CIRCULAR
SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/190 December 19, 2023
To
All Recognized Clearing Corporations and
All Depositories
Sir / Madam,
Sub: Principles of Financial Market Infrastructures (PFMIs)
1. SEBI vide its Circulars No. CIR/MRD/DRMNP/26/2013 dated September 04, 2013
and No. SEBI/HO/CDMRD/DMP/CIR/P/2016/137 dated December 16, 2016 stated
that as a member of IOSCO, SEBI is committed for adoption and implementation
of the CPSS-IOSCO Principles for Financial Market Infrastructures (FMIs) in its
regulatory functions of oversight, supervision and governance of the key FMIs
under its purview. The PFMIs issued on April 2012 comprise of 24 principles
(Annexure 1), which are designed to ensure that the infrastructure supporting
global financial markets is robust and well placed to withstand financial shocks.
2. Full, timely and consistent implementation of the PFMIs is fundamental to ensuring
the safety, soundness and efficiency of key FMIs and for supporting the resilience
of the global financial system. Global central clearing requirements reinforce the
importance of strong safeguards and consistent oversight of derivatives CCPs in
particular.
Financial Market Infrastructure (FMI)
3. The Principles apply to systematically important FMI entities such as Central
Counterparty (CCP), Central Securities Depository (CSD)/ Securities Settlement
System (SSS), Payment and Settlement Systems (PSS) and Trade Repository
(TR) which are responsible for providing clearing, settlement and recording of
monetary and other financial transactions. The principles are international
standards set forth to –
3.1. Enhance safety and efficiency in payment, clearing, settlement, and recording
arrangements,
3.2. Reduce systemic risk.
3.3. Foster transparency and financial stability and
3.4. Promote protection of participants and investors.
4. The different categories of FMIs, as identified under PFMIs, are listed below -
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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.
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.
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.
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,
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and the transfer of funds is effected using an agreed-upon operational
infrastructure.
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.
FMIs Regulated by SEBI
5. SEBI regulated Depositories and Clearing Corporations are FMIs. These
systemically important FMIs provide essential facilities and perform systemically
critical functions in the market and shall be required to comply with the PFMIs
specified by CPSS-IOSCO as applicable to them.
6. The issue of assessment of PFMI by SEBI regulated FMIs was deliberated in
Secondary Market Advisory Committee of SEBI (SMAC). Based on the
recommendations of SMAC, it has been decided that FMIs shall carry out self-
assessment on a periodic basis against the PFMIs and disclose the same on their
websites. For this purpose, the 24 principles for FMIs have been classified as
“quantitative” and “qualitative” and their applicability for respective FMIs is as
follows:
Principle Principle Classification Applicability on
No. FMIs i.e. CCs or
Depositories
CCs and
1 Legal basis Qualitative
Depositories
CCs and
2 Governance Qualitative
Depositories
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Principle Principle Classification Applicability on
No. FMIs i.e. CCs or
Depositories
Framework for the
CCs and
3 comprehensive management Qualitative
Depositories
of risks
4 Credit risk Quantitative CCs
5 Collateral Quantitative CCs
6 Margin Quantitative CCs
7 Liquidity Risk Quantitative CCs
8 Settlement finality Qualitative CCs
9 Money settlements Qualitative CCs
10 Physical deliveries Qualitative CCs
Central securities
11 Qualitative Depositories
depositories
Exchange-of-value Quantitative
12 CCs
settlement systems and Qualitative
Participant-default rules and CCs and
13 Qualitative
procedures Depositories
Quantitative
14 Segregation and portability CCs
and Qualitative
Quantitative CCs and
15 General business risk
and Qualitative Depositories
Quantitative CCs and
16* Custody and investment risks
and Qualitative Depositories
Quantitative CCs and
17* Operational risk
and Qualitative Depositories
Access and Participation CCs and
18 Qualitative
Requirements Depositories
Tiered participation Quantitative CCs and
19*
arrangements and Qualitative Depositories
CCs and
20 FMI links Qualitative
Depositories
CCs and
21 Efficiency and effectiveness Qualitative
Depositories
Communication procedures CCs and
22 Qualitative
and standards Depositories
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Principle Principle Classification Applicability on
No. FMIs i.e. CCs or
Depositories
Disclosure of rules, key CCs and
23 Qualitative
procedures, and market data Depositories
Disclosure of market data by
24 Not Applicable
trade repositories
* For these PFMI principles, Depositories have to make Qualitative Disclosures
only.
7. The periodicity of self-assessment and disclosure by the FMIs shall be as follows:
Self-assessment
Periodicity
and Disclosures
Quarterly (within 30 days from the end of the quarter –
Quantitative
June, September, December and March)
Qualitative Annually (within 30 days from the end of the financial year)
8. FMIs shall be monitored and assessed against the PFMIs on annual basis by the
Regulatory Oversight Committee (ROC) of the FMI and the ROC shall submit a
report to the governing board of the FMI and SEBI within 60 days from the end of
the financial year.
9. Applicability
9.1. The provisions of this Circular shall come into force from the quarter end
December, 2023.
9.2. Circular No. CIR/MRD/DRMNP/26/2013 dated September 04, 2013 and
Circular No. SEBI/HO/CDMRD/DMP/CIR/P/2016/137 dated December 16,
2016 shall be rescinded with effect from the date of implementation of this
circular.
10. Clearing Corporations and Depositories are advised to:
10.1. take necessary steps and put in place necessary systems for implementation
of above.
10.2. make necessary amendments to the relevant bye-laws, rules and regulations,
wherever required, for the implementation of the above; and
10.3. bring the provisions of this circular to the notice of market participants
(including investors) and also to disseminate the same on their website.
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11. This circular is issued in exercise of the powers conferred under Section 11(1) of
the Securities and Exchange Board of India Act 1992 read with Regulation 51 of
the Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2018, Section 26(3) of the Depositories Act, 1996 and
Regulation 97 of Securities and Exchange Board of India (Depositories and
Participants) Regulations, 2018 to protect the interests of investors in securities
and to promote the development of, and to regulate the securities market.
12. This circular is available on SEBI website at www.sebi.gov.in .
Yours faithfully,
Hruda Ranjan Sahoo
Deputy General Manager
Market Regulation Department
Email: hrsahoo@sebi.gov.in
Ph. No. 022-2644 9586
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Annexure 1
Principles for Financial Market Infrastructures (PFMIs)
General Organisation
Principle 1: Legal basis
An FMI should have a well-founded, clear, transparent, and enforceable legal basis
for each material aspect of its activities in all relevant jurisdictions.
Principle 2: Governance
An FMI should have governance arrangements that are clear and transparent,
promote the safety and efficiency of the FMI, and support the stability of the broader
financial system, other relevant public interest considerations, and the objectives of
relevant stakeholders.
Principle 3: Framework for the comprehensive management of risks
An FMI should have a sound risk-management framework for comprehensively
managing legal, credit, liquidity, operational, and other risks.
Credit and Liquidity Risk Management
Principle 4: Credit risk
An FMI should effectively measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and settlement processes.
An FMI should maintain sufficient financial resources to cover its credit exposure to
each participant fully with a high degree of confidence. In addition, a CCP that is
involved in activities with a more-complex risk profile or that is systemically important
in multiple jurisdictions should maintain additional financial resources sufficient to
cover a wide range of potential stress scenarios that should include, but not be limited
to, the default of the two participants and their affiliates that would potentially cause
the largest aggregate credit exposure to the CCP in extreme but plausible market
conditions. All other CCPs should maintain additional financial resources sufficient to
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cover a wide range of potential stress scenarios that should include, but not be limited
to, the default of the participant and its affiliates that would potentially cause the largest
aggregate credit exposure to the CCP in extreme but plausible market conditions.
Principle 5: Collateral
An FMI that requires collateral to manage its or its participants’ credit exposure should
accept collateral with low credit, liquidity, and market risks. An FMI should also set and
enforce appropriately conservative haircuts and concentration limits.
Principle 6: Margin
A CCP should cover its credit exposures to its participants for all products through an
effective margin system that is risk-based and regularly reviewed.
Principle 7: Liquidity risk
An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI
should maintain sufficient liquid resources in all relevant currencies to effect same-day
and, where appropriate, intraday and multiday settlement of payment obligations with
a high degree of confidence under a wide range of potential stress scenarios that
should include, but not be limited to, the default of the participant and its affiliates that
would generate the largest aggregate liquidity obligation for the FMI in extreme but
plausible market conditions.
Settlement
Principle 8: Settlement finality
An FMI should provide clear and certain final settlement, at a minimum by the end of
the value date. Where necessary or preferable, an FMI should provide final settlement
intraday or in real time.
Principle 9: Money settlements
An FMI should conduct its money settlements in central bank money where practical
and available. If central bank money is not used, an FMI should minimise and strictly
control the credit and liquidity risk arising from the use of commercial bank money.
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Principle 10: Physical deliveries
An FMI should clearly state its obligations with respect to the delivery of physical
instruments or commodities and should identify, monitor, and manage the risks
associated with such physical deliveries.
Central Securities Depositories and Exchange-of-value Settlement Systems
Principle 11: Central securities depositories
A CSD should have appropriate rules and procedures to help ensure the integrity of
securities issues and minimise and manage the risks associated with the safekeeping
and transfer of securities. A CSD should maintain securities in an immobilised or
dematerialised form for their transfer by book entry.
Principle 12: Exchange-of-value settlement systems
If an FMI settles transactions that involve the settlement of two linked obligations (for
example, securities or foreign exchange transactions), it should eliminate principal risk
by conditioning the final settlement of one obligation upon the final settlement of the
other.
Default Management
Principle 13: Participant-default rules and procedures
An FMI should have effective and clearly defined rules and procedures to manage a
participant default. These rules and procedures should be designed to ensure that the
FMI can take timely action to contain losses and liquidity pressures and continue to
meet its obligations.
Principle 14: Segregation and portability
A CCP should have rules and procedures that enable the segregation and portability
of positions of a participant’s customers and the collateral provided to the CCP with
respect to those positions.
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General Business and Operational Risk Management
Principle 15: General business risk
An FMI should identify, monitor, and manage its general business risk and hold
sufficient liquid net assets funded by equity to cover potential general business losses
so that it can continue operations and services as a going concern if those losses
materialise. Further, liquid net assets should at all times be sufficient to ensure a
recovery or orderly wind-down of critical operations and services.
Principle 16: Custody and investment risks
An FMI should safeguard its own and its participants’ assets and minimise the risk of
loss on and delay in access to these assets. An FMI’s investments should be in
instruments with minimal credit, market, and liquidity risks.
Principle 17: Operational risk
An FMI should identify the plausible sources of operational risk, both internal and
external, and mitigate their impact through the use of appropriate systems, policies,
procedures, and controls. Systems should be designed to ensure a high degree of
security and operational reliability and should have adequate, scalable capacity.
Business continuity management should aim for timely recovery of operations and
fulfilment of the FMI’s obligations, including in the event of a wide-scale or major
disruption.
Access
Principle 18: Access and participation requirements
An FMI should have objective, risk-based, and publicly disclosed criteria for
participation, which permit fair and open access.
Principle 19: Tiered participation arrangements
An FMI should identify, monitor, and manage the material risks to the FMI arising from
tiered participation arrangements.
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Principle 20: FMI links
An FMI that establishes a link with one or more FMIs should identify, monitor, and
manage link-related risks.
Efficiency
Principle 21: Efficiency and effectiveness
An FMI should be efficient and effective in meeting the requirements of its participants
and the markets it serves.
Principle 22: Communication procedures and standards
An FMI should use, or at a minimum accommodate, relevant internationally accepted
communication procedures and standards in order to facilitate efficient payment,
clearing, settlement, and recording.
Transparency
Principle 23: Disclosure of rules, key procedures, and market data
An FMI should have clear and comprehensive rules and procedures and should
provide sufficient information to enable participants to have an accurate understanding
of the risks, fees, and other material costs they incur by participating in the FMI. All
relevant rules and key procedures should be publicly disclosed.
Principle 24: Disclosure of market data by trade repositories
A TR should provide timely and accurate data to relevant authorities and the public in
line with their respective needs.
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