOSCO is committed to the adoption and implementation of the new CPSS-IOSCO standards of PFMIs in its regulatory functions of oversight, supervision and governance of the key financial market infrastructures under its purview. SEBI clarified that the following Depositories and Clearing Corporations regulated by SEBI are FMIs and would be required to comply with the PFMIs specified by CPSS-IOSCO as applicable to them.


Clearing Corporations

a) Indian Clearing Corporation Ltd. (ICCL)

b) MCX-SX Clearing Corporation Ltd. (MCX-SXCCL)

c) National Securities Clearing Corporation Ltd. (NSCCL)

(In India, stock / securities exchanges have separated out the clearing function to independent entities called clearing corporations)


Depositories

d) a. Central Depository Services Ltd. (CDSL) e) b. National Securities Depository Ltd (NSDL)


On 16 December 2016 SEBI declared the two prominent national commodity exchanges - National Commodity & Derivatives Exchange Limited (NCDEX) and Multi Commodity Exchange of India Limited (MCX), as systemically important Financial Market Infrastructure (FMIs). They are in the process of complying with the Principles for FMIs (PFMIs) specified by CPSS-IOSCO. Commodity derivatives exchanges carry out clearing and settlement processes in-house. Hence, commodity exchanges are identified as S-FMIs while stock exchanges are not. However, SEBI has advised them to separate out clearing operations to a separate legal entity over a period of time.


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