Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries
Minimum Standards for the Design and Operation of Cross-Border and Multi-Currency Netting and Settlement Schemes
Central banks' policies with respect to private interbank netting and settlement systems need to strike an appropriate balance between the requirements of market efficiency and of stability. A direct means of achieving such a balance is to ensure that such systems are designed and operated so that the participants and the netting providers have both the incentives and the ability to manage the associated credit and liquidity risks. As a first step towards ensuring the adequacy of the risk-management procedures of private interbank netting arrangements the Committee has agreed upon the following minimum standards which all cross-border and multi-currency netting schemes should meet. As minimum standards they are not a statement of best practices to which schemes should aspire and individual central banks retain the discretion to apply higher standards where necessary. This should help to provide flexibility for central banks to ensure that interbank settlement arrangements in their own currencies are consistent with the central banks' own practices.
The presentation of these minimum standards in no way diminishes the primary responsibility of participants in netting and settlement systems for ensuring that these systems have adequate credit, liquidity and operational safeguards. On the contrary, it is the Committee's intention to heighten awareness of the risks associated with netting and settlement systems and of the need for their prudent management and also to provide criteria against which risk management techniques designed by market participants can be judged.
Minimum standards for the design and operation of cross-border and multi-currency netting and settlement schemes
I. Netting schemes should have a well-founded legal basis under all relevant jurisdictions.
II. Netting scheme participants should have a clear understanding of the impact of the particular scheme on each of the financial risks affected by the netting process.
III. Multilateral netting systems should have clearly-defined procedures for the management of credit risks and liquidity risks which specify the respective responsibilities of the netting provider and the participants. These procedures should also ensure that all parties have both the incentives and the capabilities to manage and contain each of the risks they bear and that limits are placed on the maximum level of credit exposure that can be produced by each participant.
IV. Multilateral netting systems should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single net-debit position.
V. Multilateral netting systems should have objective and publicly-disclosed criteria for admission which permit fair and open access.
VI. All netting schemes should ensure the operational reliability of technical systems and the availability of back-up facilities capable of completing daily processing requirements.
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