Renewed oversight framework and new oversight tasks
4.5 Oversight tasks relating to recovery and resolution and their impact on payment systems The operation of financial infrastructures is an essential factor in the stability of the financial system. Accordingly, international recommendations propose the development of recovery61 and resolution plans as a new line of defence in respect of the institutions comprising each financial infrastructure. The institutions operating the systems comprising the financial infrastructure provide services to other participants of the market which are critical in terms of systemic risk. Due to their significance, such institutions must apply risk management methods and procedures that minimise the probability of disruptions occurring, and ensure the availability of critical functions in all circumstances. Consequently, the aim in this regard is not to provide the full range of services on a continuous basis, only critical functions. While it is obviously not possible to eliminate risk completely from the system, preparations can be made for the management of specific disruptive incidents. For these reasons, IOSCO and the Committee on Payments and Market Infrastructures (CPMI) operating under BIS auspices issued their recommendations on the recovery and resolution of financial market infrastructures in October 2014. The recommendation is in fact both a guide and a toolkit on the principles and tools for developing recovery and resolution plans. The tools employed must always be used in alignment with the financial market infrastructure concerned, in order to ensure transparency. Accordingly, the institutions comprising the financial infrastructure must have recovery and resolution plans in place. In terms of content, the two plans are similar as both are
intended to ensure the provision of critical services. The difference is that the recovery plan is prepared by the financial infrastructure itself, whereas the resolution plan is prepared by the resolution authority, i.e. the MNB in Hungary.62 Accordingly, the recovery plan is implemented by the institution that enters into a critical situation, and the resolution plan is by the resolution authority. The related risks are assessed and evaluated by overseers in both recovery and resolution planning. In Hungary, the KELER Group, which operates the securities clearing and settlement system, started to develop its recovery plan in 2014. As a result, in November 2014 the Board of KELER approved the company’s recovery plan, and in 2014 Q3, as part of KELER CCP’s recovery plan, it developed its final loss allocation concept. In the latter, KELER CCP specified the tools and procedures which the central counterparty may use in the event of a clearing member’s default of such an extent that depletes both the defaulting party’s individual collateral and the collective collateral allocated to the market concerned,63 i.e. the guarantee fund allocated to defaults, as well as KELER CCP’s capital available under EMIR to cover default losses.64 In recovery planning, the recovering party must be given an adequate degree of flexibility, and therefore it is essential that a preliminary assessment and evaluation of the risks specified in recovery plans is carried out by financial infrastructure overseers as well.
This refers to the financial recovery of systems and is introduced as a new element in addition to the existing business continuity plan (BCP) and disaster recovery plan (DRP). 62 The scope of the Hungarian resolution framework includes credit institutions and investment firms. Consequently, of the financial infrastructures, the MNB is required to prepare resolution plans only for those operating in either of these forms (e.g. KELER, which operates as a credit institution). 63 The reserves allocated by non-defaulting parties and KELER CCP’s limited contribution against its equity. 64 As part of a forum for clearing members, KELER CCP presented the concept to market participants, which made no objections to the concept. 61
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