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Effective Oversight of Financial Market Infrastructures

10 -13 September 2013
Course Chairman: Päivi Heikkinen, Head of Oversight, Market Infrastructure Division, Bank of Finland


Tuesday 10 September
The new framework for oversight

The CPSS-IOSCO "Disclosure framework for financial market infrastructures"
Ron Berndsen, Head of Oversight, The Netherlands Bank

December 2012 saw the publication of the disclosure framework and assessment methodology for financial market infrastructures, designed to promote the observance of the principles and responsibilities set forth in the previous report. The disclosure framework is intended to assist in the transparency, risk management and operating structure of the FMI's and provide market participants with a comprehensive understanding of its role. In this session the speaker will discuss the disclosure framework and provide updates on its implementation.

Financial market infrastructures: a warehouse perspective
Ron Berndsen

In this session, the concept of a financial market infrastructure is explained using a multi-storey warehouse as a metaphor. In the warehouse the payment flows and clearing & settlement of securities and derivatives are processed on a macroeconomic scale. Also, the interdependencies between FMIs domestic and cross-border, through which operational and financial risks can spread, are highlighted. This session will draw out the changes the oversight function has had to respond to in light of lessons learned from the financial crisis.

Governance: scheme ownership and operation
Paul Anning, Partner and Head of Financial Institutions Group, Osborne Clarke

The past decade has seen a revolution in retail payments with the separation of the ownership and operation of payment schemes. In the UK, at the heart of this new model of governance sits the Payment Council, an industry body charged with formulating the strategy for UK payments. Similarly, the Canadian Payments Association is tasked with setting an efficient framework for the settling and clearing of retail payments within their jurisdiction. In this session the two expert speakers will debate the development of the mechanics of retail payment governance and invite the group to assess the impact the change has had on the market, service providers and customers.

Wednesday 11 September
Large-value systems: Resilience and efficiency

Foreign exchange: are risks being managed?
James Sharpe, Senior Manager, Foreign Exchange for a leading private bank and author of ‘Foreign Exchange: The Complete Deal'

The foreign exchange (FX) market has made significant progress into reducing the risks related to settling the majority of interbank foreign exchange transactions, however many uncertainties still remain: - has settlement risk been comprehensively mitigated? What of liquidity and credit risks? The session will focus on the recent publication of the updated supervisory guidance for managing risks associated with foreign exchange transactions. The speaker will discuss in detail the new guidance and its impact on markets, participants and overseers.

Effective liquidity saving systems
Speaker to be confirmed

The crisis has placed liquidity at the top of the regulatory agendas. At the same time markets and regulators alike are raising the collateral bar both in terms of quality and amounts. It is essential therefore that market infrastructures are designed and operated to manage liquidity efficiently and mitigate liquidity risk effectively within a system. This session will focus on the ways in which different liquidity saving features can tackle this trade off drawing on specific examples from liquidity-saving mechanisms already in place while also providing a private sector user perspective.

Lessons learnt from OTC infrastructure
Richard Heckinger, Vice President and Senior Policy Advisor, Financial Markets Group, Federal Reserve Bank of Chicago

In 2009, the G20 agreed that OTC derivatives should be centrally cleared and reported to a repository by the end of 2012. The agreement resulted from the financial crisis and the systemic problems caused by the lack of regulation in the OTC market. Since 2009, work has begun in the United States, Europe and Japan on clearing solutions and continues today. This session will discuss these developments as well as consider questions of governance, ownership, competition and oversight for this important new infrastructure. More broadly the group will debate what those working in oversight can take from OTC derivatives and their debate over infrastructure.

Operational issues and oversight challenges of a hybrid system
Ricardo Medina-Alverez, Director, Payment Systems Department, Bank of Mexico

Recent years have seen a resurgence in "hybrid" payments systems. Today, several central banks operate and oversee these real-time systems, which typically processes almost all large-value payments as well as low-value credit transfers between banks. The benefits of such a system are clear: lower cost of liquidity together with the reduced settlement risk. However, operating such a complex system brings with it a unique set of challenges, notably on access, pricing and settlement priority. Mexico is one such country that has moved to a hybrid system, known as SPEI, which settles around 300,000 transactions a day (2010) and has both bank and non-bank participants. In this session, the speaker, from the Bank of Mexico, will explain the thinking behind the move to this system, how it operates, the work done with the banking sector and the particular oversight issues it presents. He will also share with the group a newly developed methodology to evaluate the system's own disaster recovery plans as well as business continuity and recovery plans of the system's participants.

Workshop: Crisis management and systemic risk
Päivi Heikkinen, Head of Oversight, Market Infrastructure Division, Bank of Finland

FMIs are of fundamental importance to the economy. Almost every financial institution uses FMIs on a daily basis. In this vein, the core aim of the recent oversight developments is to contain infrastructural systemic risk. If these developments are not properly implemented, the shocks felt through the rest of the financial system could be catastrophic. . How can overseers ensure positive interactions with other supervisors and international standards? How do the new MFIs principles interact with macroprudential policy? In this session the chairman will lead a group workshop designed to allow delegates to develop a clear understanding of the relationship between FMIs and systemic risk.

Thursday 12 September
Retail systems: Opportunities and challenges

Immediate funds transfer: making real-time retail payments a reality
Nick Senechal, Strategy Lead, VocaLink and Ricardo Medina-Alverez, Director, Payment Systems Department, Bank of Mexico

Payment systems have traditionally been separated into wholesale and retail silos, with the former settling in real time in central bank money and the latter settling on a net basis over a number of days in commercial bank money. Recent years, however, have seen this distinction blur with the introduction of systems for near-real-time or immediate funds transfer. Five years ago the UK introduced the Faster Payments Service initiative to reduce payment times for small value transactions. In Mexico, the central bank implemented the Interbank Electronic Payment System that combines a real time and a multilateral settlement system. This system has a low operational cost for banks and it does not impose a transaction amount limit, blurring the line between a large and a small value payment system. This session will focus on the two contrasting approaches taken in the UK and Mexico.

Mobile phones and payments: still on hold?
Päivi Heikkinen

The use of mobile phones is revolutionising how payments are made and the way consumers manage their money broadly. Today, the technology is there to enable payments to be made in real time from personal mobile devices. Yet, while the technology exists, the introduction and take-up of mobile payments has been patchy at best. Why is this the case? What are the risks and what are the opportunities? What role should authorities be playing here? This session, led by an experienced payment system overseer, will look to draw out experiences from the group to arrive at an idea of emerging good practice.

Cards: the emerging framework of oversight and tackling online fraud
Prof. Dr. Georg Borges, School of Law, Ruhr University and Stephanie Czák, Oversight Division, European Central Bank

As a significant proportion of payments in most economies, card payments have the potential to impact on financial stability and monetary policy and, more broadly, public confidence in payment instruments as online banking fraud threatens the integrity of retail systems. It is for these reasons that central banks are increasingly adopting a more active stance towards oversight and intervention in the market. This session will look at the risks the sector faces, the framework and tools central banks are using to oversee this sector, and the particular complications the international nature of the sector brings. Tackling online fraud has become a key priority for overseers and many security failures are at their core due to wrong incentives rather than technical failures. This session will focus on how to scrutinise these when considering threats to systems used every day by millions of people.

Friday 13 September
Oversight: Implementation and assessment

Case study: oversight in practice
Bjørn Bakke, Assistant Director, Financial Infrastructure Unit, Norges Bank

This session builds on the discussion of the previous days to focus in on the practicalities and challenges of oversight. The speaker, from the Norges Bank, will set out an example of the framework, data and tools required to assess systems before discussing how best to communicate findings. Points for discussion will include how the financial crisis has impacted the function, as well as the differences in overseeing interbank and retail systems, and the challenges of meeting multiple and occasionally conflicting aims.

Workshop: building an oversight framework
Led by the chairman

In this session, delegates will be invited to develop an oversight framework for a system of their choosing and take the results back to their home institutions. The framework will focus on how those working within central banks should implement effective oversight for a specific financial market infrastructure. Participants will be challenged with building an oversight framework that will capture key elements including payment, clearing and settlement. On the basis of a template provided, participants will be invited to adapt it to suit their own jurisdiction and circumstances

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