United States
Publication of Financial Sector Assessment Program Documentation: Detailed Assessment of Observance of the Fed wire Securities Service’s Observance of the CPSS-IOSCO Recommendations for Securities Settlement Systems

This paper discusses key findings of the Detailed Assessment of Observance of the Fedwire Securities Service’s (FSS) Observance of the Committee on Payment and Settlement Systems/International Organization of Securities Commissions (CPSS–IOSCO) Recommendations for Securities Settlement Systems for the United States. The paper discusses that laws, regulations, rules, procedures, and contractual provisions governing the operations and activities of the FSS are public and readily accessible to system participants. The assessment recommends that securities settlement systems should have a well-founded, clear, and transparent legal basis in the relevant jurisdictions.

Abstract

This paper discusses key findings of the Detailed Assessment of Observance of the Fedwire Securities Service’s (FSS) Observance of the Committee on Payment and Settlement Systems/International Organization of Securities Commissions (CPSS–IOSCO) Recommendations for Securities Settlement Systems for the United States. The paper discusses that laws, regulations, rules, procedures, and contractual provisions governing the operations and activities of the FSS are public and readily accessible to system participants. The assessment recommends that securities settlement systems should have a well-founded, clear, and transparent legal basis in the relevant jurisdictions.

Table 1.

Detailed Assessment of Observance of the Fedwire Securities Service’s of the CPSS-IOSCO Recommendations for Securities Settlement Systems

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Table 2.

Summary of the Detailed Assessment of the Observance of FSS with the CPSS-IOSCO Recommendations for Securities Settlement Systems

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Table 3.

Recommended Action plan to Improve Observance of Fedwire Securities of the CPSS-IOSCO Recommendations for Securities Settlement Systems

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Authorities’ Response to the Assessment

1. The U.S. authorities strongly support the FSAP program, welcome this independent review, and thank the assessors for all the work to produce this report. They appreciate the significant undertaking associated with a review of the biggest financial sector in the world, as well as the challenges that accompany the first assessment of a large advanced country in the wake of the crisis.

2. The authorities are pleased to note the assessment reflects the high degree of compliance of the Fedwire securities service with the CPSS-IOSCO Recommendations for Securities Settlement Systems, and are largely in agreement with the assessment’s comments and recommendations. The authorities will explore the possibility of introducing settlement instruction matching in the Fedwire securities service, taking into account the relevant costs and benefits associated with such a matching feature. The authorities will also reassess the business case for extending Fedwire securities service operating hours and seek ways to ensure that the needs and interests of smaller and midsize participants continue to be taken into account.

3. The assessment also recommends that a rolling settlement period of no later than T+3 be adopted in the U.S. mortgage-backed securities (MBS) market. While the authorities agree in principle that reducing the settlement period reduces settlement risk, they note that such a change for the U.S. MBS market requires careful study and close consultation with market participants given the characteristics of the instruments being settled, existing trading practices, and significant operational changes that are likely to be needed. The U.S. authorities believe that near-term risk reduction efforts should focus on the industry proposal to implement a central counterparty for mortgage-backed securities.

4. With regard to the recommendation concerning residual risks associated with the provision of intraday credit to participants in the Fedwire securities service, the authorities note that a rigorous program for assessing, monitoring, and mitigating the risks associated with the provision of intraday credit to Fedwire accountholders is in place. Nevertheless, the authorities are further strengthening this program as a result of a comprehensive policy review conducted from 2006 to 2008 and the planned implementation of an explicit collateralization policy in late 2010 or early 2011. As a result, the authorities are confident that the residual risks noted in the assessment are adequately monitored and controlled.

5. Again, the authorities appreciate the significant undertaking associated with the assessment of the Fedwire Securities Service and the contribution that the assessment process makes to the stability and effective supervision of systemically-important payment and settlement systems.

1

The Fedwire Securities Service is the mechanisms through which the Reserve Banks issue and maintain book-entry records evidencing ownership of Treasury and Federal agency debt.

2

The Payments Risk Committee is a private sector group of senior managers from U.S. banks that is sponsored by the Federal Reserve Bank of New York. The Committee identifies and analyzes issues of broad industry interest related to risk in payments and settlement systems. It also seeks to foster broader industry awareness and discussion, and to develop input on public and private sector initiatives

United States: Publication of Financial Sector Assessment Program Documentation: Detailed Assessment of Observance of the Fed wire Securities Service’s Observance of the CPSS-IOSCO Recommendations for Securities Settlement Systems
Author: International Monetary Fund