Financial market utilities

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See also CDS clearing, DTCC, liquidity, Markit, standards and trading book risk.


FSOC seeks comment on systemic risk of FMU's

On November 23, 2010, the Financial Stability Oversight Council (“FSOC”) issued an advance notice of proposed rulemaking (the “ANPR”) on the designation of certain financial market utilities as systemically important. The Dodd-Frank Act (“DFA”) defines a “financial market utility” as “any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person,” with certain exclusions for designated contract markets, national securities exchanges and some others. The ANPR notes that financial market utilities perform critical functions in the financial system and that some utilities may require designation as systemically important. Payment, clearing or settlement activities performed by financial institutions are not covered by the ANPR and will be addressed separately.

In considering whether a financial market utility should be designated as systemically important, the DFA requires the FSOC to consider:

  1. The aggregate monetary value of transactions processed by the financial market utility;
  2. The aggregate exposure of the financial market utility to its counterparties;
  3. The relationship, interdependencies, or other interactions of the financial market utility with other financial market utilities or payment, clearing or settlement activities;
  4. The effect that the failure of or a disruption to the financial market utility would have on critical markets, financial institutions, or the broader financial system; and
  5. Any other factors that the FSOC deems appropriate.

The ANPR seeks comment on the criteria the FSOC should use in meeting the DFA requirements. Several questions included in the ANPR invite public comment on the types of information that should be used in the designation process, objective measures that may be considered in determining systemic importance, and means to assess relationships and interdependencies of financial market utilities. Comments on the ANPR are due 30 days after publication in the Federal Register.

Title VIII – Payment, Clearing, and Settlement Supervision Act of 2009

Title VIII – Payment, Clearing, and Settlement Supervision Act of 2009

In order to mitigate systemic risk in the financial system and promote financial stability, this Act provides the Board of Governors of the Federal Reserve System (“Board”) with an enhanced role in supervising risk management standards for systemically important financial market utilities and for systemically important payment, clearing, and settlement activities conducted by financial institutions.

  • Section 804. Designation of Systemic Importance

This section authorizes the Board to designate a financial market utility or a payment, clearing, or settlement activity as systemically important, and establishes procedures and criteria for making and rescinding such a designation. Criteria for designation and rescission of designation include the aggregate monetary value of transactions processed and the effect that a failure of a financial market utility or payment, clearing, or settlement activity would have on the financial system. The Board must consult with the Financial Services Oversight Council and the relevant supervisory agency before making a designation.

  • Section 805. Standards for Systemically Important Financial Market Utilities and Payment, Clearing, or Settlement Activities

This section authorizes the Board, in consultation with the Financial Services Oversight Council, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, to prescribe risk management standards governing the operations of designated financial market utilities and the conduct of designated payment, clearing, and settlement activities by financial institutions. This section also establishes the objectives, principles, and scope of such standards.

SEC & CFTC consider clearinghouse ownership caps

  • Source: [SEC and CFTC Consider if Lynch-Type Ownership Caps Can Mitigate Conflicts of Interest] Jim Hamilton's World of Securities Regulation, September 1, 2010

There was congressional concern throughout the process of passing Dodd-Frank that, with derivatives trading required to be conducted through clearinghouses, large financial institutions would own and control the clearinghouses and effectively set rules for their own derivatives deals. The Lynch Amendment in the bill the House passed last December would have prevented large financial institutions and major swap participants from taking over these new clearinghouses by imposing a 20-percent-voting-stake limitation on ownership interest in those institutions and the governance of the clearing and trading facilities.

The Lynch Amendment specifically provided that these restricted owners, which are defined as swap dealers, security-based swap dealers, major swap participants and major security-based swap participants, cannot own more than a 20 percent voting stake in derivatives-clearing organization, a swap-execution facility, or a board of trade. Further, the rules of the clearing organization, swap-execution facility and board of trade must provide that a majority of the directors cannot be associated with a restricted owner.

The Lynch Amendment was not in the final legislation. Instead, in provisions some at the roundtable called Lynch Lite, Sections 726 and 765, the CFTC and SEC must adopt rules on conflicts of interest. Specifically, for example, the SEC may include numerical limits on the control of clearing agencies and security-based swap execution facilities. In addition, in a colloquy with Rep. Lynch, House Financial Services Chair Barney Frank agreed that Sections 726 and 765 of the Dodd-Frank Act require the SEC and CFTC to adopt rules eliminating the conflicts of interest arising from the control of clearing and trading facilities by entities such as swap dealers, security-based swap dealers, and major swap and security-based swap participants. SEC and CFTC adoption of strong conflict of interest rules on control and governance of clearing and trading facilities is mandatory. (Cong. Record, June 30, 2010, H5217).

At the recent SEC-CFTC roundtable, CFTC staffers asked if an ownership cap like the Lynch Amendment would mitigate the actual or potential conflicts of interest. Hal Scott of Harvard Law School and Director of the Committee on Capital Market Regulation, noted that the committee has opposed ownership restrictions based on its reasoning that they are counterproductive in getting needed capital liquidity into the clearinghouses which, he believes, should be the central focus in terms of systemic risk. In his view, the potential conflicts should be generally handled by board governance rules and not by ownership restrictions.

But Michael Greenberger, former CFTC Director of Trading and Markets, supports ownership restrictions. In his view, the reason the Lynch Amendment, put a 20 percent cap on ownership was a concern that then existing clearinghouses were setting their requirements for membership unreasonably high, in a discriminatory manner. If they set their membership so high, he reasoned, they are going to sift away the strongest members of the swaps market and the other clearing facilities are going to be left with everyone else. This is not open and fair access, said the former CFTC official, and it will create systemic risk in the other clearing facilities that have to take the leftovers from these clearing organizations. He pointed out that the Lynch Light provisions are extraordinarily broad. They empower the SEC and CFTC to mandate ownership restrictions in. Jason Kastner, Vice Chair of the Swaps and Derivatives Association said that SDMA strongly supports the Lynch Light provision such that no economically incentivized, monopolistic power can control and restrict access.

Roger Liddel, CEO, LCH ClearNet Group, said that, with established organizations, the concept of some combination of ownership limits and voting caps makes sense. But Lynn Martin, CEO, NYSE Euronext, said that the exchange opposes specific ownership limitations. The exchange thinks that a more effective manner in controlling conflicts of interest is around good governance structure at the board level. Thus, the exchange believes that a more balanced board structure, a more balanced governance structure, is the proper way to handle or potentially mitigate conflicts of interest.

Heather Slavkin of the AFL-CIO said that people who support governance as opposed to real caps on ownership are arguing in favor of the status quo. In her view, the Lynch Amendment that was passed in the House legislation and the Lynch Light version that was passed by the entire Congress signaled a congressional intent to create real change in recognition of the fact that the current system is broken.

Chicago Fed on “Just-in-time” liquidity

"Financial market utilities ensure that clearing, settlement, and payments operations go smoothly. This article explores how these systems mitigate settlement risk, using precisely targeted “just-in-time” liquidity, and discusses the risks for financial stability implied by the increasing role of just-in-time liquidity in our financial markets.

Every day, trillions of dollars, euros, yen, and many other currencies flow among participants in markets for foreign currency, securities, and derivatives contracts.1 This vast flow of payments happens largely below the radar screen of most people, thanks to a collection of institutions known as financial market utilities (FMUs).

The basic function FMUs perform is simple. After a financial trade has been agreed upon, a mechanism must exist to convey the financial asset from seller to buyer and reciprocally to convey compensation from buyer to seller. FMUs provide this mechanism.

In particular, FMUs mitigate settlement risk (the risk that trades will not be settled or completed as expected) and the particular form of settlement risk known as counterparty credit risk (the risk that a party involved in a transaction might fail to deliver funds or securities as promised).

A key insight about FMU operations, which we discuss in detail, is that all of the key FMUs mitigate settlement risk through essentially the same mechanism: precisely targeted liquidity that requires the FMUs and their participants to make payments according to a tight within-day timetable. We refer to this as just-in-time liquidity: liquidity that must be available at a particular location, in a particular currency, and in a precise time frame measured not in days, but in hours or even minutes.

The need for just-in-time liquidity poses challenges for both FMUs and their participants. Financial market participants must be able to manage their liquidity requirements on an ongoing basis as their payment and settlement obligations fall due. FMUs, in turn, must be able to manage their liquidity requirements in the event a participant defaults. This liquidity-dependent structure for FMUs raises an important question for the stability of financial markets: Does this dependence on precisely timed liquidity actually make fi nancial markets more vulnerable to episodes when liquidity becomes less available? Put another way, do these FMUs succeed in reducing settlement risk only by increasing liquidity risk? In this Chicago Fed Letter, we describe the evolution of FMUs. Then we focus on certain key FMUs, describing the particular credit risk they are designed to mitigate and how they depend on just-in-time liquidity. Finally, we consider the risks for financial stability implied by the increasing role of just-in-time liquidity in our financial markets.

BIS's Committee on Payment and Settlement Systems

The Committee on Payment and Settlement Systems (CPSS) contributes to strengthening the financial market infrastructure through promoting sound and efficient payment and settlement systems.

It serves as a forum for central banks to monitor and analyse developments in domestic payment, settlement and clearing systems as well as in cross-border and multicurrency settlement schemes.

The CPSS undertakes specific studies in the field of payment and settlement systems at its own discretion or at the request of the G10 Governors. Working groups are set up as required. In recent years the Committee has developed relationships with other central banks, particularly those of emerging market economies, in order to extend its work outside the G10.

Through the publication of the:

the Committee has contributed to the set of standards, codes and best practices that are deemed essential for strengthening the financial architecture worldwide.

The Committee publishes various reports covering large-value funds transfer systems, securities settlement systems, settlement mechanisms for foreign exchange transactions, clearing arrangements for exchange-traded derivatives and retail payment instruments, including electronic money. The 'Red Book' on payment systems, which provides extensive information on the most important systems in the CPSS countries, is periodically revised and a statistical update of the data it contains is published each year.

Financial market infrastructures generally performed well during the recent financial crisis, and did much to help prevent the crisis becoming even more serious than it actually was. Nevertheless, the committees believe that there are lessons to be learned from the crisis and, indeed, from the experience of more normal operation in the years that have passed since the standards were originally issued. It thus seems timely to review the standards with a view to strengthening them where appropriate.

Robust financial market infrastructures make an essential contribution to financial stability by reducing what could otherwise be a major source of systemic risk. Moreover, insofar as they enable settlement to take place without significant counterparty risk, they also help markets to remain liquid even during times of financial stress.

The review will be led by representatives of the central banks that are members of the CPSS and those of the securities regulators that are members of the IOSCO Technical Committee. The International Monetary Fund and the World Bank are also participating in the review. The review is part of the Financial Stability Board's work to reduce the risks that arise from interconnectedness in the financial system.

The committees will coordinate with other relevant authorities and communicate with the industry, as appropriate, as the work progresses. They aim to issue a draft of all the revised standards for public consultation by early 2011.

Separately, as announced in the press release on 20 July 2009, the CPSS and the Technical Committee of IOSCO are already in the process of providing guidance on how the 2004 Recommendations for central counterparties should be applied to CCPs handling OTC derivatives. The guidance will also cover other relevant infrastructures handling OTC derivatives such as trade repositories. This aspect of the work has been put on a fast track because of the new CCPs for OTC derivatives and trade repositories that have recently started, or are about to start, operating. A consultative document on the guidance will be issued within the next few months. This new guidance will not entail amendments to the existing recommendations for CCPs but will of course be incorporated into the general review of the standards that has now begun.

BOE/FSA joint memo for payment systems


This Memorandum of Understanding (MoU) is intended to help facilitate effective communication and co-operation between the Bank of England (‘the Bank’) and the Financial Services Authority (‘the FSA’) in respect of the oversight of payment systems.

Roles and Responsibilities

Under the Financial Services and Markets Act 2000 (FSMA), the FSA has statutory responsibilities for regulation of firms with permission under Part 4, and, under Part 18, the recognition and supervision of Recognised Bodies (RBs) (together, “FSA-regulated organisations”).

The Bank has statutory responsibility for the oversight of payment systems of systemic or system wide importance that have been ‘recognised’ under Part 5 of the Banking Act 2009. The Bank also provides settlement services and facilities for certain payment systems.

Some FSA-regulated organisations have payment systems embedded within them (“embedded payment systems”). Where such a payment system is recognised under the Banking Act 2009, the FSA and Bank both have regulatory functions.

The Bank also acts as the designating authority for stand-alone payment systems under the Financial Markets and Insolvency (Settlement Finality) Regulations 19991 (the 'Settlement Finality Regulations'), while the FSA is the designating authority for RBs, including the payment systems embedded within them.

Under the Payment Services Regulations 20092, the FSA is also the competent authority for Authorised and Registered Payment Institutions (firms providing payment services). The Regulations implement Directive 2007/64/EC of the European Parliament and of the Council on payment services in the internal market.3

The Bank does not have responsibilities for consumer protection in this area.

Global standards group formed for credit transfers

"The body says its main purpose is to provide business rules, standards and operating procedures to improve non-urgent cross border credit transfers based on the ISO 20022 message standard by establishing a contractual framework.

At its inaugural meeting in London the IPFA has elected a board of directors - consisting of representatives from six banking institutions and three clearing houses - for a three year term.

Arthur Cousins of Standard Bank of South Africa was elected chairman with Equens' Michael Steinbach named vice-chairman.

April 2010 will see the commencement of live traffic between two IPFA members when the The Federal Reserve Bank in Atlanta and Equens will start with exchanging both USD and EUR payments between the USA and Europe.

Meanwhile, several IPFA members have begun planning for the inclusion, into the framework, of the Brazilian, Canadian, Mexican and South African currencies over the next two years.

The full list of members is ABN Amro, Canadian Payments Association, CamaraInterbancariade Pagamentos(CIP), Clear2Pay, Equens, Eurogiro, Federal Reserve Bank, Fifth Third Bank, JP Morgan, Nacha, PayPro, PNC, SECB Swiss Euro Clearing Bank, Standard Bank of South Africa, Standard Chartered Bank, Swift, The Clearing House, US Bank, VocaLink, Wells Fargo/Wachovia, World Savings Banks Institute and ZionsBancorp."

LCH begins backing interest rate swaps for bank clients

LCH.Clearnet Ltd., Europe’s largest clearinghouse, began guaranteeing trades today between banks and their clients in the $342 trillion interest-rate swaps market.

The London-based clearinghouse’s SwapClear Client Clearing Service is the first to back trades between banks and hedge funds, asset managers and pension funds. SwapClear has been guaranteeing interest-rate swaps between banks since 1999 and accounts for more than half that market. About $146 trillion in notional interest swaps between banks and clients that isn’t cleared could be processed by its new service, LCH.Clearnet said in a statement.

Regulators in the U.S. and Europe are pushing the financial industry to improve the over-the-counter derivatives market structure after last year’s bankruptcy of Lehman Brothers Holdings Inc., one of the largest OTC dealers, froze trading and cost investors hundreds of millions of dollars. Clearing interest swaps may generate $190 million in annual revenue by 2013, according to Morgan Stanley.

“It’s a very significant market event to get clearing extended out to a wider audience,” Chris Willcox, global head of rates trading at JPMorgan Chase & Co. in London, said in a telephone interview. “At the core of the offering is the robust and tested default management process, which has been through the flames and proven itself to be successful.”

CQS-Barclays Trade

CQS, an asset manager based in Guernsey, and Barclays Capital cleared a trade via the new service this morning, according to the bank.

“We will continue to support the various initiatives that are being developed in the coming months,” Scott Carpenter, head of operations at CQS, said in an e-mailed statement.

LCH.Clearnet settled $9 trillion in interest-rate swaps held by Lehman Brothers when it defaulted last year, according to the clearinghouse.

Investors use interest-rate swaps to hedge against or speculate on moves in interest rates. The contracts pay one counterparty a fixed rate and the other counterparty a floating rate. The trades often accompany the sale of fixed-rate bonds when sellers of debt want to swap to pay floating rates.

Clearinghouses, which are capitalized by their members, increase stability in over-the-counter derivatives markets because they lessen the effect of a default by sharing that risk among the membership and use daily margining procedures to keep accounts current. They also allow regulators to see market positions and prices.

‘Natural Evolution’

The expansion to allow clients to clear trades was “a natural evolution,” said Harry Harrison, head of global rates trading at Barclays Capital in New York. “Clearly, the events of the last two years accelerated the process, but we were going to get here in any case.”

LCH.Clearnet, majority-owned by banks, is used as a so- called utility by its owners to reduce counterparty default risk in trading interest swaps. The clearinghouse charges an annual fee to its member banks that equates to about 2.3 cents per $100,000 notional value for each side of a trade, according Morgan Stanley analysts led by Celeste Mellet Brown.

Trades between banks and their clients will “see the strongest competition among exchanges for clearing,” Brown wrote in a Dec. 15 note to clients. “We think it will be difficult for any clearinghouse to compete with LCH.Clearnet’s utility model in clearing of dealer-to-dealer interest-rate swaps.”

About 56 percent of interest-rate swaps are between banks and hedge funds, asset managers or pension funds, Brown wrote.

Legislation Pending

Dealers and investors in the OTC derivatives market face legislation working its way through Congress that would require most trading to be backed by clearinghouses. The failure of Lehman and near bankruptcy of American International Group Inc. in September 2008 triggered concerns that the private unregulated market threatened the entire financial system because no one could easily determine how interconnected banks had become.

“Some regulatory pressure” prompted the move to offer buyside clearing, Harrison said, though “not as much as in credit-default swaps, where no central clearing counterparty previously existed.”

Competition among clearinghouses to process interest swaps will depend on what other contracts can be offset to reduce margin payments and how the service is priced, Harrison said. “The clients want to be educated on all the potential avenues” for clearing, he said. “You will see other potential central clearing counterparties spring up.”

‘Shadow Clearing’

The International Derivatives Clearing Group LLC, based in New York, is also seeking to guarantee interest-rate swaps with its clearinghouse. IDCG, controlled by Nasdaq OMX Group Inc., has run “shadow-clearing” of more than $3 trillion for 20 market users like hedge funds and corporations, said John Shay, founder and head of sales and marketing. Shadow clearing shows investors and banks how their operating costs could be reduced by clearing trades.

“This does not necessarily translate to actual clearing volumes” Morgan Stanley’s Brown wrote about IDCG.

SwapClear Client Clearing is supported by Banca IMI SpA, Barclays Plc, BNP Paribas SA, Bank of America Corp., Calyon, Citigroup Inc., Credit Suisse AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc, JPMorgan Chase, Morgan Stanley, Nomura Holdings Inc., Royal Bank of Scotland Plc, Societe Generale SA and UBS AG, LCH.Clearnet said in the statement.

Many bank clients are waiting to see how LCH.Clearnet clearing operates before using the service, Harrison said. “LCH has a proven track record here,” he said. “A robust central clearing counterparty is very good for the industry.”

CLS Bank to establish FX trade data repository

"Foreign exchange settlement outfit CLS Bank is to establish a trade data repository for the global FX market, in a move designed to head off regulatory pressure for more transparency in the over-the-counter currency markets.

The provision of trade data repositories that can ensure transparency of trading, achieve timely matching and confirmation, and provide full information on the size and structure of the market in one venue is attracting heightened regulatory interest.

The need for such repositories is currently being prescribed for over-the-counter derivative markets, with pressure for similar initiatives expected to be applied to participants in the global foreign exchange industry.

CLS Bank currently settles nearly three quarters of available eligible market trades. It says the storage of all past, present and future dated FX trades already makes CLS the defacto industry repository.

CLS says it is working with member banks to further extend coverage and refine the reporting capabilities needed to satisfy any forthcoming regulatory requirements.

Jeff Feig, head of G-10 foreign exchange, Citi, comments: "The provision of trade data repositories is being developed across various OTC markets, but in the case of FX, we have CLS already in place to provide this service. It makes sense for CLS to offer to extend its data services in this way as they have extensive coverage of the market already."

DTCC names chief systemic risk officer

The Depository Trust & Clearing Corporation (DTCC) has appointed Anne Noonan, a founding member of CLS Bank International, to the new position of managing director and chief systemic risk officer. Reporting to the DTCC's general councel, Larry Thompson, Noonan will oversee the management of the systemic risk framework for the group and its subsidiaries in a bid to identify and assess the implications for existing and new products, activities, processes and systems.

The DTCC says she will work with the direct regulators of its subsidiaries - the Securities and Exchange Commission, the Federal Reserve Bank of New York and the New York State Banking Department.

She will also work with the group's chief risk officer, Douglas George, to review DTCC enterprise-wide risk management methodology.

Noonan joins from CLS Bank International - which she helped to found - in New York, where she has been executive vice president and global head of risk management and regulatory affairs since 1999. Prior to that, she spent over 20 years at JP Morgan, holding a variety of positions.

Donald Donahue, chairman and CEO, DTCC, says: "DTCC has a very strong track record for safeguarding the industry during times of crisis - and in working with regulators in the US and globally. However, the experience of the financial crisis over the past two years has cast a very bright light on the risks that exist at the level of the financial services system as a whole. We are delighted to have someone with Nan's extensive background in risk management join DTCC."

Finextra verdict Smart move by the DTCC. The appointment of a chief 'systemic' risk officer should appease regulators and demonstrate the company's awareness of its responsibilities as a critical market utility. It's a new term on us, but expect a rash of similar appointments at other "systemically-important" institutions over the coming months.

Bloomberg open sources securities symbology

Subscriptions to the Bloomberg Professional service came through the Bloomberg terminal, which acted (and acts) as the proprietary gateway to the data. Each rents for $1,500 a month. No volume discounts.

Now, rather quietly, Bloomberg LLP is giving away the keys to navigating, retrieving and using information from its data services for free.

Earlier this month, it launched a Web site that goes by the stiff name of BSYM ( As in Bloomberg Symbology.

The site allows, free of charge, any individual to look up the multicharacter codes used in the Bloomberg Professional and other Bloomberg data products to identify almost any security.

You can't yet download a complete set of Bloomberg identifiers. But you can download batches for stocks in one sector of the economy or for a particular "subclass" of asset.

These identifiers are needed for front office functions such as data analysis, pricing and risk evaluation as well as back office functions such as clearing, settlement and transaction reporting.

To date, any substantive provider of market data develops its own symbology-its own sequence of numbers and characters-to identify stocks, options, bonds, puts, calls, etc. The better to tie you to its array of services for delivering detailed information about each instrument.

If you didn't want to be tied to those unique identifiers, then you developed ... your own symbology. If you are big enough, on your own.

But now Bloomberg identifiers can be adopted by the world at large.

In a fashion, Bloomberg is stepping up to possibly become the online financial world's equivalent of the Internet Corporation for Assigned Names and Numbers. That's the outfit that maintains and updates unique identifying codes that allow any computer to find another computer.

In this case, Bloomberg pledges to constantly update codes that will allow any computer to find data on any financial instrument, from any other computer.

"Bloomberg will continue to update, build, and administer its identifiers to ensure they continue to serve as effective symbols for the broad uses required in today's financial markets, the site says.

It's interesting this launch of the BSYM site comes in the wake of a declaration by the European Commission that it was initiating a probe of Bloomberg data rival Thomson Reuters.

The EC's point? That Reuters Instrument Codes might unfairly restrict competition. If your trading or asset management firm has built analytical tools and operations around those codes, re-mapping to some other set of codes and moving your business to some other supplier of data can be prohibitive.

And it's doubly interesting to note that the move may only be the start of a new "open" Bloomberg platform. You can, it says here, expect to see more free-dom-so to speak-from Bloomberg.

MSCI to buy RiskMetrics in $1.55bn deal

RiskMetrics, which provides risk analysis, financial research and corporate-governance services for investors, began as an internal function within JP Morgan in 1994 before being spun out as a separate company in 1998.

Speculation that it had put itself up for sale surfaced earlier this year, with MSCI touted as a possible bidder, along with Bloomberg, McGraw-Hill and Thomson Reuters.

MSCI was also understood to have been interested in bidding for Interactive Data and the Dow Jones index business before it was snapped up by CME Group last month.

It has now signed a definitive merger agreement with RiskMetrics that will create a merged entity boasting around $750 million of revenues and 2000 employees across 20 countries.

The cash and stock transaction is valued at $21.75 per share based on the MSCI's closing price of $29.98 per share on Friday. The offer consists of $16.35 in cash and 0.1802 shares of MSCI per share of RiskMetrics, a 16% premium on the Friday closing price.

MSCI says the deal will be financed by existing cash and proceeds of debt and the firm has received a commitment letter from Morgan Stanley Senior Funding for senior secured credit facilities worth $1.375 billion.

Henry Fernandez, chairman and CEO, MSCI, says: "The combined scale, complementary product capabilities and clients and extensive geographic footprint of MSCI and RiskMetrics will drive significant cost-saving synergies and revenue opportunities."

Ethan Berman, CEO, RiskMetrics, adds: "Managing risk is critically important in today's financial markets. Our clients will greatly benefit from the combined company's expanded product range and enhanced risk management offerings."

The deal is expected to close in third quarter, subject to customary closing conditions, including approval by the shareholders of RiskMetrics, the receipt by MSCI of the proceeds of the debt financing for the transaction and antitrust clearance.

British banks to phase out cheques

After more than three centuries, the humble cheque is set to become a historic relic after British banks voted to phase it out in favour of more modern payment methods.

The board of the UK Payments Council, the body for setting payment strategy in Britain, agreed to set a target date of October 31, 2018 for winding up the cheque clearing system. The board is largely made up of Britain's leading banks.

"There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement," Paul Smee, the council chief executive, said in a statement.

The use of cheques has fallen drastically in the past 10 years as more consumers transfer money electronically, by direct debit or with debit and credit cards.

Last year, around 3.8 million cheques were written every day in Britain, compared to a peak of 10.9 million in 1990, the council said.

It costs about one pound to process every cheque.

"The next generation probably won't even have a chequebook," said Addy Frederick, a spokeswoman at the payments council.

But while many UK supermarkets, high street retailers and petrol stations have stopped accepting cheques, they are still a popular form of payment among elderly people, many of whom find the idea of using automated cash machines intimidating.

"Chip and pin is problematic for many older and housebound people and we know 6.4 million over 65s have never used the internet," said Vicky Smith, a spokeswoman for the charity Age Concern.

"Without cheques, we are very concerned people will be forced to keep large amounts of cash in their home, leaving them vulnerable to theft and financial abuse."

Harriet Harman, deputy leader of the ruling Labour Party, said the authorities must take care not to discriminate against the elderly in making their decision.

"We need to look to the future but make sure that older people don't suffer as a result," she told parliament.

The council said cheques would be phased out gradually, making sure consumers had access to user-friendly alternatives and that the needs of elderly and vulnerable groups were met. A review will take place in 2016 before cheques are finally abolished.

The Federation of Small Businesses said it was disappointed by the decision. "It's something that's going to impact heavily on small businesses and their customers," said spokeswoman Sophie Kummer.

Cheques have all but disappeared in high-tech countries like Sweden and Norway and their use is under review in Ireland, South Africa and Australia, Frederick at the council said.

The oldest surviving cheque in Britain was written in 1659, according to the council and made out for 400 pounds (equivalent to around 42,000 pounds today).

It was signed by Nicholas Vanacker, made payable to a Mr Delboe and drawn on Messrs Morris and Clayton, scriveners and bankers of the City of London.

In those days, cheques would have been exchanged informally in coffee houses. It was not until 1833 that the first clearing house was built in London to exchange cheques.

Australian oversight of market utilities

ASIC releases guidance on clearing and settlement facilities

ASIC today released regulatory guidance on its approach to the licensing and regulation of clearing and settlement (CS) facilities.

ASIC’s Regulatory Guide 211 Clearing and settlement facilities: Australian and overseas operators (RG 211) has been released in anticipation of more CS facilities seeking to operate in Australia. It responds to international regulatory developments promoting the use of central counterparty (CCP) clearing and settlement of over-the-counter (OTC) derivative transactions.

RG 211 provides guidance on:

  • when an Australian CS facility licence will be required;
  • how to apply for a CS facility licence; and
  • ASIC's approach to exemptions.

ASIC believes that more specific guidance on the approach we will take to the regulation of CS facilities will assist entities who provide, or who may want to provide, CS facilities in Australia.

A consistent and clear policy is appropriate to give prospective CS facility licence applicants guidance on what we are looking for in considering their applications, providing advice to the Minister and helping entities comply with their obligations after they obtain a licence.

RG 211 takes into account feedback from a variety of sources following a public consultation late last year (see Consultation Paper 120 Operators of clearing and settlement facilities). A feedback report on this consultation process, Report 194 Response to submissions on CP 120 Operators of clearing and settlement facilities (REP 194), has also been released today.


A CCP interposes itself between counterparties in financial transactions, becoming the buyer to the seller and the seller to the buyer. A well designed CCP, with appropriate risk management arrangements, reduces the risk of settlement failure faced by participants and contributes to the goal of financial stability.

A number of international supervisory bodies such as the Financial Stability Board, the International Organization of Securities Commissions and the Basel Committee on Banking Supervision have made recommendations for addressing the weaknesses that have produced the recent crisis and for strengthening the financial system going forward. One theme of those recommendations was to promote wider use of CCP clearing for OTC derivatives.

RG 211 responds to these international developments and consolidates ASIC's policy guidance on licensing and regulation of CS facilities in Australia. Some selective guidance about clearing and settlement was previously included in:

  • Regulatory Guide 54 Principles for cross border financial services regulation (RG 54);
  • Regulatory Guide 172 Australian market licences: Australian operators (RG 172)
  • Regulatory Guide 176 Licensing: Discretionary powers—wholesale foreign financial services providers (RG 176); and
  • Regulatory Guide 177 Australian market licences: Overseas operators s (RG 177); .

Under s820A of the Corporations Act, a CS facility, including a CCP clearing OTC derivatives, which operates in Australia must hold an Australian CS facility licence unless the CS facility is exempted from the requirement to do so by the Minister.

Currently, five licensed CS facilities are authorised to operate in Australia in accordance with Chapter 7 of the Corporations Act. They are the two clearing houses and the two settlement facilities of the ASX Group, and IMB Limited, which provides a CS facility to settle transactions in its own shares. No CSF licence exemptions have ever been granted.

Functions of the Reserve Bank of Australia's Payments System Board

The responsibilities of the Payments System Board are set out in the Reserve Bank Act 1959. In particular, the Act requires the Board to determine the Reserve Bank’s payments system policy so as to best contribute to:

  • controlling risk in the financial system;
  • promoting the efficiency of the payments system; and
  • promoting competition in the market for payment services, consistent with the overall

stability of the financial system.

In order to give effect to these responsibilities, the Bank has powers that are set out in two Acts:

  • the Payment Systems (Regulation) Act 1998 and
  • the Payment Systems and Netting Act 1998.

Under the Payment Systems (Regulation) Act the Bank has the power to designate payment systems and to set standards and access regimes in designated systems. The Act also sets out the matters that the Bank must take into account when using these powers.

The Payment Systems and Netting Act provides the Bank with the power to give legal certainty to certain settlement arrangements so as to ensure that risks of systemic disruptions from payment systems are minimised.

In addition, the Reserve Bank Act gives the Board responsibility for ensuring that clearing and settlement facilities contribute to the stability of the financial system. The relevant powers are set out in the Corporations Act 2001, which gives the Bank the power to determine financial stability standards for licensed securities clearing and settlement facilities. This Report discusses the activities of the Board over 2008/09.


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