BIS report sets guidance on FMI general business risk

On October 14, the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a final report on how financial market infrastructures, or FMIs, manage general business risks and general business losses. The release is short on detail, but the BIS report is a useful reminder that financial stability rests on the less visible plumbing of markets as well as on interest-rate decisions.

Key takeaways

• CPMI and IOSCO have moved their work on FMI general business risk and general business losses from consultation to a final report.
• The document is guidance for FMIs, the institutions that sit underneath payments, clearing and settlement.
• The topic concerns losses that arise from running a business, not from a participant defaulting or from the market positions a system clears.
• Overseers and operators will now decide how to fold the final text into their own supervisory and risk-management practice.

What was published

According to the BIS, the two standard-setting bodies issued the final report on the same day it was announced. Its subject is how FMIs handle general business risks and the losses that can flow from them. The press release is the only detail available at this stage, so any claim about the report’s specific recommendations would be premature. What can be said is what the category covers and why standard-setters keep returning to it.

CPMI is the BIS-hosted committee that sets standards for payment, clearing and settlement arrangements. IOSCO is the global grouping of securities regulators. When the two publish jointly, the output is meant to be read by central banks and securities authorities alike, because the infrastructures in question often fall under both. A final report, as opposed to a consultation, signals that the drafting phase is over and that the text is ready to be used as a reference point.

Why general business risk matters

FMIs are the systems that move payments, clear trades and hold securities. Their failure modes are usually discussed in terms of participant defaults or operational outages. General business risk is a different category. It refers broadly to the risk of deterioration in an FMI’s financial position as a business, for example through weak revenue, poor execution of strategy or unexpectedly high expenses, which can erode the resources it needs to keep operating.

That may sound like a corporate-finance concern rather than a systemic one. But an infrastructure that cannot absorb such losses may struggle to continue critical services, or to wind down in an orderly way if it must. Because many market participants depend on a small number of FMIs, the health of the operator itself becomes a public-interest question. Guidance on how these risks should be identified, managed and covered is therefore part of the wider architecture of central bank policy and market oversight, even though it rarely makes headlines.

The wider context for policymakers

The same day brought another reminder of how central banks frame resilience. The European Central Bank published a speech by Frank Elderson titled “Ensuring resilience in the face of uncertainty.” The ECB’s listing offers the title but no text that can be summarized here, so it would be a stretch to link his argument to the CPMI-IOSCO work. Still, the juxtaposition is instructive. Officials in different institutions are using the vocabulary of resilience, whether they are talking about banks, the broader financial system or the infrastructures that connect them.

For readers who follow Fed speeches, ECB policy and Bank of England rates, the lesson is that monetary decisions and market-plumbing standards operate on different timetables. Rate decisions arrive at scheduled meetings and move quickly through financial conditions. Standards for FMIs are slower, negotiated among many jurisdictions, and mostly noticed only when something goes wrong. Their quiet, cumulative effect is to determine whether the system can absorb a shock without interruption.

What to watch next

Three questions follow from the publication. First, how national authorities and regional regulators will translate the final report into expectations for the infrastructures they oversee, and on what timeline. Second, how operators of payment systems, central counterparties and securities depositories respond, given that guidance on business losses can touch capital planning, recovery arrangements and governance. Third, whether the CPMI and IOSCO follow with monitoring of how consistently the guidance is applied across jurisdictions, as standard-setters have often done with earlier frameworks.

Until the full text is examined in detail, the cautious reading is that this is an incremental but meaningful step. It clarifies expectations for a corner of the financial system that is easy to overlook and hard to replace. Dovo Journal will follow how supervisors and market infrastructures respond, and will report on the specific provisions as they are digested.