PFMI (Principles for Financial Market Infrastructures)

The PFMI (Principles for Financial Market Infrastructures) are the international standards for the systems that move, clear, settle and record payments and securities. Published on 16 April 2012 by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO), they set 24 principles for the operators of these systems and 5 responsibilities for the central banks and regulators that oversee them. Authorities in most major economies use them as the basis of supervision.

The PFMI should not be confused with the bodies around them. A financial market infrastructure (FMI) is the system being regulated, such as a payment system or clearing house. The Committee on Payments and Market Infrastructures (CPMI), the name CPSS took in September 2014, is one of the two standard-setters that wrote the rules and is hosted by the Bank for International Settlements. The PFMI are the rulebook itself.

Think of the systems that carry money and securities between banks as the bridges and tunnels of the financial world. Every day huge amounts cross them, and if one collapses, traffic on the whole network stops. The PFMI are a common building code for these bridges. They say how strong the structure must be, how much spare capacity it needs, what happens if a lorry breaks down halfway across, and how quickly the bridge must reopen after an accident.

The code applies to the bridge operators. A separate part tells the inspectors, meaning the central banks and market regulators, what they must do: check the bridges regularly, have the power to order repairs, publish their rules and work with inspectors in other countries when a bridge crosses a border.

Before 2012 there were three separate sets of standards: the CPSS Core Principles for Systemically Important Payment Systems (2001), and the CPSS-IOSCO Recommendations for Securities Settlement Systems (2001) and for Central Counterparties (2004). The 2008 financial crisis and the G20 decision in 2009 to push OTC derivatives into central clearing made it clear that these systems would carry more risk and needed tougher, unified rules. The PFMI replaced all three documents, and a disclosure framework and assessment methodology followed in December 2012.

The standards have since been supplemented with guidance on FMI recovery, cyber resilience, central counterparty resilience and, in July 2022, the application of the PFMI to systemically important stablecoin arrangements. CPMI and IOSCO monitor implementation in member jurisdictions at three levels: whether rules have been adopted, whether they are complete and consistent, and whether outcomes are consistent across jurisdictions.

The PFMI apply to five kinds of systemically important infrastructure:

• Payment systems. These include large-value systems such as real-time gross settlement systems and systems using deferred net settlement.
• Central securities depositories. They hold securities accounts and keep the record of who owns which securities.
• Securities settlement systems. They transfer securities between accounts, usually against payment.
• Central counterparties. A central counterparty (CCP) becomes the buyer to every seller and the seller to every buyer.
• Trade repositories. They keep a central electronic record of derivatives trades.

Central bank-operated systems are expected to meet the same standards, except where the principles conflict with a central bank's legal mandate or policy role.

The 24 principles are grouped into nine areas: general organisation, credit and liquidity risk management, settlement, central securities depositories and exchange-of-value settlement, default management, general business and operational risk, access, efficiency, and transparency. Some of the best-known requirements are:

• Credit risk cover. A CCP that is systemically important in several jurisdictions, or that clears complex products, must hold resources to cover the default of its two largest participants in extreme but plausible conditions, a test known as "cover 2".
• Margin. CCPs must run a risk-based margin system, collecting initial margin and variation margin at least daily.
• Settlement finality and money. Settlement should be final by the end of the value date at the latest, and should use central bank money where practical and available.
• Exchange-of-value settlement. Systems that settle two linked obligations must remove principal risk by making one transfer depend on the other, reducing settlement risk.
• Operational resilience. Business continuity plans should aim for critical systems to resume within two hours of a disruption.

The five responsibilities, labelled A to E, require authorities to:

• Responsibility A. Subject FMIs to appropriate and effective regulation, supervision and oversight.
• Responsibility B. Have the powers and resources to carry out that role.
• Responsibility C. Clearly define and disclose their policies towards FMIs.
• Responsibility D. Adopt and apply the principles consistently.
• Responsibility E. Cooperate with other authorities, at home and abroad, to promote financial stability.

Cross-border cooperation matters most for systems such as Continuous Linked Settlement, which settles foreign exchange trades in many currencies and is overseen by a group of central banks.

• Bank for International Settlements: Principles for financial market infrastructures
• International Organization of Securities Commissions (IOSCO)