28 September 2012

EBF: TARGET Working Group response to the CPSS/IOSCO Consultative Report on Recovery and Resolution of Financial Market Infrastructures

The TARGET Working Group represents the European payments industry in discussions with the ECB/Eurosystem on issues relating to the TARGET 2 payment system. Remarks are divided into two sections: general remarks and detailed comments on the report.

Whilst the unique nature of FMIs is implied in the report, it is not entirely clear whether the authors believe that continuity of FMI services should be the overriding objective or whether they envisage more of a parallel with resolution of a financial institution in difficulties. It is strongly recommended that the report states clearly that continuity of FMI services should be the overriding objective with the various resolution procedures described being an option for achieving this.

Having said this, the TARGET Working Group broadly agrees with the comment in the covering note that all types of FMIs should generally be subject to regimes and strategies for recovery and resolution. However, a significant number of FMIs, particularly RTGS payment systems, are owned and operated by central banks but the TARGET Working Group has been informed by the European Central Bank that CB owned FMIs are expected to be exempt from the recovery and resolution requirements. If this is correct, it is important that it is made clear in publicly available documentation and also that Note 2 in the Consultative Report is amended accordingly.

It is recognised that whilst like any other corporate body, privately owned FMIs will be subject to applicable insolvency and associated legal provisions, such provisions may not be applicable to public authorities including central banks. Bearing in mind the need to preserve the continuity of the FMI’s critical operations and services and to minimise systemic disruption, it is suggested that resolution of issues affecting CB owned and operated FMIs, which may be addressed by resolution procedures in the case of privately owned FMIs, should be clarified in the report.

Even in the case of sovereign default of the country in which a payment system is located, a central bank operating a payment system using the currency of its own country would normally still be able to function and operate domestic payment systems. However, in such circumstances, the CB should also be required to provide local currency to facilitate the operation of privately owned FMIs. For the purpose of this paper war, armed hostilities or major civil unrest which prevent the operation of key infrastructure including payment systems has been ignored. Conversely, a factor which can affect both publicly and privately owned payment systems is where they are either not using the currency of the country in which they are located or are possibly using a currency shared with other countries. In such a case, it is likely that privately owned systems would still be subject to applicable resolution procedures. However, although a central bank owned system may still exist, it would no longer necessarily be in a position to provide an effective service. In such circumstances it is not clear what powers could be given to the relevant authorities in order to maintain a payment system’s critical services necessary to maintain stability.

With one important exception, the TARGET Working Group believes the summary of the KAs provided in the annex is sufficiently detailed to support the development of recovery and resolution regimes for FMIs. The exception relates to FMIs operated by central banks where further clarification on how they should be interpreted would be welcome. Subject to the opt-outs recognised by the Commentary, the TARGET Working Group considers that all the KAs may be applicable to all types of FMIs although in practice the degree of applicability will differ.

It is undoubtedly true that resolution and recovery will be much easier if an FMI’s obligations and liabilities are unambiguous and not subject to the possibility of dispute. In this connection, it is considered to be particularly important that an FMI’s responsibilities under tiered participation arrangements are clearly stated and, where appropriate, backed by legally binding contracts whether by means of adherence to the FMI’s rules or a separate contract.

Full comments

© EBF