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Government Sets New Rules for Financial Market Infrastructures

The government has introduced new standards for financial market infrastructures (FMIs) to ensure the stability and resilience of the country’s financial system. The new rules aim to reduce risk, improve governance, and enhance transparency in FMIs.

Key Requirements

According to the new standards, FMIs must:

  • Invest in a diversified portfolio of securities that meet certain criteria
    • Government-issued securities
    • Bank acceptances
    • Commercial paper
    • Corporate bonds
    • Asset-backed securities sponsored by prudentially regulated financial institutions and backed by high-quality assets
  • Reduce concentration risk by limiting investments to:
    • No more than 20% of their total portfolio in any combination of municipal and private sector securities
    • No more than 5% of the total portfolio in a single issuer
  • Mitigate specific wrong-way risk by inversely relating their investments to market events that increase the likelihood of those assets being required
  • Limit investments:
    • To no more than 10% of their portfolio in financial sector securities
    • Not allowed to invest in the securities of their own affiliates

New Standards for Prominent Payment Systems

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The government has also introduced new standards for prominent payment systems (PPS), which are designed to be less stringent than those for systemic FMIs. PPSs must:

  • Meet certain criteria, including:
    • Having a significant impact on the financial system
    • Being critical to the functioning of the economy
  • Have:
    • A legal basis
    • A governance structure
    • A framework for managing risks
    • Procedures in place for:
      • Credit risk management
      • Liquidity risk management
      • Settlement finality
      • Default management
      • General business and operational risk management

Conclusion

The government’s new standards for FMIs aim to promote the stability and resilience of the country’s financial system by reducing risk, improving governance, and enhancing transparency. The new rules apply to different types of systemic FMIs and prominent payment systems, and are designed to be proportionate to the level of risk involved.

For more information on the government’s approach to adopting the principles for financial market infrastructures, please refer to:

  • Bank of Canada’s Financial System Review (December 2012)
  • Additional guidelines related to bank oversight activities under the Payment Clearing and Settlement Act
  • CPSS-IOSCO Principles for financial market infrastructures
  • Criteria and risk-management standards for prominent payment systems