Draft Guidance – Financial Stability Standards for Securities Settlement Facilities: Comparison to CPSS-IOSCO Principles for Financial Market Infrastructures
Introduction
This document provides a comparison between the draft guidance for the Financial Stability Standards for Securities Settlement Facilities (SSF Standards), and the Principles for Financial Market Infrastructures (the Principles) issued by the Committee for Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO). It is intended to assist readers of the draft guidance to the SSF Standards in understanding where the Reserve Bank has added to and amended the text of the Principles and associated explanatory notes, by providing a broad indication of variations and changes between the two primary documents. 
Disclaimer: An automated process was used in generating the comparison of the draft guidance to the SSF Standards against the Principles and associated explanatory notes. While the Reserve Bank has taken due care in compiling this document, it is possible that the comparison contains errors, omissions and inaccuracies introduced through use of the automated process. This document should therefore be used as an aid only. Readers should refer directly to the text of the draft guidance to the SSF Standards and the Principles in order to fully understand the requirements of and differences between the two.
PrincipleStandard 1: Legal basis 
An FMIA securities settlement facility should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
Explanatory noteGuidance
3.1.1.	A robust legal basis for an FMI’sa securities settlement facility’s activities in all relevant jurisdictions is critical to an FMI’sa securities settlement facility’s overall soundness. The legal basis defines, or provides the foundation for relevant parties to define, the rights and obligations of the FMIsecurities settlement facility, its participants, and other relevant parties, such as its participants’ customers, custodians, money settlement banksagents, and service providers. Most risk-management mechanisms are based on assumptions about the manner and time at which these rights and obligations arise through the FMI.securities settlement facility. Therefore, if risk management is to be sound and effective, the enforceability of rights and obligations relating to an FMIa securities settlement facility and its risk management should be established with a high degree of certainty. If the legal basis for an FMI’sa securities settlement facility’s activities and operations is inadequate, uncertain, or opaque, then the FMIsecurities settlement facility, its participants, and their customers may face unintended, uncertain, or unmanageable credit or liquidity risks, which may also create or amplify systemic risks. 
1.1.	A securities settlement facility should be a legal entity (whose primary activity is operating the securities settlement facility) and one which is separate from other entities which may expose it to risks unrelated to those arising from its function as a securities settlement facility.
1.1.1.	In general, a securities settlement facility should not provide services that have a distinct risk profile from, and potentially pose material additional risks to, its primary activity of operating the securities settlement facility. This may require that the securities settlement facility provide any such services in a legally and financially separate entity, or take other equivalent action. Where a securities settlement facility performs, or wishes to perform, functions that, while having a distinct risk profile, are necessarily ancillary to its primary activity, it should consult the Reserve Bank and demonstrate that any potential risks posed to its primary activity as a securities settlement facility are appropriately and effectively managed.
1.1.2.	The identification of the securities settlement facility as a separate legal entity is of particular importance where an entity related to the securities settlement facility is experiencing operational or financial difficulties, including external administration. Related entities which may expose the securities settlement facility to material risks unrelated to those arising from its function as a securities settlement facility include a related central counterparty, a financial market, or technology or other service providers. The legal separation of the securities settlement facility from other legal entities may also provide protection to those other legal entities should the securities settlement facility itself experience operational or financial difficulties. This Standard does not assume or suggest, however, that legal separation will remove all risks that may arise as a result of operational or financial difficulties faced by a securities settlement facility or related entities. 
1.2.	The legal basis should provide a high degree of certainty for each material aspect of an FMI’sa securities settlement facility’s activities in all relevant jurisdictions. 
Legal basis
1.2.1.	3.1.2.	The legal basis should provide a high degree of certainty for each material aspect of an FMI’sa securities settlement facility’s activities in all relevant jurisdictions. The legal basis consists of the legal framework and the FMI’ssecurities settlement facility’s rules, procedures, and contracts. The legal framework includes general laws and regulations that govern, among other things, property, contracts, insolvency, corporations, securities, banking, secured interests, and liability. In some cases, the legal framework that governs competition and consumer and investor protection may also be relevant. Laws and regulations specific to an FMI’sa securities settlement facility’s activities include those governing its authorization and itsauthorisation, regulation, supervision, and oversight; rights and interests in financial instruments; settlement finality; netting; immobilisation and dematerialisation of securities; arrangements for delivery versus payment (DvP, ), payment versus payment (PvP,), or delivery versus delivery (DvD;); collateral arrangements (including margin arrangements); default procedures; and the resolution of an FMI. An FMIa securities settlement facility. A securities settlement facility should establish rules, procedures, and contracts that are clear, understandable, and consistent with the legal framework and provide a high degree of legal certainty. An FMIA securities settlement facility also should consider whether the rights and obligations of the FMIsecurities settlement facility, its participants, and as appropriate, other parties, as set forth in its rules, procedures, and contracts are consistent with relevant industry standards and market protocols. 
3.1.4.	A TR’s rules, procedures, and contracts should be clear about the legal status of the transaction records that it stores. Most TRs store transaction data that do not represent legally enforceable trade records. For some TRs, however, participants may agree that the TR’s electronic transaction record provides the official economic details of a legally binding contract, which enables trade details to be used for the calculation of payment obligations and other events that may occur during the life of the transaction. A TR should identify and mitigate any legal risks associated with any such ancillary services that it may provide. Further, the legal basis should also determine the rules and procedures for providing access and disclosing data to participants, relevant authorities, and the public to meet their respective information needs, as well as data protection and confidentiality issues (see also Principle 24 on disclosure of market data by TRs).
Rights and interests
1.2.2.	3.1.5.	The legal basis should clearly define the rights and interests of an FMIa securities settlement facility, its participants, and, where relevant, its participants’ customers in the financial instruments, such as cash and securities, or other relevant assets held in custody, directly or indirectly, by the FMI.securities settlement facility. It is not sufficient for key rights and obligations to be implied. The legal basis should fully protect both a participant’s assets held in custody by the FMIsecurities settlement facility and, where appropriate, a participant’s customer’s assets held by or through the FMIsecurities settlement facility, from the insolvency of relevant parties and other relevant risks. It should also protect these assets when held at a custodian or linked FMI. In particular, consistent with Principle 11SSF Standard 9 on CSDs and Principle 14 on segregation and portability,central securities depositories the legal basis should protect the assets and positions of a participant’s customers in a CSD and CCP. In addition, . Where applicable, the legal basis should provide certainty , where applicable, with respect to an FMI’s: a securities settlement facility’s interests in, and rights to use and dispose of, collateral; an FMI’sa securities settlement facility’s authority to transfer ownership rights or property interests; and an FMI’sa securities settlement facility’s rights to make and receive payments, in all cases, notwithstanding the bankruptcy or insolvency of its participants, participants’ customers, or a custodian bank. Also, the FMIsecurities settlement facility should structure its operations so that its claims against collateral provided to it by a participant should have priority over all other claims, and the claims of the participant to that same collateral should have priority over the claims of third-party creditors. For TRs, the legal basis also should specifically define the rights and interests of participants and other relevant stakeholders with respect to the data stored in the TR’s systems. 
Mitigating legal risk
1.2.3.	3.1.12. 	In general, there is no substitute for a sound legal basis and full legal certainty. supported by applicable legislation in all jurisdictions relevant to a securities settlement facility’s activities. However, in some practical situations, however,such as might arise where a securities settlement facility offers services outside its home jurisdiction, or where participants are located in another jurisdiction to that of the securities settlement facility, it may not be possible, notwithstanding an independent legal opinion, to be confident of full legal certainty may not be achievable.for all aspects of a securities settlement facility’s operations. In this case, the authorities may need to take steps to address the legal framework. Pending this resolution, an FMIa securities settlement facility should investigate steps to mitigate its legal risk through the selective use of alternative risk-management tools that do not suffer from the legal uncertainty identified. These could include, in appropriate circumstances and if legally enforceable, participant requirements, exposure limits, collateral requirements, and prefunded default arrangements. The use of such tools may limit an FMI’s exposure if its activities are found to be not supported by relevant laws and regulations. If such controls are insufficient or not feasible, an FMIa securities settlement facility could, as appropriate, apply activity limits and, in extreme circumstances, restrict access or not perform the problematic activity until the legal situation is addressed.
1.3.	An FMIA securities settlement facility should have rules, procedures, and contracts that are clear, understandable, and consistent with relevant laws and regulations.
1.3.1.	The operating rules and procedures of a securities settlement facility play a key role in enabling participants to understand the risks they incur. The rules need to be clear, comprehensive and up-to-date to facilitate understanding by participants and prospective participants of the risks they can face through participation in the system. Explanatory material written in plain language can aid understanding of the facility's design and processes, thus improving understanding of risks that may arise through participation. 
1.3.2.	The rules and procedures should describe the roles of participants and the securities settlement facility and the procedures that will be followed in various circumstances (for example, which parties are to be notified of specific events and the timetables for decision making and notification). They should make clear the degree of discretion parties are able to exercise in taking decisions that can have a direct effect on the operation of the system. There should be clear processes for changing rules and procedures. The degree of discretion the securities settlement facility can exercise to make unilateral changes to the rules or procedures, and any period of notice it must give to participants, should be clear. 
1.4.	An FMIA securities settlement facility should be able to articulate the legal basis for its activities to the Reserve Bank and other relevant authorities, participants, and, where relevant, participants’ customers, in a clear and understandable way.
1.4.1.	3.1.3.	An FMI should be able to articulate the legal basis for its activities to relevant authorities, participants, and, where relevant, participants’ customers in a clear and understandable way. One recommended approach to articulating the legal basis for each material aspect of an FMI’sa securities settlement facility’s activities is to obtain well-reasoned and independent legal opinions or analyses. A legal opinion or analysis should, to the extent practicable, confirm the enforceability of the FMI’s rules and procedures and must provide reasoned support for its conclusions. An FMIA securities settlement facility should consider, subject to any restrictions, sharing these legal opinions and analyses with its participants in an effort to promote confidence among participants and transparency in the system. In addition, an FMIa securities settlement facility should seek to ensure that its activities are consistent with the legal basis in all relevant jurisdictions. These jurisdictions could include (a): those where an FMIa securities settlement facility is conducting business (including through linked FMIs); (b) those where its participants are incorporated, located, or otherwise conducting business for the purposes of participation; (c) those where collateral is located or held; and (d) those indicated in relevant contracts.
1.5.	An FMIA securities settlement facility should have rules, procedures, and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the FMIsecurities settlement facility under such rules and procedures will not be voided, reversed, or subject to stays, including in the event that the securities settlement facility enters into external administration or that one or more of its participants or a settlement bank defaults or is suspended. 
Settlement finality
1.5.1.	3.1.6.	There should be a clear legal basis regarding when settlement finality occurs in an FMIa securities settlement facility in order to define when key financial risks are transferred in the system, including the point at which transactions are irrevocable. Settlement finality is an important building block for risk-management systems (see also Principle 8). An FMISSF Standard 7). A securities settlement facility should consider, in particular, the actions that would need to be taken in the event of a participant’s insolvency. A key question is whether transactions of an insolvent participant would be honoured as final, or could be considered void or voidable by liquidators and relevant authorities. In some countries, for example, so-called “‘zero-hour rules”rules’ in insolvency law can have the effect of reversing a payment, notwithstanding that appears to haveit has successfully been settled inprocessed by a payment system. Because this possibility can lead to credit and liquidity risks, the securities settlement facility should ensure that the finality of settlement is not affected by the operation of zero-hour rules that undermine settlement finality should be eliminated. in any relevant jurisdiction. If the securities settlement facility offers real-time gross settlement, or has arrangements that involve the netting of transactions, it should seek the benefit of the relevant sections of the Payment Systems and Netting Act 1998 (if operating in Australia), or equivalent legislation in other jurisdictions. An FMIA securities settlement facility also should consider the legal basis for the external settlement mechanisms it uses, such as funds transfer or securities transfer systems. The laws of the relevant jurisdictions should support the provisions of the FMI’ssecurities settlement facility’s legal agreements with its participants and money settlement banksagents relating to finality.
Netting arrangements
1.5.2.	3.1.7.	If an FMIIf a securities settlement facility has a netting arrangement, the enforceability of the netting arrangement should have a sound and transparent legal basis. In general, netting offsets obligations between or among participants in the netting arrangement, thereby reducing the number and value of payments or deliveries needed to settle a set of transactions. Netting can reduce potential losses in the event of a participant default and may reduce the probability of a default. Netting arrangements should be designed to be explicitly recognised and supported under the law and enforceable against an FMI and an FMI’s failed participants in bankruptcy.a securities settlement facility and a securities settlement facility’s failed participants in bankruptcy. In particular, the securities settlement facility should seek the benefit of the relevant sections of the Payment Systems and Netting Act 1998 (if operating in Australia), or equivalent legislation in another jurisdiction, with respect to any netting arrangements. Without such legal underpinnings, net obligations may be challenged in judicial or administrative insolvency proceedings. If these challenges arewere successful, the FMIsecurities settlement facility and its participants could be liable forface gross settlement amounts that could drastically increase obligations because gross obligations, which in some circumstances could be many multiples of net obligations. 
3.1.8.	Novation, open offer, and other similar legal devices that enable an FMI to act as a CCP should be founded on a sound legal basis.  In novation (and substitution), the original contract between the buyer and seller is discharged and two new contracts are created, one between the CCP and the buyer and the other between the CCP and the seller. The CCP thereby assumes the original parties’ contractual obligations to each other. In an open-offer system, the CCP extends an open offer to act as a counterparty to market participants and thereby is interposed between participants at the time a trade is executed. If all pre-agreed conditions are met, there is never a contractual relationship between the buyer and seller. Where supported by the legal framework, novation, open offer, and other similar legal devices give market participants legal certainty that a CCP is supporting the transaction. 
Enforceability
1.5.3.	3.1.9.	The rules, procedures, and contracts related to an FMI’sa securities settlement facility’s operation should be enforceable in all relevant jurisdictions. In particular, the legal basis should support the enforceability of the participant-default rules and procedures that an FMIa securities settlement facility uses to handle a defaulting or insolvent participant, especially any transfers and close-outs of a direct or indirect participant’s assets or positions (see also Principle 13SSF Standard 11 on participant-default rules and procedures). An FMIA securities settlement facility should have a high degree of certainty that such actions taken under such rules and procedures will not be voided, reversed, or subject to stays, including with respect to the resolution regimes applicable to its participants. Ambiguity about the enforceability of procedures could delay and possibly prevent an FMIa securities settlement facility from taking actions to fulfil its obligations to non-defaulting participants or to minimise its potential losses. Insolvency law should support isolating risk and retaining and using collateral and cash payments previously paid into an FMI, notwithstanding a participant default or the commencement of an insolvency proceeding against a participant. The securities settlement facility should obtain a written and reasoned legal opinion as to the enforceability of the securities settlement facility's arrangements under the laws of each relevant jurisdiction.
1.5.4.	3.1.10.	An FMIA securities settlement facility should also establish rules, procedures, and contracts related to its operations that arewould be enforceable when the FMI is implementingin the event that the securities settlement facility had to implement its plans for recovery or orderly wind-down., and in the event of external administration. Where relevant, theythese should adequately address issues and associated risks resulting from (a)foreign and cross-border participation and interoperability of FMIs and (b) foreign participants in the case of an FMI which is being wound down.. There should be a high degree of certainty that any actions taken by the FMIsecurities settlement facility under such rules and procedures willwould not be voided, reversed, or subject to stays. Ambiguity about the enforceability of procedures that facilitate the implementation of the FMI’ssecurities settlement facility’s plans for recovery or orderly wind-down, or the resolution of the FMIsecurities settlement facility, could delay and possibly prevent the FMIsecurities settlement facility or the Reserve Bank and other relevant authorities from taking appropriate actions and hence increase the risk of a disruption to its critical services or a disorderly wind-down of the FMIsecurities settlement facility. In the case that an FMI is being wound down or resolved, the legal basis should support decisions or actions concerning termination, close-out netting, the transfer of cash and securities positions of an FMI, or the transfer of all or parts of the rights and obligations provided in a link arrangement to a new entity. 
Default or suspension of participants
1.5.5.	The rules applying in the event of the default or suspension of a participant should be set out in advance: this enhances the certainty of obligations placed on participants and thus minimises the opportunity for surviving participants to challenge any liability (in a default situation, there are likely to be strong incentives to undertake behaviour to minimise any contribution, and this could amplify systemic risks, see SSF Standard 11 on participant-default rules and procedures). 
External administration
1.5.6.	Where a securities settlement facility is in external administration or is otherwise facing difficulties, there is scope for these events to cause instability in the broader financial system. A high degree of certainty in the legal framework concerning such events can help to limit the capacity for such instability. 
1.6.	An FMIA securities settlement facility conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflicts of laws across jurisdictions. A securities settlement facility should provide the Reserve Bank with a legal opinion that demonstrates the enforceability of its rules and addresses relevant conflicts of law across the jurisdictions in which it operates. This should be reviewed on a periodic basis or when material changes occur that may have an impact on the opinion, and updated where appropriate.
Conflicts of law
1.6.1.	3.1.11 	Legal risk due to conflicts of laws may arise if an FMIa securities settlement facility is, or reasonably may become, subject to the laws of various other jurisdictions (for example, when it accepts participants established in those jurisdictions, when assets are held in multiple jurisdictions, or when business is conducted in multiple jurisdictions). In such cases, an FMIa securities settlement facility should identify and analyse potential conflict-conflicts of-laws issues law and develop rules and procedures to mitigate this risk.associated risks (see paragraph 1.6.2 on obtaining a legal opinion). For example, the rules governing itsa securities settlement facility’s activities should clearly indicate the law that is intended to apply to each aspect of an FMI’sits operations. The FMIsecurities settlement facility and its participants should be aware of applicable constraints on their abilities to choose the law that will govern the FMI’ssecurities settlement facility’s activities when there is a difference in the substantive laws of the relevant jurisdictions. For example, such constraints may exist because of jurisdictions’ differing laws on insolvency and irrevocability. A jurisdiction ordinarily does not permit contractual choices of law that would circumvent that jurisdiction’s fundamental public policy. Thus, when uncertainty exists regarding the enforceability of an FMI’s choice of law in relevant jurisdictions, the FMI should obtain reasoned and independent legal opinions and analysis in order to address properly such uncertainty.
Legal opinion
1.6.2.	A securities settlement facility operating in multiple jurisdictions should obtain a well-reasoned, independent legal opinion and provide this to the Reserve Bank. This opinion should cover potential conflicts of law, the enforceability of the securities settlement facility’s rules in all relevant jurisdictions and the securities settlement facility’s ability to satisfy its regulatory obligations in all relevant jurisdictions. At least every two years, this legal opinion should be reviewed, updated where appropriate, and provided to the Reserve Bank. Between periodic reviews, the legal opinion should be reviewed whenever there is a material change to the securities settlement facility’s operational, governance or risk-management arrangements or to the legal or regulatory framework governing its activities that may impact on the opinion. Further to such a review, the opinion should be updated where appropriate and provided to the Reserve Bank. Material changes triggering a review of the legal opinion may include changes to: the nature and composition of the securities settlement facility’s membership; its internal organisation or structure; product offerings; or applicable laws or regulations. 
PrincipleStandard 2: Governance
An FMIA securities settlement facility should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMIsecurities settlement facility, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.
Explanatory noteGuidance
3.2.1.	Governance is the set of relationships between an FMI’sa securities settlement facility’s owners, board of directors (or equivalent), management, and other relevant parties, including participants, the Reserve Bank and other relevant authorities, and other stakeholders (such as participants’ customers, other interdependent FMIs, and the broader market). Governance provides the processes through which an organisation sets its objectives, determines the means for achieving those objectives, and monitors performance against those objectives. Good governance provides the proper incentives for an FMI’sa securities settlement facility’s board and management to pursue objectives that are in the interestinterests of its stakeholders and that support relevant public interest considerations. 
2.1.	An FMIA securities settlement facility should have objectives that place a high priority on the safety and efficiency of the FMIsecurities settlement facility and explicitly support the stability of the financial stabilitysystem and other relevant public interest considerations.
2.1.1.	3.2.2.	Given the importance of FMIssecurities settlement facilities and the fact that their decisions can have widespread impact, affecting multiple financial institutions, markets, and jurisdictions, it is essential for each FMIsecurities settlement facility to place a high priority on the safety and efficiency of its operations and explicitly support financial stability and other relevant public interests. This is consistent with a securities settlement facility’s obligations under section 821A of the Corporations Act 2001, which states that a CS facility must, to the extent that it is reasonably practicable to do so, not only comply with standards determined by the Reserve Bank under section 827D, but also do all other things necessary to reduce systemic risk. Supporting the public interest is a broad concept that includes, for example, fostering fair and efficient markets. For example, in certain OTC derivatives markets, industry standards and market protocols have been developed to increase certainty, transparency, and stability in the market. If a CCP in such markets were to diverge from these practices, it could, in some cases, undermine the market’s efforts to develop common processes to help reduce uncertainty. An FMI’sA securities settlement facility’s governance arrangements should also include appropriate consideration of the interests of participants, participants’ customers, the Reserve Bank and other relevant authorities, and other stakeholders. A TR, for example, should have objectives, policies, and procedures that support the effective and appropriate disclosure of market data to relevant authorities and the public (see Principle 24). For all types of FMIs, Governance arrangements should provide for fair and open access (see Principle 18, insofar as this would not be inconsistent with the maintenance of acceptable risk-control standards (see SSF Standard 15 on access and participation requirements) and for effective implementation of recovery or wind-down plans, or resolution.
2.2.	An FMIA securities settlement facility should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, the Reserve Bank and other relevant authorities, participants, and, at a more general level, the public. 
2.2.1.	3.2.3.	Governance arrangements, which define the structure under which the board and management operate, should be clearly and thoroughly documented. These arrangements should include certain key components such as the (a): role and composition of the board and any board committees, (b); senior management structure, (c); reporting lines between management and the board, (d); ownership structure, (e); internal governance policy, (f) ; design of risk management and internal controls, (g); procedures for the appointment of board members and senior management,; and (h) processes for ensuring performance accountability. Governance arrangements should provide clear and direct lines of responsibility and accountability, particularly between management and the board, and ensure sufficient independence for key functions such as risk management, internal control, and audit. These arrangements should be disclosed to owners, the Reserve Bank and other relevant authorities, participants, and, at a more general level, the public. 
2.2.2.	3.2.4.	No single set of governance arrangements is appropriate for all FMIssecurities settlement facilities and all market jurisdictions. Arrangements may differ significantly because of national law, ownership structure, or organisational form. For example, national law may require an FMI to maintain a two-tier board system in which the supervisory board (all non-executive directors) is separated from the management board (all executive directors). Further, an FMIIndeed, a securities settlement facility may be owned by its participants or by another organisation, may be operated as a for-profit or not-for-profit enterprise, or may be organised as a bank or non-bank entity. While specific arrangements vary, this principleStandard is intended to be generally applicable to all ownership and organisational structures. 
2.2.3.	3.2.5.	Depending on its ownership structure and organisational form, an FMIa securities settlement facility may need to focus particular attention on certain aspects of its governance arrangements. An FMI that is part of a larger organisation, for example, should place particular emphasis on the clarity of its governance arrangements, including in relation to any conflicts of interests and outsourcing issues that may arise because of the parent or other affiliated organisation’s structure. The FMI’s governance arrangements should also be adequate to ensure that decisions of affiliated organisations are not detrimental to the FMI. An FMIFor instance, a securities settlement facility that is, or is part of, a for-profit entity may need to place particular emphasis on managing any conflicts between income generation and safety. And a securities settlement facility that is part of a larger organisation or corporate group, should consider any conflicts of interest or other issues that may arise from its relationship to its parent or to other affiliated entities (see SSF Standard 2.9). For example, a TR should ensure that it effectively identifies and manages conflicts of interests that may arise between its public role as a centralised data repository and its own commercial interests, particularly if it offers services other than recordkeeping. Where relevant, any cross-border issues should also be appropriately identified, assessed, and dealt with in the facility’s governance arrangements, both at the FMI level of the securities settlement facility and at the level(s) of its parent entity(ies). TheA securities settlement facility’s ownership structure and organisational form may also need to be considered in the preparation and implementation of the FMI’sits recovery or wind-down plans or in assessments of the FMI’sits resolvability.
3.2.6.	An FMI may also need to focus particular attention on certain aspects of its risk-management arrangements as a result of its ownership structure or organisational form. If an FMI provides services that present a distinct risk profile from, and potentially pose significant additional risks to, its payment, clearing, settlement, or recording function, the FMI needs to manage those additional risks adequately. This may include separating the additional services that the FMI provides from its payment, clearing, settlement, and recording function legally, or taking equivalent action. 
3.2.7.	Central bank-operated systems may need to tailor the application of this principle in light of the central bank’s own governance requirements and specific policy mandates. If a central bank is an operator of an FMI, as well as the overseer of private-sector FMIs, it needs to consider how to best address any possible or perceived conflicts of interest that may arise between those functions. Except when explicitly required by law, regulation, or policy mandates, a central bank should avoid using its oversight authority to disadvantage private-sector FMIs relative to an FMI the central bank owns or operates. This can be facilitated by separating the operator and oversight functions into different organisational units within the central bank that are managed by different personnel. Where there is competition with private-sector systems, a central bank should also be careful to protect confidential information about external systems collected in its role as overseer and avoid its misuse.
2.3.	The roles and responsibilities of an FMI’sa securities settlement facility’s board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address, and manage member conflicts of interest. The board should regularly review both its overall performance and the performance of its individual board members regularly.
2.3.1.	3.2.8.	An FMI’sA securities settlement facility’s board has multiple roles and responsibilities that should be clearly specified. These roles and responsibilities should include (a): establishing clear strategic aims for the entity; (b) ensuring effective monitoring of senior management (including selecting its senior managers, setting their objectives, evaluating their performance, and, where appropriate, removing them); (c) establishing appropriate compensation policies (which should be consistent with best practices and based on long-term achievements, in particular, the safety and efficiency of the FMI); (d)securities settlement facility – see paragraph 2.5.2); establishing and overseeing the risk-management function and material risk decisions; (e) overseeing internal control functions (including ensuring independence and adequate resources); (f) ensuring compliance with all supervisory and oversight requirements; (g) ensuring consideration of financial stability and other relevant public interests; and (h) providing accountability to the owners, participants, and other relevant stakeholders. (see SSF Standard 2.8).
2.3.2.	3.2.9.	Policies and procedures related to the functioning of the board should be clear and documented. These policies include the responsibilities and functioning of board committees. A board would normally be expected to have, among others, a risk committee, an audit committee, and a compensation committee, or equivalents. All such committees should have clearly assigned responsibilities and procedures.  Board policies and procedures should include processes to identify, address, and manage potential conflicts of interest of board members. Conflicts of interest include, for example, circumstances in which a board member has material competing business interests with the FMI.securities settlement facility. Further, policies and procedures should also include regular reviews of the board’s performance and the performance of each individual member, as well as, potentially, periodic independent assessments of performance. 
2.4.	The board should contain suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s). 
2.4.1.	3.2.10.	Governance policies related to board composition, appointment, and term should also be clear and documented. The board should be composed of suitable members with an appropriate mix of skills (including strategic and relevant technical skills), experience, competence, and knowledge of the entity (including an understanding of the FMI’ssecurities settlement facility’s interconnectedness with other parts of the financial system). The nature and degree of the skills, experience and expertise required of board members will depend on the size, scope and nature of the business conducted by the securities settlement facility. Members should also have a clear understanding of their roles in corporate governance, be able to devote sufficient time to their roles, ensure that their skills remain up-to-date, and have appropriate incentives to fulfil their roles. Members should be able to exercise objective and independent judgment.judgement. A securities settlement facility should be able to demonstrate that its board composition provides a sufficient degree of independence from the views of management. This typically requires the inclusion of non-executive board members, including independent board members, as appropriate. Definitions of an independent board member vary and often are determined by local laws and regulations, but. The key characteristic of independence is the ability to exercise objective, independent judgmentjudgement after fair consideration of all relevant information and views and without undue influence from executives or from inappropriate external parties or interests. The precise definition of independence used by an FMIa securities settlement facility should be specified and publicly disclosed, and should exclude parties with significant business relationships with the FMIsecurities settlement facility, cross-directorships, or controlling shareholdings, as well as employees of the organisation. Further, an FMIa securities settlement facility should publicly disclose which board members it regards as independent. An FMIThe appropriate number of independent non-executive directors on a securities settlement facility’s board will depend on the size, scope and nature of the business conducted by the securities settlement facility. A securities settlement facility may also need to consider setting a limit on the duration of board members’ terms. 
2.5.	The roles and responsibilities of management should be clearly specified. An FMI’sA securities settlement facility’s management should have the appropriate experience, a mix of skills, and the integrity necessary to effectively discharge their responsibilities for the operation and risk management of the FMIsecurities settlement facility. Compensation arrangements should be structured in such a way as to promote the soundness and effectiveness of risk management.
Roles and responsibilities of management
2.5.1.	3.2.11.	An FMI A securities settlement facility should have clear and direct reporting lines between its management and board in order to promote accountability, and the roles and responsibilities of management should be clearly specified. An FMI’sA securities settlement facility’s management should have the appropriate experience, a mix of skills, and the integrity necessary to discharge theirits responsibilities for the operation and risk management of the FMI.securities settlement facility. Under board direction, management should ensure that the FMI’ssecurities settlement facility’s activities are consistent with the objectives, strategy, and risk tolerance of the FMIsecurities settlement facility, as determined by the board. Management should ensure that internal controls and related procedures are appropriately designed and executed in order to promote the FMI’ssecurities settlement facility’s objectives, and that these procedures include a sufficient level of management oversight. Internal controls and related procedures should be subject to regular review and testing by well-trained and staffed risk-management and internal-audit functions. Additionally, senior management should be actively involved in the risk-control process and should ensure that significant resources are devoted to itsthe securities settlement facility’s risk-management framework. 
Compensation
2.5.2.	A securities settlement facility should structure compensation arrangements for management to provide incentives for sound and effective risk management. The securities settlement facility should consider offering incentives that reward management for effective risk management and the longer-term financial soundness of the facility. Fundamentally, the securities settlement facility should avoid compensation arrangements that create incentives for management to pursue greater profitability by relaxing risk controls.
2.6.	The board should establish a clear, documented risk-management framework that includes the FMI’ssecurities settlement facility’s risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. Governance arrangements should ensure that the risk-management and internal control functions have sufficient authority, independence, resources, and access to the board, including through the maintenance of a separate and independent internal-audit function. 
Risk-management governance
2.6.1.	3.2.12.	Because the board is ultimately responsible for managing an FMI’sa securities settlement facility’s risks, it should establish a clear, documented risk-management framework that includes the FMI’ssecurities settlement facility’s risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. The board should regularly monitor the FMI’ssecurities settlement facility’s risk profile to ensure that it is consistent with the FMI’ssecurities settlement facility’s business strategy and risk-tolerance policy. In addition, the board should ensure that the FMIsecurities settlement facility has an effective system of controls and oversight, including adequate governance and project-management processes, over the models used to quantify, aggregate, and manage the FMI’ssecurities settlement facility’s risks. Board approval should be required for material decisions that would have a significant impact on the risk profile of the entity, such as the limits for total credit exposure and large individual credit exposures. Other material decisions that may require board approval include the introduction of new products, implementation of new links, use of new crisis-management frameworks, adoption of processes and templates for reporting significant risk exposures, and adoption of processes for considering adherence to relevant market protocols. In the OTC derivatives markets, CCPs are expected to adhere to practices or arrangements that have become established market conventions or to act in a manner that does not conflict with such terms, unless the CCP has reasonable grounds not to do so and that does not conflict with the market’s wider interest. In this regard, where a CCP supports a market and is expected to fully adhere to marketwide protocols and related decisions, the CCP should be involved in the development and establishment of such standards. It is critical that market governance processes fully reflect the role of the CCP in the market. The arrangements adopted by a CCP should be transparent to its participants and regulators. 
2.6.2.	3.2.13.	The board and governance arrangements, generally, should support the use of clear and comprehensive rules and key procedures, including detailed and effective participant-default rules and procedures (see Principle 13SSF Standard 11). The board should have procedures in place to support its capacity to act appropriately and immediately if any risks arise that threaten the FMI’ssecurities settlement facility’s viability as a going concern. The governance arrangements should also provide for effective decision making in a crisis and support any procedures and rules designed to facilitate the recovery or orderly wind-down of the FMIsecurities settlement facility. 
2.6.3.	3.2.14.	In addition, the governance of the risk-management function is particularly important. It is essential that an FMI’sa securities settlement facility’s risk-management personnel have sufficient independence, authority, resources, and access to the board to ensure that the operations of the FMIsecurities settlement facility are consistent with the risk-management framework set by the board. The reporting lines for risk management should be clear and separate from those for other operations of the FMIsecurities settlement facility, and there should be an additional direct reporting line to a non-executive director on the board via a chief risk officer (or equivalent). To help the board discharge its risk-related responsibilities, an FMIa securities settlement facility should consider the case forhave a risk committee, responsible for advising the board on the FMI’ssecurities settlement facility’s overall current and future risk tolerance and strategy. A CCP, however, should have such a risk committee or its equivalent. An FMI’s A securities settlement facility’s risk committee should be chaired by a sufficiently knowledgeable individual who is typically independent of the FMI’ssecurities settlement facility’s executive management and should typically be composed of a majority of members who are non-executive members. The committee should have a clear and public mandate and operating procedures and, where appropriate, have access to external expert advice. 
3.2.15.	Where an FMI, in accordance with applicable law, maintains a two-tier board system, the roles and responsibilities of the board and senior management will be allocated to the supervisory board and the management board, as appropriate. The reporting lines of the risk and other committees need to reflect this allocation, as well as the legal responsibilities of the management and supervisory boards. Therefore a direct reporting line for the risk-management function may involve members of the management board. In addition, the establishment of a risk committee has to take into account the legally founded responsibility of the management board for managing the risks of the FMI.
Model validation
2.6.4.	3.2.16.	The board should ensure that there is adequate governance surrounding the adoption and use of models, such as for credit, collateral, margining, and liquidity risk‑management systems. An FMIA securities settlement facility should validate, on an ongoing basis, the models and their methodologies used to quantify, aggregate, and manage the FMI’ssecurities settlement facility’s risks. The validation process should be independent of the development, implementation, and operation of the models and their methodologies, and the validation process should be subjectedsubject to an independent review of its adequacy and effectiveness. Validation should include (a): an evaluation of the conceptual soundness of (including developmental evidence supporting) the models, (b); an ongoing monitoring process that includes verification of processes and benchmarking,; and (c) an analysis of outcomes that includes backtesting.
2.7.	A securities settlement facility’s operations, risk-management processes, internal control mechanisms and accounts should be subject to internal audit and periodic external independent expert review.  Internal audits should be performed, at a minimum, on an annual basis. The outcome of internal audits and external reviews should be notified to the Reserve Bank and other relevant authorities.
Internal controls and audit
2.7.1.	3.2.17.	The board is responsible for establishing and overseeing internal controls and audit. An FMIA securities settlement facility should have sound internal control policies and procedures to help manage its risks. For example, as part of a variety of risk controls, the board should ensure that there are adequate internal controls to protect against the misuse of confidential information. An FMIA securities settlement facility should also have an effective internal-audit function, with sufficient resources and independence from management to provide, among other activities, a rigorous and independent assessment of the effectiveness of an FMI’sa securities settlement facility’s risk-management and control processes (see also PrincipleSSF Standard 3 on the framework for the comprehensive management of risks). The board will typically establish an audit committee to oversee the internal-audit function. In addition to reporting to senior management, the audit function should have regular access to the board through an additional reporting line. 
External review
2.7.2.	A securities settlement facility should engage independent and appropriately qualified external experts to conduct a review of its operations, risk-management processes, internal control mechanisms and accounts on an annual basis, or more frequently if required. The adequacy of and adherence to control mechanisms may also be assessed through regular independent compliance programmes.  Additional external reviews may be required if internal-audit processes or other internal controls identify potential areas of weakness that require additional external scrutiny and analysis. The outcomes of annual or ad hoc external reviews should be provided to the Reserve Bank and other relevant authorities on a timely basis, and the securities settlement facility should advise the Reserve Bank or other relevant authorities as to how it plans to address any areas of weakness identified.
2.8.	The board should ensure that the FMI’ssecurities settlement facility’s design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Governance arrangements should provide for consultation and stakeholder engagement through appropriate fora on operational arrangements, and risk-control and default-management rules and procedures. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.
2.8.1.	3.2.18.	An FMI’sA securities settlement facility’s board should consider all relevant stakeholders’ interests, including those of its direct and indirect participants, in making major decisions, including those relating to the system’s design, rules, and overall business strategy. An FMIA securities settlement facility with cross-border operations, in particular, should ensure that the full range of views across the jurisdictions in which it operates is appropriately considered in the decision-making process. Mechanisms for involving stakeholders in the board’s decision-making process may include stakeholder representation on the board (including direct and indirect participants), user committees, and public consultation processes. Where appropriate, a securities settlement facility should consider establishing targeted stakeholder fora that provide opportunities for focused consultation with specific segments of the participant base, or other stakeholders that have common interests. This might be particularly important where stakeholders vary significantly in size, location or other characteristics. These fora may provide opportunity for stakeholder input on matters such as the securities settlement facility’s operational arrangements, risk controls and default-management rules and procedures. As opinions among interested parties are likely to differ, the FMIsecurities settlement facility should have clear processes for identifying and appropriately managing the diversity of stakeholder views and any conflicts of interest between stakeholders and the FMI.securities settlement facility. Without prejudice to local requirements on confidentiality and disclosure, the FMIsecurities settlement facility should clearly and promptly inform its owners, participants, other users, and, where appropriate, the broader public, of the outcome of major decisions, and consider providing summary explanations for decisions to enhance transparency where it would not endanger candid board debate or commercial confidentiality.
2.9.	A securities settlement facility that is part of a group of companies should take into account any implications of the group structure and activities for its own governance arrangements, including whether it has the necessary level of independence of decision making and management to meet its regulatory obligations as a distinct legal entity, and whether such independence could be compromised by the group structure or by board members also being members of the board of other entities in the same group. In particular, such a securities settlement facility should consider specific procedures for preventing and managing conflicts of interest, including with respect to intra-group outsourcing arrangements.
2.9.1.	Where a securities settlement facility is part of a wider corporate group, there may be the potential for conflicts to arise between the obligations and interests of the securities settlement facility and those of other entities in the group, or the group as a whole. For example, where a securities settlement facility utilises staff or other resources that are employed or owned by other group entities, there may be circumstances in which it is in the interests of the group to withhold the provision of those resources – for instance, if it appears likely that the securities settlement facility may enter external administration. A securities settlement facility should therefore ensure that it has sufficient independence in decision making and management such that potential conflicts will not prevent it from fulfilling its obligations. This may include consideration of whether adequate arrangements exist to manage potential conflicts arising from board composition – i.e. where directors of other group entities are members of the securities settlement facility’s board – or any intra-group outsourcing arrangements (including the sharing of staff or other resources) that exist between the securities settlement facility and other group entities.
PrincipleStandard 3: Framework for the comprehensive management of risks 
An FMIA securities settlement facility should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.
Explanatory noteGuidance
3.3.1.	An FMIA securities settlement facility should take an integrated and comprehensive view of its risks, including the risks it bears from and poses to its participants and their customers, as well as the risks it bears from and poses to other entities, such as other FMIs, money settlement banksagents, liquidity providers, and service providers (for example, matching and portfolio compression service providers). An FMI. A securities settlement facility should consider how various risks relate to, and interact with, each other. The FMIThe securities settlement facility should have a sound risk-management framework (including policies, procedures, and systems) that enable it to identify, measure, monitor, and manage effectively the range of risks that arise in or are borne by the FMI. An FMI’ssecurities settlement facility. A securities settlement facility’s framework should include the identification and management of interdependencies. An FMIA securities settlement facility should also provide appropriate incentives and the relevant information for its participants and other entities to manage and contain their risks vis-à-vis the FMI.securities settlement facility. As discussedset out in PrincipleSSF Standard 2 on governance, the board of directors plays a critical role in establishing and maintaining a sound risk-management framework.
3.1.	An FMIA securities settlement facility should have risk-management policies, procedures, and systems that enable it to identify, measure, monitor, and manage the range of risks that arise in or are borne by the FMI.securities settlement facility. This risk-management frameworks should be subject to periodic review.
Identification of risks
3.1.1.	3.3.2.	To establish a sound risk-management framework, an FMIa securities settlement facility should first identify the range of risks that arise within the FMIsecurities settlement facility and the risks it directly bears from or poses to its participants, its participants’ customers, and other entities. It should identify those risks that could materially affect its ability to perform or to provide services as expected. Typically these include legal, credit, liquidity, and operational risks. An FMI, and in some cases may include credit and liquidity risks. A securities settlement facility should also consider other relevant and material risks, such as market (or price), concentration, and general business risks, as well as risks that do not appear to be significant in isolation, but when combined with other risks become material. The consequences of these risks may have significant reputational effects on the FMIsecurities settlement facility and may undermine an FMI’sa securities settlement facility’s financial soundness as well as the stability of the broader financial markets. In identifying risks, an FMIa securities settlement facility should take a broad perspective and identify the risks that it bears from other entities, such as other FMIs, money settlement banksagents, liquidity providers, service providers, and any entities that could be materially affected by the FMI’ssecurities settlement facility’s inability to provide services. For example, the relationship between an SSSa securities settlement facility and an LVPSa large-value payment system to achieve DvP settlement can create system-based interdependencies. 
Comprehensive risk policies, procedures, and controls
3.1.2.	3.3.3.	An FMI’sA securities settlement facility’s board and senior management are ultimately responsible for managing the FMI’ssecurities settlement facility’s risks (see PrincipleSSF Standard 2 on governance). The board should determine an appropriate level of aggregate risk tolerance and capacity for the FMI.securities settlement facility. The board and senior management should establish policies, procedures, and controls that are consistent with the FMI’ssecurities settlement facility’s risk tolerance and capacity. The FMI’ssecurities settlement facility’s policies, procedures, and controls serve as the basis for identifying, measuring, monitoring, and managing the FMI’ssecurities settlement facility’s risks and should cover routine and non-routine events, including the potential inability of a participant, or the FMIsecurities settlement facility itself, to meet its obligations. An FMI’sA securities settlement facility’s policies, procedures, and controls should address all relevant risks, including legal, credit, liquidity, general business, and operational risks. These policies, procedures, and controls should be part of a coherent and consistent framework that is reviewed and updated periodically, and shared with the Reserve Bank and other relevant authorities.
Information and control systems
3.1.3.	3.3.4.	In addition, an FMIa securities settlement facility should employ robust information and risk-control systems to provide the FMIsecurities settlement facility with the capacity to obtain timely information necessary to apply risk-management policies and procedures. In particular, these systems should allow for the accurate and timely measurement and aggregation of risk exposures across the FMIsecurities settlement facility, the management of individual risk exposures and the interdependencies between them, and the assessment of the impact of various economic and financial shocks that could affect the FMI.securities settlement facility. Where relevant, information systems should also enable the FMIsecurities settlement facility to monitor its credit and liquidity exposures, overall credit and liquidity limits, and the relationship between these exposures and limits.
3.1.4.	3.3.5.	Where appropriate, an FMIa securities settlement facility should also provide its participants and its participants’ customers with the relevant information to manage and contain their credit and liquidity risks. An FMIA securities settlement facility may consider it beneficial to provide its participants and its participants’ customers with information necessary to monitor their credit and liquidity exposures, overall credit and liquidity limits, and the relationship between these exposures and limits. For example, where the FMI permits participants’ customers to create exposures in the FMI that are borne by the participants, the FMI should provide participants with the capacity to limit such risks.
Internal controls
3.1.5.	3.3.9.	An FMIA securities settlement facility also should have comprehensive internal processes to help the board and senior management monitor and assess the adequacy and effectiveness of an FMI’sa securities settlement facility’s risk-management policies, procedures, systems, and controls. While business-line management serves as the first “‘line of defence,”defence’, the adequacy of and adherence to control mechanisms should be assessed regularly through independent compliance programmes and independent auditsexternal reviews. A robust internal-audit function can provide an independent assessment of the effectiveness of an FMI’sa securities settlement facility’s risk-management and control processes. An emphasis on the adequacy of controls by senior management and the board as well as internal audit can also help counterbalance a business-management culture that may favour business interests over establishing and adhering to appropriate controls. In addition, proactive engagement of audit and internal control functions when changes are under consideration can also be beneficial. Specifically, FMIssecurities settlement facilities that involve their internal-audit function in pre-implementation reviews will often reduce their need to expend additional resources to retrofit processes and systems with critical controls that had been overlooked during initial design phases and construction efforts.
3.2.	A securities settlement facility should ensure that financial and other obligations imposed on participants under its risk-management framework are proportional to the scale and nature of individual participants’ activities.
3.2.1.	A securities settlement facility should ensure that it has sufficient risk controls and other arrangements in place to comply with the SSF Standards, and address any other systemic risk implications of its activities. In accordance with a securities settlement facility’s risk-management framework, these arrangements may place financial and other obligations on participants, such as ex ante-agreed arrangements for the provision of liquid resources and allocations of uncovered losses or liquidity shortfalls (see SSF Standard 4 on credit risk, SSF Standard 6 on liquidity risk, and SSF Standard 11 on participant-default rules and procedures), or minimum operational requirements (see SSF Standard 14 on operational risk). Such obligations should be proportional to the nature and magnitude of the risk that individual participants’ activities pose to the safety of the securities settlement facility. In general, obligations placed on a participant with limited and conservative activities should differ from those placed on a participant with extensive and risky activities. For the purposes of this Standard, financial obligations do not include minimum capital requirements for participants, which are dealt with under SSF Standard 15 on access and participation requirements.
3.3.	A securities settlement facility should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the FMIsecurities settlement facility. 
3.3.1.	3.3.6.	In establishing risk-management policies, procedures, and systems, an FMIa securities settlement facility should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the FMI.securities settlement facility. There are several ways in which an FMIa securities settlement facility may provide incentives. For example, an FMIa securities settlement facility could apply financial penalties to participants that fail to settle securities in a timely manner or to repay intraday credit by the end. Provision of the operating day. Another example is the use of loss-sharing arrangements proportionate to the exposures brought to the FMI. Such approachesincentives can help reduce the moral hazard that may arise from formulas in which losses are shared equally among participants or other formulas where losses are not shared proportionally to risk.
3.4.	An FMIA securities settlement facility should regularly review the material risks it bears from and poses to other entities (such as other FMIs, money settlement agentssettlement banks, liquidity providers, and service providers) as a result of interdependencies, and develop appropriate risk-management tools to address these risks.
3.4.1.	3.3.7.	An FMIA securities settlement facility should regularly review the material risks it bears from and poses to other entities (such as other FMIs, money settlement banksagents, liquidity providers, or service providers) as a result of interdependencies and develop appropriate risk-management tools to address these risks (see also Principle 20SSF Standard 17 on FMI links). In particular, an FMIa securities settlement facility should have effective risk-management tools to manage all relevant risks, including the legal, credit, liquidity, general business, and operational risks that it bears from and poses to other entities, in order to limit the effects of disruptions from and to such entities as well as disruptions from and to the broader financial markets. These tools should include business-continuity arrangements that allow for rapid recovery and resumption of critical operations and services in the event of operational disruptions (see Principle 17SSF Standard 14 on operational risk), liquidity risk-management techniques (see Principle 7SSF Standard 6 on liquidity risk), and recovery or orderly wind-down plans should the FMIsecurities settlement facility become non-viable. Because of the interdependencies between and among systems, an FMIa securities settlement facility should ensure that its crisis-management arrangements allow for effective coordination among the affected entities, including cases in which its own viability or the viability of an interdependent entity is in question. 
3.5.	An FMIA securities settlement facility should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. An FMIA securities settlement facility should prepare appropriate plans for its recovery or orderly wind-down based on the results of that assessment. Where applicable, an FMIa securities settlement facility should also provide relevant authorities with the information needed for purposes of resolution planning. 
3.5.1.	3.3.8.	An FMIA securities settlement facility should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. These scenarios should take into account the various independent and related risks to which the FMIsecurities settlement facility is exposed. Using this analysis (and taking into account any constraints potentially imposed by domestic legislation), the FMIsecurities settlement facility should prepare appropriate plans for its recovery or orderly wind-down. The planplans should contain, among other elements, a substantive summary of the key recovery or orderly wind-down strategies, the identification of the FMI’ssecurities settlement facility’s critical operations and services, and a description of the measures needed to implement the key strategies. An FMIA securities settlement facility should have the capacity to identify and provide to related entities the information needed to implement the planits plans on a timely basis during stress scenarios. In addition, these plans should be reviewed and updated regularly. Where applicable, an FMIa securities settlement facility should provide relevant resolution authorities with the information, including strategy and scenario analysis, needed for purposes of resolution planning.
PrincipleStandard 4: Credit risk 
An FMIA securities settlement facility should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMIA securities settlement facility should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions.
Explanatory noteGuidance
This Standard applies only to a securities settlement facility that assumes credit risk as principal. In general, a securities settlement facility operating in Australia would not be expected to assume credit risk as principal. The design of the securities settlement facility and the scope of its activities should minimise the potential for such risk to arise. In the event that it did assume credit risk as principal, the facility should consult with the Reserve Bank to identify clearly the circumstances in which such risk was assumed. 
3.4.1.	Credit risk is broadly defined as the risk that a counterparty will be unable to meet fully its financial obligations when due or at any time in the future. The default of a participant (and its affiliates) has the potential to cause severe disruptionsdisruption to an FMIa securities settlement facility, its other participants, and the financial markets more broadly. Therefore, an FMIa securities settlement facility should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing, and settlement processes (see also PrincipleSSF Standard 3 on the framework for the comprehensive management of risks, Principle 9SSF Standard 8 on money settlements, and Principle 16SSF Standard 10 on exchange-of-value systems, and SSF Standard 13 on custody and investment risks). Credit exposure may arise in the form of current exposures, potential future exposures, or both. Current exposure, in this context, is defined as the loss that an FMI (or in some cases, its participants)a securities settlement facility would face immediately if a participant were to default. Potential future exposure is broadly defined as any potential credit exposure that an FMIa securities settlement facility could face at a future point in time. The type and level of credit exposure faced by an FMIa securities settlement facility will vary based on its design and the credit risk of the counterparties concerned.
Credit risk in payment systems
3.4.2.	Sources of credit risk. A payment system may face credit risk from its participants, its payment and settlement processes, or both. This credit risk is driven mainly by current exposures from extending intraday credit to participants. For example, a central bank that operates a payment system and provides intraday credit will face current exposures. A payment system can avoid carrying over current exposures to the next day by requiring its participants to refund any credit extensions before the end of the day. Intraday credit can lead to potential future exposures even when the FMI accepts collateral to secure the credit. A payment system would face potential future exposure if the value of collateral posted by a participant to cover intraday credit were to fall below the amount of credit extended to the participant by the FMI, leaving a residual exposure.
3.4.3.	Sources of credit risk in deferred net settlement systems. A payment system that employs a DNS mechanism may face financial exposures arising from its relationship with its participants or its payment and settlement processes. A DNS payment system may explicitly guarantee settlement, whether the guarantee is provided by the FMI itself or its participants. In such systems, the guarantor of the arrangement would face current exposure if a participant were not to meet its payment or settlement obligations. Even in a DNS system that does not have an explicit guarantee, participants in the payment system may still face settlement risk vis-à-vis each other. Whether this risk involves credit exposures or liquidity exposures, or a combination of both, will depend on the type and scope of obligations, including any contingent obligations, the participants bear. The type of obligations will, in turn, depend on factors such as the payment system’s design, rules, and legal framework.
3.4.4.	Measuring and monitoring credit risk. A payment system should frequently and regularly measure and monitor its credit risks, throughout the day using timely information. A payment system should ensure it has access to adequate information, such as appropriate collateral valuations, to allow it to measure and monitor its current exposures and degree of collateral coverage. In a DNS payment system without a settlement guarantee, the FMI should provide the capacity to its participants to measure and monitor their current exposures to each other in the system or adopt rules that require participants to provide relevant exposure information. Current exposure is relatively straightforward to measure and monitor; however, potential future exposure may require modelling or estimation. In order to monitor its risks associated with current exposure, a payment system should monitor market conditions for developments that could affect these risks, such as collateral values. In order to estimate its potential future exposure and associated risk, a payment system should model possible changes in collateral values and market conditions over an appropriate liquidation period. A payment system, where appropriate, needs to monitor the existence of large exposures to its participants and their customers. Additionally, it should monitor any changes in the creditworthiness of its participants.
3.4.5.	Mitigating and managing credit risk. A payment system should mitigate its credit risks to the extent possible. A payment system can, for example, eliminate some of its or its participants’ credit risks associated with the settlement process by employing an RTGS mechanism. In addition, a payment system should limit its current exposures by limiting intraday credit extensions and, where relevant, avoid carrying over these exposures to the next day by requiring participants to refund any credit extensions before the end of the day. Such limits should balance the usefulness of credit to facilitate settlement within the system against the payment system’s credit exposures. 
3.4.6.	In order to manage the risk from a participant default, a payment system should consider the impact of participant defaults and robust techniques for managing collateral. A payment system should cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources (equity can be used after deduction of the amount dedicated to cover general business risk) (see Principle 5 on collateral and Principle 15 on general business risk). By requiring collateral to cover the credit exposures, a payment system mitigates, and in some cases eliminates, its current exposure and may provide participants with an incentive to manage credit risks they pose to the payment system or other participants. Further, this collateralisation reduces the need in a DNS payment system to unwind payments should a participant default on its obligations. Collateral or other equivalent financial resources can fluctuate in value, however, so the payment system should establish prudent haircuts to mitigate the resulting potential future exposure.
3.4.7. 	A DNS payment system that explicitly guarantees settlement, whether the guarantee is from the FMI itself or from its participants, should maintain sufficient financial resources to cover fully all current and potential future exposures using collateral and other equivalent financial resources. A DNS payment system in which there is no settlement guarantee, but where its participants face credit exposures arising from its payment and settlement processes, should maintain, at a minimum, sufficient resources to cover the exposures of the two participants and their affiliates that would create the largest aggregate credit exposure in the system. A higher level of coverage should be considered for a payment system that creates large exposures or that could have a significant systemic impact if more than two participants and their affiliates were to default. 
4.1.	An FMIA securities settlement facility should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing, and settlement processes. Credit exposures may arise from current exposures, potential future exposures, or both.
4.1.1.	3.4.8.	Sources of credit risk. An SSSA securities settlement facility may face a number of credit risks from its participants or its settlement processes. An SSS faces A securities settlement facility may face counterparty credit risk when it extends intraday or overnightfrom the extension of credit to participants. This extension of credit creates current exposures and can lead to potential future exposures, even when the SSSsecurities settlement facility accepts collateral to secure the credit. An SSSA securities settlement facility would face potential future exposure if the value of collateral posted by a participant to cover this credit mightcould fall below the amount of credit extended to the participant by the SSSsecurities settlement facility, leaving a residual uncovered exposure. In addition, an SSSa securities settlement facility that explicitly guarantees settlement would face current exposures if arising from any failure of a participant were not to fund its net debit position or meet its obligations to deliver financial instruments. Further, if an SSS does not use a DvP settlement mechanism, the SSS or its participants face principal risk, which is the risk of loss of securities or payments made to the defaulting participant prior to the detection of the default (see Principle 12 on exchange-of-value settlement systems).
4.2.	An FMIA securities settlement facility should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk-management tools to control these risks. To assist in this process, a securities settlement facility should ensure it has mechanisms in place to calculate exposures to participants in real time, and to receive and review timely and accurate information on participants’ credit standing. 
4.2.1.	3.4.10.	Measuring and monitoring credit risk. An SSSA securities settlement facility should frequently and regularly measure and monitor its credit risks throughout the day using timely information. An SSSA securities settlement facility should ensure it has access to adequate information, such as appropriate collateral valuations, to allow it to measure and monitor its current exposures and degree of collateral coverage. If credit risk exists between participants, the SSSsecurities settlement facility should provide the capacity to participants to measure and monitor their current exposures to each other in the system or adopt rules that require participants to provide relevant exposure information. Current exposure should be relatively straightforward to measure and monitor; however, potential future exposure may require modelling or estimation. In order to monitor its risks associated with current exposure, an SSSa securities settlement facility should monitor market conditions for developments that could affect these risks, such as collateral values. In order to estimate its potential future exposure and associated risk, an SSSa securities settlement facility should model possible changes in collateral values and market conditions over an appropriate liquidation period. An SSSA securities settlement facility, where appropriate, needs to monitor the existence of large exposures to its participants and their customers. Additionally, it should monitor any changes in the creditworthiness of its participants through the systematic review of timely information on financial standing, business activities and profile, and potential interdependencies.
4.2.2.	3.4.11.	Mitigating and managing credit risk. An SSSA securities settlement facility should mitigate its credit risks to the extent possible. An SSSA securities settlement facility should, for example, eliminate its or its participants’ principal risk associated with the settlement process by employing an exchange-of-value settlement system (see Principle 12SSF Standard 10 on exchange-of-value settlement systems). The use of a system that settles securities and funds on a gross, obligation-by-obligation basis (DvP model 1) would further reduce credit and liquidity exposures among participants and between participants and the SSS.securities settlement facility. In addition, an SSSa securities settlement facility should limit its current exposures by strictly limiting intraday credit the extensions and, where relevant, overnight credit extensions. Such limits should balance the usefulness of credit to facilitate settlement within the system against the SSS’s credit exposures.
4.3.	A securities settlement facility should have the authority to impose activity restrictions or additional credit risk controls on a participant in situations where the securities settlement facility determines that the participant’s credit standing may be in doubt. 
4.3.1.	If a securities settlement facility determines that a participant’s credit standing may be in doubt, it should have the authority to impose additional credit risk controls on the participant. These may include placing restrictions on the level or types of activities that the participant can undertake, or calling for additional collateral from the participant. In extreme cases, the securities settlement facility may need to consider suspending the participant (see SSF Standard 11 on participant-default rules and procedures and SSF Standard 15 on access and participation requirements).
4.4.	A payment system or SSSA securities settlement facility should cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources (see PrincipleSSF Standard 5 on collateral). In the case of a DNS payment system or DNS SSSsecurities settlement facility in which there is no settlement guarantee, but where its participants face credit exposures arising from its payment, clearing, and settlement processes, such an FMIthe facility should maintain, at a minimum, sufficient resources to cover the exposures of the two participants and their affiliates that would create the largest aggregate credit exposure in the system.
4.4.1.	3.4.9.	 Sources of credit risk in deferred net settlement systems. An SSSA securities settlement facility may settle securities on a gross basis and funds on a net basis (DvP model 2) or settle both securities and funds on a net basis (DvP model 3). Further, an SSSa securities settlement facility that uses a DvP model 2 or 3 settlement mechanism may explicitly guarantee settlement, whether the guarantee is by the FMIsecurities settlement facility itself or by its participants. In such systems, this guarantee represents an extension of intraday credit from the guarantor. In an SSSIn a securities settlement facility that does not provide an explicit settlement guarantee, participants may face settlement risk vis-à-vis each other if a participant defaults on its obligations. Whether this settlement risk involves credit exposures, liquidity exposures, or a combination of both will depend on the type and scope of the obligations, including any contingent obligations, the participants bear. The type of obligations will, in turn, depend on factors such as the SSS’ssecurities settlement facility’s design, rules, and legal framework.
4.4.2.	3.4.12. 	In order to manage the risk from a participant default, an SSSa securities settlement facility should consider the impact of participant defaults and use robust techniques for managing collateral. An SSSA securities settlement facility should cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources (equity can be used after deduction of the amount dedicated to cover general business risk) (see PrincipleSSF Standard 5 on collateral and Principle 15SSF Standard 12 on general business risk). By requiring collateral to cover the credit exposures, an SSSa securities settlement facility mitigates, and in some cases eliminates, its current exposures and may provide participants with an incentive to manage the credit risks they pose to the SSSsecurities settlement facility or other participants. Further, this collateralisation allows an SSSa securities settlement facility that employs a DvP model 2 or 3 mechanism to avoid unwinding transactions or to mitigate the effect of an unwind should a participant default on its obligations. Collateral and other equivalent financial resources can fluctuate in value, however, so the SSSsecurities settlement facility needs to establish prudent haircuts to mitigate the resulting potential future exposures. 
4.4.3.	3.4.13.	An SSSA securities settlement facility that uses a DvP model 2 or 3 mechanism and explicitly guarantees settlement, whether the guarantee is from the FMIsecurities settlement facility itself or from its participants, should maintain sufficient financial resources to cover fully, with a high degree of confidence, all current and potential future exposures using collateral and other equivalent financial resources. An SSSA securities settlement facility that uses a DvP model 2 or 3 mechanism and does not explicitly guarantee settlement, but where its participants face credit exposures arising from its payment, clearing, and settlement processes, should maintain, at a minimum, sufficient resources to cover the exposures of the two participants and their affiliates that would create the largest aggregate credit exposure in the system. DvP model 3 mechanisms do not create credit exposures for participants due to the contemporaneous settlement of linked obligations. A higher level of coverage should be considered for an SSSa securities settlement facility that has large exposures or that could have a significant systemic impact if more than two participants and their affiliates were to default. 
3.4.14.	Sources of credit risk. A CCP typically faces both current and potential future exposures because it typically holds open positions with its participants. Current exposure arises from fluctuations in the market value of open positions between the CCP and its participants. Potential future exposure arises from potential fluctuations in the market value of a defaulting participant’s open positions until the positions are closed out, fully hedged, or transferred by the CCP following an event of default. For example, during the period in which a CCP neutralises or closes out a position following the default of a participant, the market value of the position or asset being cleared may change, which could increase the CCP’s credit exposure, potentially significantly. A CCP can also face potential future exposure due to the potential for collateral (initial margin) to decline significantly in value over the close-out period.
3.4.15.	Measuring and monitoring credit risk. A CCP should frequently and regularly measure and monitor its credit risks throughout the day using timely information. A CCP should ensure that it has access to adequate information to allow it to measure and monitor its current and potential future exposures. Current exposure is relatively straightforward to measure and monitor when relevant market prices are readily available. Potential future exposure is typically more challenging to measure and monitor and usually requires modelling and estimation of possible future market price developments and other variables and conditions, as well as specifying an appropriate time horizon for the close out of defaulted positions. In order to estimate the potential future exposures that could result from participant defaults, a CCP should identify risk factors and monitor potential market developments and conditions that could affect the size and likelihood of its losses in the close out of a defaulting participant’s positions. A CCP should monitor the existence of large exposures to its participants and, where appropriate, their customers. Additionally, it should monitor any changes in the creditworthiness of its participants.
3.4.16.	Mitigating and managing credit risk. A CCP should mitigate its credit risk to the extent possible. For example, to control the build-up of current exposures, a CCP should require that open positions be marked to market and that each participant pay funds, typically in the form of variation margin, to cover any loss in its positions’ net value at least daily; such a requirement limits the accumulation of current exposures and therefore mitigates potential future exposures. In addition, a CCP should have the authority and operational capacity to make intraday margin calls, both scheduled and unscheduled, from participants. Further, a CCP may choose to place limits on credit exposures in some cases, even if collateralised. Limits on concentrations of positions or additional collateral requirements may also be warranted.
3.4.17. 	A CCP typically uses a sequence of prefunded financial resources, often referred to as a “waterfall,” to manage its losses caused by participant defaults. The waterfall may include a defaulter’s initial margin, the defaulter’s contribution to a prefunded default arrangement, a specified portion of the CCP’s own funds, and other participants’ contributions to a prefunded default arrangement. Initial margin is used to cover a CCP’s potential future exposures, as well as current exposures not covered by variation margin, to each participant with a high degree of confidence. However, a CCP generally remains exposed to residual risk (or tail risk) if a participant defaults and market conditions concurrently change more drastically than is anticipated in the margin calculations. In such scenarios, a CCP’s losses may exceed the defaulting participant’s posted margin. Although it is not feasible to cover all such tail risks given the unknown scope of potential losses due to price changes, a CCP should maintain additional financial resources, such as additional collateral or a prefunded default arrangement, to cover a portion of the tail risk.
3.4.18.	A CCP should cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources. As discussed more fully in Principle 6 on margin, a CCP should establish initial margin requirements that are commensurate with the risks of each product and portfolio. Initial margin should meet an established single-tailed confidence level of at least 99 percent of the estimated distribution of future exposure. For a CCP that calculates margin at the portfolio level, this standard applies to the distribution of future exposure of each portfolio. For a CCP that calculates margin at more-granular levels, such as at the subportfolio level or product level, the standard must be met for the corresponding distributions of future exposure.
3.4.19.	In addition to fully covering its current and potential future exposures, a CCP should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios involving extreme but plausible market conditions. Specifically, a CCP that is involved in activities with a more-complex risk profile (such as clearing financial instruments that are characterised by discrete jump-to-default price changes or that are highly correlated with potential participant defaults) or that is systemically important in multiple jurisdictions, should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. Determinations of whether a CCP is systemically important in multiple jurisdictions should include consideration of, among other factors, (a) the location of the CCP’s participants, (b) the aggregate volume and value of transactions that originate in each jurisdiction in which it operates, (c) the proportion of its total volume and value of transactions that originate in each jurisdiction in which it operates, (d) the range of currencies in which the instruments it clears are cleared or settled, (e) any links it has with FMIs located in other jurisdictions, and (f) the extent to which it clears instruments that are subject to mandatory clearing obligations in multiple jurisdictions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. In all cases, a CCP should document its supporting rationale for, and should have appropriate governance arrangements relating to (see Principle 2 on governance), the amount of total financial resources it maintains.
3.4.20.	A CCP should determine the amount and regularly test the sufficiency of its total financial resources through stress testing. A CCP should also conduct reverse stress tests, as appropriate, to test how severe stress conditions would be covered by its total financial resources. Because initial margin is a key component of a CCP’s total financial resources, a CCP should also test the adequacy of its initial margin requirements and model through backtesting and sensitivity analysis, respectively (see Principle 6 for further discussion on testing of the initial margin requirements and model). 
3.4.21. 	Stress testing. A CCP should determine the amount and regularly test the sufficiency of its total financial resources available in the event of a default or multiple defaults in extreme but plausible market conditions through rigorous stress testing. A CCP should have clear procedures to report the results of its stress tests to appropriate decision makers at the CCP and to use these results to evaluate the adequacy of and adjust its total financial resources. Stress tests should be performed daily using standard and predetermined parameters and assumptions. On at least a monthly basis, a CCP should perform a comprehensive and thorough analysis of stress-testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for determining the CCP’s required level of default protection in light of current and evolving market conditions. A CCP should perform this analysis of stress testing more frequently when the products cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by a CCP’s participants increases significantly. A full validation of a CCP’s risk-management model should be performed at least annually.
3.4.22. 	In conducting stress testing, a CCP should consider a wide range of relevant stress scenarios in terms of both defaulters’ positions and possible price changes in liquidation periods. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Extreme but plausible conditions should not be considered a fixed set of conditions, but rather, conditions that evolve. Stress tests should quickly incorporate emerging risks and changes in market assumptions (for example, departures from usual patterns of co-movements in prices among the products a CCP clears). A CCP proposing to clear new products should consider movements in prices of any relevant related products. 
3.4.23. 	Reverse stress tests. A CCP should conduct, as appropriate, reverse stress tests aimed at identifying the extreme scenarios and market conditions in which its total financial resources would not provide sufficient coverage of tail risk. Reverse stress tests require a CCP to model hypothetical positions and extreme market conditions that may go beyond what are considered extreme but plausible market conditions in order to help understand margin calculations and the sufficiency of financial resources given the underlying assumptions modelled. Modelling extreme market conditions can help a CCP determine the limits of its current model and resources; however, it requires the CCP to exercise judgment when modelling different markets and products. A CCP should develop hypothetical extreme scenarios and market conditions tailored to the specific risks of the markets and of the products it serves. Reverse stress testing should be considered a helpful management tool but need not, necessarily, drive the CCP’s determination of the appropriate level of financial resources. 
4.5.	An FMIA securities settlement facility should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the FMI.securities settlement facility. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds an FMIa securities settlement facility may borrow from liquidity providers. These rules and procedures should also indicate the FMI’ssecurities settlement facility’s process to replenish any financial resources that the FMIsecurities settlement facility may employ during a stress event, so that the FMIsecurities settlement facility can continue to operate in a safe and sound manner.
Use of financial resources
4.5.1.	3.4.24. 	The rules of an FMIa securities settlement facility should expressly set out the waterfall, including the order and circumstances in which specific resources of the FMIsecurities settlement facility can be used in a participant default (see Principle 13SSF Standard 11 on participant-default rules and procedures and Principle 23SSF Standard 18 on disclosure of rules, key policies and procedures, and market data). For the purposes of this principle, an FMIStandard, a securities settlement facility should not include as “available”‘available’ to cover credit losses from participant defaults those resources that are needed to cover current operating expenses, potential general business losses, or other losses from otherancillary activities in which the FMIsecurities settlement facility is engaged (see Principle 15SSF Standard 1 on legal basis and SSF Standard 12 on general business risk). In addition, if an FMIa securities settlement facility serves multiple markets (either in the same jurisdiction or multiple jurisdictions), its ability to use resources supplied by participants in one market to cover losses from a participant default in another market should have a sound legal basis, be clear to all participants, and avoid significant levels of contagion risk between markets and participants. The design of an FMI’sa securities settlement facility’s stress tests should take into account the extent to which resources are pooled across markets in scenarios involving one or more participant defaults across several markets. 
Contingency planning for uncovered credit losses
4.5.2.	3.4.25.	In certain extreme circumstances, the post-liquidation value of the collateral and other financial resources that secure an FMI’sa securities settlement facility’s credit exposures may not be sufficient to cover credit losses resulting from those exposures fully. An FMIA securities settlement facility should analyse and plan for how it would address any uncovered credit losses. An FMIA securities settlement facility should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the FMI.securities settlement facility. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds an FMIa securities settlement facility may borrow from liquidity providers. An FMI’sA securities settlement facility’s rules and procedures should also indicate its process to replenish any financial resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.
PrincipleStandard 5: Collateral 
An FMIA securities settlement facility that requires collateral to manage its or its participants’ credit exposureexposures should accept collateral with low credit, liquidity, and market risks. An FMIA securities settlement facility should also set and enforce appropriately conservative haircuts and concentration limits.
Explanatory noteGuidance
3.5.1.	Collateralising any credit exposures protects an FMIa securities settlement facility and, where relevant, its participants against potential losses in the event of a participant default (see PrincipleSSF Standard 4 on credit risk). Besides mitigating an FMI’sa securities settlement facility’s own credit risk, the use of collateral can provide participants with incentives to manage the risks they pose to the FMIsecurities settlement facility or other participants. An FMIA securities settlement facility should apply prudent haircuts to the value of the collateral to achieve a high degree of confidence that the liquidation value of the collateral will be greater than or equal to the obligation that the collateral secures in extreme but plausible market conditions. Additionally, an FMIa securities settlement facility should have the capacity to use the collateral promptly when needed. 
5.1.	An FMIA securities settlement facility should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity, and market risks. 
5.1.1.	3.5.2.	An FMIA securities settlement facility should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity, and market risks. In the normal course of business, an FMICollateral with low credit, liquidity and market risks comprises assets that may be reliably liquidated or repurchased in private markets, within a reasonable time frame and at a value within the haircut applied or, in extremis and where the collateral-taker has access, sold to a central bank under a repurchase agreement or otherwise pledged to a central bank. In the normal course of business, a securities settlement facility may be exposed to risk from certain types of collateral that are not considered to have low credit, liquidity, and market risks. However, in some instances, these assets may be acceptable collateral for credit purposes if an appropriate haircut is applied. An FMIA securities settlement facility must be confident of the collateral’s value in the event of liquidation and of its capacity to use that collateral quickly, especially in stressed market conditions. An FMIA securities settlement facility that accepts collateral with credit, liquidity, and market risks above minimum levels should demonstrate that it sets and enforces appropriately conservative haircuts and concentration limits. (see SSF Standard 5.3).
5.1.2.	3.5.3.	Further, an FMIa securities settlement facility should regularly adjustreview its requirements for acceptable collateral in accordance with changes in underlying risks. When evaluating types of collateral, an FMIa securities settlement facility should consider potential delays in accessing the collateral due to the settlement conventions for transfers of the asset. In addition, participants should not be allowed to post their own debt or equity securities, or debt or equity of companies closely linked to them, as collateral. More generally, an FMIa securities settlement facility should mitigate specific wrong-way risk by limiting the acceptance of collateral that would likely lose value in the event that the participant providing the collateral defaults. The FMIdefaulted. The securities settlement facility should measure and monitor the correlation between a counterparty’s creditworthiness and the collateral posted and take measures to mitigate the risks, for instance by setting more -conservative haircuts. 
5.1.3.	3.5.4.	If an FMIa securities settlement facility plans to use assets held as collateral to secure liquidity facilities in the event of a participant default, the FMIsecurities settlement facility will also need to consider, in determining acceptable collateral, what will be acceptable as security to lenders offering liquidity facilities (see Principle 7SSF Standard 6).
5.2.	In determining its collateral policies, a securities settlement facility should take into consideration the broad effect of these policies on the market. As part of this, a securities settlement facility should consider allowing the use of collateral commonly accepted in the relevant jurisdictions in which it operates.
5.2.1.	A securities settlement facility’s collateral policies may have broader effects than their direct implications for the effectiveness of the securities settlement facility’s risk controls. On the one hand, assets accepted as collateral by FMIs, including securities settlement facilities, may be more likely to then be held by participants or used as collateral in other contexts, and may become more liquid as a result. On the other hand, use of a particular class of assets to meet collateral obligations at FMIs may, depending on its supply, restrict the availability of such assets for other uses, or significantly affect pricing. A securities settlement facility should consider such broader effects when framing its collateral policies.
5.2.2.	Participants that are required to source unfamiliar assets as collateral may face additional operational, legal or financial risks as a result. A securities settlement facility should therefore consider allowing the use of collateral that is commonly accepted in each jurisdiction in which it operates. In particular, a securities settlement facility with material Australian-based participation should consider accepting appropriate Australian dollar-denominated securities as collateral.
5.3.	A securities settlement facility should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions. 
5.3.1.	3.5.5.	To have adequate assurance of the collateral’s value in the event of liquidation, an FMIa securities settlement facility should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions. An FMIA securities settlement facility should, at a minimum, mark its collateral to market daily. Haircuts should reflect the potential for asset values and liquidity to decline over the interval between their last revaluation and the time by which an FMIa securities settlement facility can reasonably assume that the assets can be liquidated. Haircuts also should incorporate assumptions about collateral value during stressed market conditions and reflect regular stress testing that takes into account extreme price moves, as well as changes in market liquidity for the asset. If market prices do not fairly represent the true value of the assets, an FMIa securities settlement facility should have the authority to exercise discretion in valuing assets according to predefined and transparent methods. An FMI’sA securities settlement facility’s haircut procedures should be independently validated at least annually. 
5.4.	In order to reduce the need for procyclical adjustments, an FMIa securities settlement facility should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent.
5.4.1.	3.5.6.	An FMIA securities settlement facility should appropriately address procyclicality in its collateral arrangements. To the extent practicable and prudent, an FMIa securities settlement facility should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions in order to reduce the need for procyclical adjustments. In this context, procyclicality typically refers to changes in risk-management practices that are positively correlated with market, business, or credit cycle fluctuations and that may cause or exacerbate financial instability. While changes in collateral values tend to be procyclical, collateral arrangements can increase procyclicality if haircut levels fall during periods of low market stress and increase during periods of high market stress. For example, in a stressed market, an FMIa securities settlement facility may require the posting of additional collateral both because of the decline of asset prices and because of an increase in haircut levels. Such actions could exacerbate market stress and contribute to driving down asset prices further, resulting in additional collateral requirements. This cycle could exert further downward pressure on asset prices. Addressing issues of procyclicality may create additional costs for FMIssecurities settlement facilities and their participants in periods of low market stress because of higher collateral requirements, but result in additional protection and potentially less -costly and less -disruptive adjustments in periods of high market stress. 
5.5.	An FMIA securities settlement facility should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects. 
5.5.1.	3.5.7.	An FMIA securities settlement facility should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects, including in stressed market conditions. High concentrations within holdings can be avoided by establishing concentration limits or imposing concentration charges. Concentration limits restrict participants’ ability to provide certain collateral assets above a specified threshold as established by the FMI.securities settlement facility. Concentration charges penalise participants for maintaining holdings of certain assets beyond a specified threshold as established by the FMI.securities settlement facility. Further, concentration limits and charges should be constructed to prevent participants from covering a large share of their collateral requirements with the most risky assets acceptable. Concentration limits and charges should be periodically reviewed by the FMIsecurities settlement facility to determine their adequacy.
5.6.	An FMIA securities settlement facility that accepts cross-border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner.
5.6.1.	3.5.8.	If an FMIa securities settlement facility accepts cross-border (or foreign) collateral, it should identify and mitigate any additional risks associated with its use and ensure that it can be used in a timely manner. A cross-border collateral arrangement can provide an efficient liquidity bridge across markets, help relax collateral constraints for some participants, and contribute to the efficiency of some asset markets. These linkages, however, can also create significant interdependencies between a securities settlement facility and other FMIs and risks to FMIs the securities settlement facility that need to be evaluated and managed by the affected FMIs (see also Principle 17SSF Standard 14 on operational risk and Principle 20SSF Standard 17 on FMI links). For example, an FMIa securities settlement facility should have appropriate legal and operational safeguards to ensure that it can use the cross-border collateral in a timely manner and should identify and address any significant liquidity effects. An FMIA securities settlement facility also should consider foreign-exchange risk where collateral is denominated in a currency different from that in which the exposure arises, and set haircuts to address the additional risk to a high level of confidence. The FMIThe securities settlement facility should have the capacity to address potential operational challenges of operating across borders, such as differences in time zones or operating hours of foreign CSDscentral securities depositories or custodians. 
5.7.	An FMIA securities settlement facility should use a collateral management system that is well-designed and operationally flexible. 
Collateral management systems
5.7.1.	3.5.9.	An FMIA securities settlement facility should use a well-designed and operationally flexible collateral management system. Such a system should accommodate changes in the ongoing monitoring and management of collateral. Where appropriate, the system should allow for the timely calculation and execution of margin calls, the management of margin call disputes, and the accurate daily reporting of levels of initial and variation margin. Further, A collateral management system should track the extent of reuse of collateral (both cash and non-cash) and the rights of an FMIa securities settlement facility to the collateral provided to it by its counterparties. An FMI’sWhere appropriate, a securities settlement facility’s collateral management system should also have functionality to accommodate the timely deposit, withdrawal, substitution, and liquidation of collateral. An FMI in each jurisdiction in which it operates. In particular, where the scope of Australian participation in the securities settlement facility is material, and where market conventions dictate, a securities settlement facility’s collateral management system should have the capacity to accommodate the timely deposit, withdrawal, substitution and liquidation of collateral during Australian market hours. A securities settlement facility should allocate sufficient resources to its collateral management system to ensure an appropriate level of operational performance, efficiency, and effectiveness. Senior management should ensure that the FMI’ssecurities settlement facility’s collateral management function is adequately staffed to ensure smooth operations, especially during times of market stress, and that all activities are tracked and reported, as appropriate, to senior management. 
Reuse of collateral
5.7.2.	3.5.10.	Reuse of collateral refers to the FMI’ssecurities settlement facility’s subsequent use of collateral that has been provided by participants in the normal course of business. This differs from the FMI’ssecurities settlement facility’s use of collateral in a default scenario during which the defaulter’s collateral, which has become the property of the FMIsecurities settlement facility, can be used to access liquidity facilities or can be liquidated to cover losses (see Principle 13SSF Standard 11 on participant-default rules and procedures). An FMIA securities settlement facility should have clear and transparent rules regarding the reuse of collateral (see Principle 23SSF Standard 18 on disclosure of rules, key policies and procedures, and market data). In particular, the rules should clearly specify when an FMIa securities settlement facility may reuse its participant collateral and the process for returning that collateral to participants. In general, an FMIa securities settlement facility should not rely on the reuse of collateral as an instrument for increasing or maintaining its profitability. However, an FMIa securities settlement facility may invest any cash collateral received from participants on their behalf (see Principle 16SSF Standard 13 on custody and investment risks). 
[The SSF Standards do not incorporate Principle 6 on margin]
Principle 7Standard 6: Liquidity risk 
An FMIA securities settlement facility should effectively measure, monitor, and manage its liquidity risk. An FMIA securities settlement facility should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMIsecurities settlement facility in extreme but plausible market conditions. 
Explanatory noteGuidance
This Standard applies primarily to a securities settlement facility that assumes liquidity risk as principal, although it also places some obligations where the design of a securities settlement facility generates liquidity risk exposures for its participants. In general, a securities settlement facility operating in Australia would not be expected to assume liquidity risk as principal. The design of the securities settlement facility and the scope of its activities should minimise the potential for such risk to arise. In the event that it did assume liquidity risk as principal, the facility should consult with the Reserve Bank to identify clearly the circumstances in which such risk was assumed. 
3.7.1.	Liquidity risk arises in an FMIa securities settlement facility when it, its participants, or other entities cannot settle their payment obligations when due as part of the clearing or settlement process. Depending on the design of an FMIa securities settlement facility, liquidity risk can arise between the FMIsecurities settlement facility and its participants, between the FMIsecurities settlement facility and other entities (such as its commercial bank money settlement banksagents, nostro agents, custodian banks, and liquidity providers), or between participants in an FMI (such as in a DNS payment system or SSS).a securities settlement facility. It is particularly important for an FMIa securities settlement facility to manage carefully its liquidity risk if, as is typical in many systems, the FMI the securities settlement facility relies on incoming payments from participants or other entities during the settlement process in order to make payments to other participants. If a participant or another entity fails to pay the FMIsecurities settlement facility, the FMIsecurities settlement facility may not have sufficient funds to meet its payment obligations to other participants. In such an event, the FMIsecurities settlement facility would need to rely on its own liquidity resources (that is, liquid assets and prearranged funding arrangements) to cover the funds shortfall and complete settlement. An FMIA securities settlement facility should have a robust framework to manage its liquidity risks from the full range of participants and other entities. In some cases, a participant may play other roles within the FMIsecurities settlement facility, such as a settlement or custodian bank or liquidity provider. These other roles should be considered in determining an FMI’sa securities settlement facility’s liquidity needs.
6.1.	An FMIA securities settlement facility should have a robust framework to manage its liquidity risks from its participants, commercial bank money settlement agentssettlement banks, nostro agents, custodian banks, liquidity providers, and other entities. 
Sources of liquidity risk
6.1.1.	3.7.2.	An FMIA securities settlement facility should clearly identify its sources of liquidity risk and assess its current and potential future liquidity needs on a daily basis. An FMIA securities settlement facility can face liquidity risk from the default of a participant. For example, if an FMIa securities settlement facility extends intraday credit, implicitly or explicitly, to participants, such credit, even when fully collateralised, may create liquidity pressure in the event of a participant default. The FMIsecurities settlement facility might not be able to convert quickly the defaulting participant’s collateral into cash at short notice. If an FMI does not have sufficient cash to meet all of its payment obligations to participants, there will be a settlement failure. An FMIA securities settlement facility can also face liquidity risk from itsany commercial bank money settlement banksagents, nostro agents, custodian banks, and liquidity providers, as well as linked FMIs and service providers, if they fail to perform as expected. Moreover, as noted above, an FMIa securities settlement facility may face additional risk from entities that have multiple roles within the FMIsecurities settlement facility (for example, a participant that also serves as the FMI’ssecurities settlement bankfacility’s money settlement agent or liquidity provider). These interdependencies and the multiple roles that an entity may serveassume within an FMIa securities settlement facility should be taken into account by the FMI. 3.7.3.	An FMIsecurities settlement facility. A securities settlement facility that employs a deferred net settlement (DNS) mechanism may also create direct liquidity exposures between participants. For example, in a payment system that uses a multilateral net settlement mechanism, participants may face liquidity exposures to each other if one of the participants fails to meet its obligations. Similarly, in an SSSIn a securities settlement facility that uses a DvP model 2 or 3 settlement mechanism and does not guarantee settlement, participants may face liquidity exposures to each other if one of the participants fails to meet its obligations(see SSF Standard 10 on exchange-of-value settlement systems). A long-standing concern is that these types of systems may address a potential settlement failure by unwinding transfers involving the defaulting participant. An unwind imposes liquidity pressures (and, potentially, replacement costs) on the non-defaulting participants. If all such transfers must be deleted, and if the unwind occurs at a time when money markets and securities lending markets are illiquid (for example, at or near the end of the day), the remaining participants could be confronted with shortfalls of funds or securities that would be extremely difficult to cover. The potential total liquidity pressure of unwinding could be equal to the gross value of the netted transactions. 
Managing liquidity risk
6.1.2.	3.7.6.	An FMIA securities settlement facility should also regularly assess its design and operations to manage, and where possible reduce,liquidity risk in the system. An FMIA securities settlement facility that employs a DNS mechanism may be able to reduce its or its participants’ liquidity risk by using alternative settlement designs, such as new real-time gross settlement (RTGS) designs with liquidity-saving features or a continuous or extremely frequent batch settlement system. (see SSF Standard 10 on exchange-of-value systems). In addition, it could reduce the liquidity demands of its participants by providing participants with sufficient information or control systems to help them manage their liquidity needs and risks. Furthermore, an FMIa securities settlement facility should ensure that it is operationally ready to manage the liquidity risk caused by participants’ or other entities’ financial or operational problems. Among other things, the FMIa securities settlement facility that does not settle its funds obligations directly in central bank money (see SSF Standard 9 on money settlements) should have the operational capacity to reroute payments, where feasible, on a timely basis in case of problems with a correspondent bank. 
6.1.3.	3.7.7.	An FMI has A securities settlement facility may use other risk-management tools that it can use to manage its or, where relevant, its participants’ liquidity risk. To mitigate and manage liquidity risk stemming from a participant default, an FMI could use, either individually or in combination, exposure limits, collateral requirements, and prefunded default arrangements.For instance, to mitigate and manage liquidity risks from the late-day submission of payments or other transactions, an FMIa securities settlement facility could adopt rules or financial incentives for timely submission. And to mitigate and manage liquidity risk stemming from a service provider or a linked FMI, an FMIa securities settlement facility could use, individually or in combination, selection criteria, concentration or exposure limits, and collateral requirements. For example, an FMIa securities settlement facility should seek to manage or diversify its settlement flows and liquid resources to avoid excessive intraday or overnight exposure to one entity. This, however, may involve trade-offs between the efficiency of relying on an entity and the risks of being overly dependent on that entity. These tools are often also used by an FMI to manage its credit risk.
6.2.	An FMIA securities settlement facility should have effective operational and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity. 
6.2.1.	3.7.4.	An FMIA securities settlement facility should have effective operational and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis, including itsany use of intraday liquidity. In particular, an FMIa securities settlement facility should understand and assess the value and concentration of its daily settlement and funding flows through itsany money settlement banksagents, nostro agents, and other intermediaries. An FMIA securities settlement facility also should be able to monitor on a daily basis the level of liquid assets (such as cash, securities, other assets held in custody, and investments) that it holds. An FMIA securities settlement facility should be able to determine the value of its available liquid assets, taking into account the appropriate haircuts on those assets (see Principle 5 on collateral and Principle 6 on margin). SSF Standard 5 on collateral).
6.2.2.	In a DNS system, the FMIa securities settlement facility should provide sufficient information and analytical tools to help its participants measure and monitor their liquidity risks in the FMIsecurities settlement facility. As part of this, the securities settlement facility should ensure that all participants understand how their settlement obligations might change in the event that a participant (or its settlement bank) failed to meet its funding obligations and the securities settlement facility had to recalculate other participants’ obligations in a multilateral net settlement batch.
6.2.3.	3.7.5.	If an FMIa securities settlement facility maintains prearranged funding arrangements, the FMIsecurities settlement facility should also identify, measure, and monitor its liquidity risk from the liquidity providers of those arrangements. An FMIA securities settlement facility should obtain a high degree of confidence through rigorous due diligence that each liquidity provider, whether or not it is a participant in the FMIsecurities settlement facility, would have the capacity to perform as required under the liquidity arrangement and is subject to commensurate regulation, supervision, or oversight of its liquidity risk-management requirements. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, the liquidity provider’s potential access to credit from the relevant central bank may be taken into account.
6.3.	A payment system or SSSA securities settlement facility, including one employing a DNS mechanism, should maintain sufficient liquid resources in all relevant currencies to effect same-day settlement, and where appropriate intraday or multiday settlement, of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions. 
6.3.1.	3.7.8	An FMIA securities settlement facility should ensure that it has sufficient liquid resources, as determined by regular and rigorous stress testing, to effect settlement of any payment obligations that it faces as principal with a high degree of confidence under a wide range of potential stress scenarios. A payment system or SSS, including one employing a DNS mechanism, should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday or multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions. In some instances, a payment system or SSSsecurities settlement facility may need to have sufficient liquid resources to effect settlement of payment obligations over multiple days to account for any potential liquidation of collateral that is outlined in the FMI’ssecurities settlement facility’s participant-default procedures. (see SSF Standard 6.8 on liquidity stress testing). 
3.7.9.	Similarly, a CCP should maintain sufficient liquid resources in all relevant currencies to settle securities-related payment obligations, make required variation margin payments, and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should consider maintaining additional liquidity resources sufficient to cover a wider range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions. The CCP should carefully analyse its liquidity needs, and the analysis is expected to be reviewed by the relevant authorities. In many cases, a CCP may need to maintain sufficient liquid resources to meet payments to settle required margin and other payment obligations over multiple days to account for multiday hedging and close-out activities as directed by the CCP’s participant-default procedures. 
6.4.	For the purpose of meeting its minimum liquid resource requirement, an FMI’sa securities settlement facility’s qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps, and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If an FMIa securities settlement facility has access to routine credit at the central bank of issue, the FMIsecurities settlement facility may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed. 
3.7.10. 	For the purpose of meeting its minimum liquid resource requirement, an FMI’s qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps, and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If an FMI has access to routine credit at the central bank of issue, the FMI may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed. However, such access does not eliminate the need for sound risk-management practices and adequate access to private-sector liquidity resources.
6.5.	An FMIA securities settlement facility may supplement its qualifying liquid resources with other forms of liquid resources. If the FMIsecurities settlement facility does so, then these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps, or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if an FMIa securities settlement facility does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. An FMIA securities settlement facility should not assume the availability of emergency central bank credit as a part of its liquidity plan.
6.5.1.	3.7.11. 	An FMI A securities settlement facility may consider using suchnon-qualifying liquid resources within its liquidity risk management framework in advance of, or in addition to, using its qualifying liquid resources. This may be particularly beneficial where liquidity needs exceed qualifying liquid resources, where qualifying liquid resources can be preserved to cover a future default, or where using other liquid resources would cause less liquidity dislocation to the FMI's participants and the financial system as a whole. Even if an FMI does not have access to routine central bank credit, it should take account of what collateral is typically accepted by the relevant central bank of issue, as such assets may be more likely to be liquid in stressed circumstances. In any case, an FMI should not assume the availability of emergency central bank credit as a part of its liquidity plan. securities settlement facility’s participants and the financial system as a whole.
6.6.	An FMIA securities settlement facility should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the FMIsecurities settlement facility or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider’s performance reliability with respect to a particular currency, a liquidity provider’s potential access to credit from the central bank of issue may be taken into account. An FMIA securities settlement facility should regularly test its procedures for accessing its liquid resources at a liquidity provider. 
3.7.12. 	If an FMI has prearranged funding arrangements, the FMI should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the FMI or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, a liquidity provider’s potential access to credit from the central bank of issue may be taken into account. Additionally, an FMI should adequately plan for the renewal of prearranged funding arrangements with liquidity providers in advance of their expiration.
6.6.1.	3.7.13. 	An FMIA securities settlement facility should have detailed procedures for using its liquid resources to complete settlement during a liquidity shortfall. An FMI’sA securities settlement facility’s procedures should clearly document the sequence for using each type of liquid resource (for example, the use of certain assets before prearranged funding arrangements). These procedures may include instructions for accessing cash deposits or overnight investments of cash deposits, executing same-day market transactions, or drawing on prearranged liquidity lines. In addition, an FMI, including any pre-committed liquidity allocation mechanisms involving participants established under the securities settlement facility’s rules. In addition, a securities settlement facility should regularly test its procedures for accessing its liquid resources at a liquidity provider, including by activating and drawing down test amounts from committed credit facilities and by testing operational procedures for conducting same-day repos. A securities settlement facility should also adequately plan for the renewal of prearranged funding arrangements with liquidity providers in advance of their expiration.
6.7.	An FMIA securities settlement facility with access to central bank accounts, payment services, or securities services should use these services, where practical, to enhance its management of liquidity risk. 
6.7.1.	If an FMIa securities settlement facility has access to central bank accounts, payment services, securities services, or collateral management services, it should use these services, where practical, to enhance its management of liquidity risk. Cash balances at the central bank of issue, for example, offer the highest liquidity (see Principle 9SSF Standard 8 on money settlements). 
6.8.	An FMIA securities settlement facility should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. An FMIA securities settlement facility should have clear procedures to report the results of its stress tests to appropriate decision makers at the FMIsecurities settlement facility and to use these results to evaluate the adequacy of, and adjust, its liquidity risk-management framework. In conducting stress testing, an FMIa securities settlement facility should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the FMIsecurities settlement facility, include all entities that might pose material liquidity risks to the FMIsecurities settlement facility (such as commercial bank money settlement agents settlement banks, nostro agents, custodian bankscustodians, liquidity providers, and linked FMIs), and where appropriate, cover a multiday period. In all cases, an FMIa securities settlement facility should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.
6.8.1.	3.7.15. 	An FMI should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. An FMI should have clear procedures to report the results of its stress tests to appropriate decision makers at the FMI and to use these results to evaluate the adequacy of and adjust its liquidity risk-management framework. In conducting stress testing, an FMI should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also consider the design and operation of the FMI, include all entities that might pose material liquidity risks to the FMI (such as settlement banks, nostro agents, custodian banks, liquidity providers, and linked FMIs), and where appropriate, cover a multiday period. An FMI As part of a securities settlement facility’s assessment of the sufficiency of its liquid resources through stress testing, it should also consider any strong inter-linkages or similar exposures between its participants, as well as the multiple roles that participants may play with respect to the risk management of the FMIsecurities settlement facility, and assess the probability of multiple failures and the contagion effect among its participants that such failures may cause. 
6.8.2.	3.7.17. 	Frequency of stress testing. Liquidity stress testing should be performed on a daily basis using standard and predetermined parameters and assumptions. In addition, on at least a monthly basis, an FMIa securities settlement facility should perform a comprehensive and thorough analysis of stress testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for achieving the FMI’ssecurities settlement facility’s identified liquidity needs and resources in light of current and evolving market conditions. An FMIA securities settlement facility should perform stress testing more frequently when markets are unusually volatile, when they are less liquid, or when the size or concentration of positions held by its participants increases significantly. A full validation of an FMI’sa securities settlement facility’s liquidity risk-management model should be performed at least annually. 
6.8.3.	3.7.16. 	Reverse stress tests. An FMIA securities settlement facility should also conduct, as appropriate, reverse stress tests aimed at identifying the extreme default scenarios and extreme market conditions for which the FMI’ssecurities settlement facility’s liquid resources would be insufficient. In other words, these tests identify how severe stress conditions would be covered by the FMI’ssecurities settlement facility’s liquid resources. An FMIA securities settlement facility should judge whether it would be prudent to prepare for these severe conditions and various combinations of factors influencing these conditions. Reverse stress tests require an FMIa securities settlement facility to model extreme market conditions that may go beyond what are considered extreme but plausible market conditions in order to help understand the sufficiency of liquid resources given the underlying assumptions modelled. Modelling very extreme market conditions can help an FMIa securities settlement facility determine the limits of its current model and resources; however, it requires the FMIsecurities settlement facility to exercise judgment when modelling different markets and products. An FMIA securities settlement facility should develop hypothetical very extreme scenarios and market conditions tailored to the specific risks of the markets and of the products it serves. Reverse stress tests should be considered a helpful risk-management tool but they need not, necessarily, drive an FMI’sa securities settlement facility’s determination of the appropriate level of liquid resources.
6.9.	An FMIA securities settlement facility should establish explicit rules and procedures that enable the FMIsecurities settlement facility to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking, or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the FMI’ssecurities settlement facility’s process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.
6.9.1.	3.7.18. 	In certain extreme circumstances, the liquid resources of an FMIa securities settlement facility or its participants required under SSF Standard 6.3 may not be sufficient to meet the payment obligations of the FMIsecurities settlement facility to its participants or the payment obligations of participants to each other within the FMI. In a stressed environment, for example, normally liquid assets held by an FMIa securities settlement facility may prove not to be sufficiently liquid to obtain same-day funding, or the liquidation period may be longer than expected. An FMIA securities settlement facility should establish explicit rules and procedures that enable the FMIsecurities settlement facility to effect same-day, and where appropriate, intraday and multiday settlement, of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking, or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the FMI’ssecurities settlement facility’s process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.
6.9.2.	3.7.19	If an FMIa securities settlement facility allocates potentially uncovered liquidity shortfalls to its participants, the FMIsecurities settlement facility should have clear and transparent rules and procedures for the allocation of shortfalls. These procedures could involve a funding arrangement between the FMIsecurities settlement facility and its participants, the mutualisation of shortfalls among participants according to a clear and transparent formula, or the use of liquidity rationing (for example, reductions in payouts to participants). Any allocation rule or procedure must be discussed thoroughly with and communicated clearly to participants, as well as be consistent with participants’ respective regulatory liquidity risk-management requirements. Furthermore, an FMIa securities settlement facility should consider and validate, through simulations and other techniques and through discussions with each participant, the potential impact on each participant of any such same-day allocation of liquidity risk and each participant’s ability to bear proposed liquidity allocations.
Principle 8Standard 7: Settlement finality 
An FMIA securities settlement facility should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMIa securities settlement facility should provide final settlement intraday or in real time.
Explanatory noteGuidance
3.8.1.	An FMIA securities settlement facility should be designed to provide clear and certain final settlement of payments, transfer instructions, or other obligations. Final settlement is defined as the irrevocable and unconditional transfer of an asset or financial instrument, or the discharge of an obligation by the FMIsecurities settlement facility or its participants in accordance with the terms of the underlying contract. A payment, transfer instruction, or other obligation that an FMIa securities settlement facility accepts for settlement in accordance with its rules and procedures should be settled with finality on the intended value date. The value date is the day on which the payment, transfer instruction, or other obligation is due and the associated funds and securities are typically available to the receiving participant. Completing final settlement by the end of the value date is important because deferring final settlement to the next -business day can create both credit and liquidity pressures for an FMI’sa securities settlement facility’s participants and other stakeholders, and potentially be a source of systemic risk. Where necessary or preferable, an FMIa securities settlement facility should provide intraday or real-time settlement finality to reduce settlement risk. This will be necessary where transactions are settled through an intraday multilateral net batch or on a real-time basis.
3.8.2.	Although some FMIssecurities settlement facilities guarantee settlement, this principleStandard does not necessarily require an FMIa securities settlement facility to provide such a guarantee. Instead, this principleStandard requires FMIssecurities settlement facilities to clearly define the point at which the settlement of a payment, transfer instruction, or other obligation is final, and to complete the settlement process no later than the end of the value date, and preferably earlier inon the value date. Similarly, this principleStandard is not intended to eliminate fails to deliver in securities trades. The occurrence of non-systemic amounts of such failures, although potentially undesirable, should not by itself be interpreted as a failure to satisfy this principle.Standard. However, an FMIa securities settlement facility should take steps to mitigate both the risks and the implications of such failures to deliver securities (see Principle, in particular, SSF Standard 4 on credit risk, Principle 7 and SSF Standard 6 on liquidity risk, and other relevant principles). 
7.1.	An FMI’sA securities settlement facility’s rules and procedures should clearly define the point at which settlement is final. 
7.1.1.	3.8.3.	An FMI’sA securities settlement facility’s rules and procedures should clearly define the point at which settlement is final. A clear definition of when settlements are final also greatly assists in a resolution scenario such that the positions of the participant in resolution and other affected parties can be quickly ascertained. 
7.1.2.	3.8.4.	An FMI’sA securities settlement facility’s legal framework and rules generally determine finality. For a transaction to be considered final, the legal basis governing the FMIsecurities settlement facility, including therelevant insolvency law, must acknowledge the discharge of a payment, transfer instruction, or other obligation between the FMIsecurities settlement facility and system participants, or between or among participants, for the transaction to be considered final. An FMI (see SSF Standard 1.5). Where relevant, a securities settlement facility should take reasonable steps to confirm the effectiveness of cross-border recognition and protection of cross-system settlement finality, especially when it is developing plans for recovery or orderly wind-down or providing the Reserve Bank and other relevant authorities with information relating to its resolvability. Because of the complexity of legal frameworks and system rules, particularly in the context of cross-border settlement where legal frameworks are not harmonised, a well-reasoned legal opinion is generally necessary to establish the point at which finality takes place (see also Principle SSF Standard 1 on legal basis). 
7.2.	An FMIThe securities settlement facility should complete final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk. An LVPS or SSSA securities settlement facility should consider adopting RTGS or multiple-batch processing during the settlement day. 
Same-day settlement 
7.2.1.	3.8.5.	An FMI’sA securities settlement facility’s processes should be designed to complete final settlement, at a minimum no later than the end of the value date. This means that any payment, transfer instruction, or other obligation that has been submitted to and accepted by an FMIa securities settlement facility in accordance with its risk-management process and other relevant acceptance criteria should be settled on the intended value date. An FMIA securities settlement facility that is not designed to provide final settlement on the value date (or same-day settlement) would not satisfy this principleStandard, even if the transaction’s settlement date is adjusted back to the value date after settlement. This is because, in most of such arrangements, there is no certainty that final settlement will occur on the value date as expected. Further, deferral of final settlement to the next -business day can entail overnight risk exposures. For example, if an SSS or CCPa securities settlement facility conducts its money settlements using instruments or arrangements that involve next-day settlement, a participant’s default on its settlement obligations between the initiation and finality of settlement could pose significant credit and liquidity risks to the FMIsecurities settlement facility and its other participants.  
Intraday settlement
7.2.2.	3.8.6.	Depending on the type of obligations that an FMIa securities settlement facility settles, the use of intraday settlement, either in multiple batches or in real time, may be necessary or desirable to reduce settlement risk. As such, some types of FMIs, such as LVPSs and SSSs,Accordingly, a securities settlement facility should consider adopting RTGS or multiple-batch settlement to complete final settlement intraday. RTGS is the real-time settlement of payments, transfer instructions, or other obligations individually on a transaction-by-transaction basis. Batch settlement is the settlement of groups of payments, transfer instructions, or other obligations together at one or more discrete, often pre-specified times during the processing day. With batch settlement, the time between the acceptance and final settlement of transactions should be kept short.  To speed up settlements, an FMIa securities settlement facility should encourage its participants to submit transactions promptly. To validate the finality of settlement, an FMIa securities settlement facility also should inform its participants of their final account balances and, where practical, settlement date and time as quickly as possible, preferably in real time.  
7.2.3.	3.8.7.	The use of multiple-batch settlement and RTGS involves different trade-offs. Multiple-batch settlement based on a DNS mechanism, for example, may expose participants to settlement risks for the period during which settlement is deferred. These risks, if not sufficiently controlled, could result in the inability of one or more participants to meet their financial obligations. Best practice is for securities settlement facilities to provide real-time finality by settling individual transactions on an RTGS basis. Indeed, this is required under SSF Standard 10 where the trades settled by a securities settlement facility are individually large. ConverselyHowever, while an RTGS system can mitigate or eliminate these settlement risksrisk, it requires participants to have sufficient liquidity to cover all their outgoing payments and can therefore require relatively large amounts of intraday liquidity. This liquidity can come from various sources, including balances at a central bank or commercial bank, incoming payments, and intraday credit. An RTGS system may be able to reduce its liquidity needs by implementing a queuing facility or other liquidity-saving mechanisms. Where trade values are small, a securities settlement facility may alternatively utilise batch settlement (see SSF Standard 10 on exchange-of-value settlement systems). The use of multiple such batches reduces liquidity needs compared with an RTGS system, while limiting the build-up of exposures between participants that can occur under batch settlement. 
7.3.	An FMIA securities settlement facility should clearly define the point after which unsettled payments, transfer instructions, or other obligations may not be revoked by a participant.
7.3.1.	3.8.8.	An FMIA securities settlement facility should clearly define the point after which unsettled payments, transfer instructions, or other obligations may not be revoked by a participant. In general, an FMIa securities settlement facility should prohibit the unilateral revocation of accepted and unsettled payments, transfer instructions, or other obligations after a certain point or time in the settlement day, so as to avoid creating liquidity risks. In all cases, cutoff times and materiality rules for exceptions should be clearly defined. The rules should make clear that changes to operating hours are exceptional and require individual justifications. For example, an FMIa securities settlement facility may want to permit extensions for reasons connected with the implementation of monetary policy or widespreadbroader financial market disruption. If extensions are allowed for participants with operating problems to complete processing, the rules governing the approval and duration of such extensions should be clear to participants.
Principle 9Standard 8: Money settlements 
An FMIA securities settlement facility should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMIa securities settlement facility should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.
Explanatory noteGuidance
3.9.1.	An FMIA securities settlement facility typically needs to conduct money settlements with or between its participants for a variety of purposes, such as the settlement of individual payment obligations, and funding and defunding activities, and the collection and distribution of margin payments.. To conduct such money settlements, an FMIa securities settlement facility can use central bank money or, commercial bank money, or a combination of the two. Central bank money is a liability of a central bank, in this case in the form of deposits held at the central bank, which can be used for settlement purposes.  Where individual payment obligations are settled in commercial bank money, exposures are typically created between commercial banks, which are ultimately settled in central bank money. A securities settlement facility may not specify how participants fund their obligations. However, the securities settlement facility, its participants, any commercial settlement banks and any commercial bank money settlement agents should take into account the risks associated with alternate money settlement arrangements.
Settlement in central bank money typically involves the discharge of settlement obligations on the books of central bank of issue assuming the role of money settlement agent, with ultimate money settlement occurring across accounts held by participants or their commercial settlement banks with the central bank of issue. Commercial bank money is a liability of a commercial bank, in the form of deposits held at the commercial bank, which can be used for settlement purposes. Typically, this sort of arrangement for the settlement of individual transactions minimises the accrual of exposures between commercial settlement banks.
Settlement in commercial bank money typically occurs on the books of a commercial bank. money settlement agent. In this model, an FMIa securities settlement facility typically establishes an account with one or more commercial settlement banksbank(s) and requires each of its participants to establish an account with one of them. In some cases, the FMIsecurities settlement facility itself can serve as the money settlement bank.agent, in which case money settlements are then effected through accounts on the books of the FMI, which may need to be funded and defunded. An FMIsecurities settlement facility. Either model may require funding activities. A securities settlement facility may also use a combination of central bank and commercial bank monies to conduct settlements, for example, by using central bank money for funding and defunding activities and usingaccounts at commercial bank money for thebanks where settlement of individual payment obligations occurs in commercial bank money through those accounts. 
3.9.2.	An FMIA securities settlement facility and its participants may face credit and liquidity risks from commercial bank money settlements. Credit risk may arise when a settlement bank has the potential to default on its obligations (for example, if the settlement bank becomes insolvent). When an FMI settles on its own books, participants face credit risk from the FMI itselfparticipants use commercial settlement banks to effect money settlements, or when the securities settlement facility uses a commercial bank money settlement agent. Liquidity risk may arise in money settlements if, after a payment obligation has been settled, participants or the FMIsecurities settlement facility itself are unable to transfer readily their assets at the commercial settlement bank, or money settlement agent, into other liquid assets, such as claims on a central bank. 
8.1.	An FMIA securities settlement facility should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.
8.1.1.	3.9.3.	An FMI should conduct its money settlements using central bank money, where practical and available, to avoid credit and liquidity risks. With the use of central bank money, a payment obligation is typically discharged by providing the FMI orsecurities settlement facility, its participants, or its participants’ commercial settlement banks, with a direct claim on the central bank,; that is, the relevant central bank is the money settlement agent, and the settlement asset is central bank money. Central banks have the lowest credit risk and are the source of liquidity with regard to their currency of issue. Indeed, one of the fundamental purposes of central banks is to provide a safe and liquid settlement asset. Where individual trade values are large, and settlement obligations arise in Australian dollars between participants, final settlement must occur across Exchange Settlement Accounts at the Reserve Bank. However, the use of central bank money, however, may not always be practical or available. For example, an FMI or its participantsa securities settlement facility may not have direct access to all relevant central bank accounts and payment services. in all relevant jurisdictions. A multicurrency FMIsecurities settlement facility that has access to all relevant central bank accounts and payment services may find that some central bank payment services do not operate, or provide finality, at the times when it needs to make money settlements.
8.2.	If central bank money is not used, an FMIa securities settlement facility should conduct its money settlements using a settlement asset with little or no credit or liquidity risk. 
8.2.1.	3.9.4.	An alternative to the use of central bank money is commercial bank money. When settling in commercial bank money, a payment obligation is typically discharged by providing the FMIsecurities settlement facility or its participants with a direct claim on the relevanta commercial bank money settlement agent. To conduct settlements in commercial bank money, an FMIa securities settlement facility and its participants need to establish accounts with at least one commercial bank, and likely hold intraday or overnight balances, or both. The use of commercial bank money to settle payment obligations, however, can create additional credit and liquidity risks for the FMIsecurities settlement facility and its participants. For example, if thea commercial bank conductingmoney settlement becomesagent became insolvent, the FMIsecurities settlement facility and its participants maymight not have immediate access to their settlement funds or ultimately receive the full value of their funds. It also creates operational dependencies on the relevant commercial bank(s).
8.3.	If an FMIIf a securities settlement facility settles in commercial bank money, or its participants effect settlements using commercial settlement banks, it should monitor, manage, and limit its credit and liquidity risks arising from the commercial bank money settlement agents and commercial settlement banks. In particular, an FMIa securities settlement facility should establish and monitor adherence to strict criteria for commercial banks that play an integral role in the settlement process,its settlement banks that take taking account of, among other things, their regulation and supervision, creditworthiness, capitalisation, access to liquidity, and operational reliability. An FMIA securities settlement facility should also monitor and manage the concentration of its and its participants’ credit and liquidity exposures to itscommercial bank money settlement agents and commercial settlement banks.
8.3.1.	3.9.5.	If an FMI securities settlement facility uses a commercial bank money settlement agent (or a non-bank deposit-taking institution) for its money settlements, it should monitor, manage, and limit its credit and liquidity risks arising from the commercial settlement bank this arrangement. For example, an FMIa securities settlement facility should limit both the probability of being exposed to a commercial settlementthe bank’s failure and limit the potential losses and liquidity pressures to which it would be exposed in the event of such a failure. An FMIA securities settlement facility should establish and monitor adherence to strict criteria for its commercial bank money settlement banksagents that take into account, among other things, their regulation and supervision, creditworthiness, capitalisation, access to liquidity, and operational reliability. Under these criteria, a commercial bank money settlement bankagent should be subject to effective banking regulation and supervision. It should also be creditworthy, be well capitalised, and have ample liquidity from the marketplace or the central bank of issue. Where money settlements take place in Australian dollars, a securities settlement facility should only utilise an authorised deposit-taking institution (ADI) that holds an Exchange Settlement Account at the Reserve Bank and has been approved to act as an agent for RTGS payments by the Australian Prudential Regulation Authority.
8.3.2.	3.9.6.	In addition, an FMI should take further steps to limit its credit exposures and liquidity pressures by diversifying the risk of a commercial settlement bank failure, where reasonable, through use of multiple commercial settlement banks. In some jurisdictions, however, there may be only one commercial settlement bank that meets appropriate criteria for creditworthiness and operational reliability. Additionally, even with multiple commercial settlement banks, the extent to which risk is actually diversified depends upon the distribution or concentration of participants using different commercial settlement banks and the amounts owed by those participants. Even where ultimate settlement occurs in central bank money, many participants in a securities settlement facility may not have direct access to accounts with the relevant central bank. They will therefore typically use the services of commercial settlement banks to effect money settlements or carry out funding and defunding activities. These commercial settlement banks play an important role in the smooth functioning of the settlement process and therefore the securities settlement facility should establish similar criteria to those described in paragraph 8.3.1 around their financial and operational capacity to fulfil this role (see also SSF Standard 11 on participant-default rules and procedures).  
8.3.3.	An FMIIn addition, a securities settlement facility should monitor and manage the full range and concentration of exposures toits and its commercial settlement banksparticipants’ credit and liquidity exposures to commercial bank money settlement agents and commercial settlement banks. The securities settlement facility should consider the diversification of its and its participants’ exposures to commercial banks in the settlement process and assess its potential losses and liquidity pressures as well as those of its participants in the event that the of the failure of a commercial bank money settlement agent or commercial settlement bank with the largest share of activity were to fail.(see also SSF Standard 16 on tiered participation arrangements).
8.4.	If an FMIIf a securities settlement facility conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.
8.4.1.	3.9.7.	If money settlement does not occur in central bank money and the FMI conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks. In such an arrangement, an FMIWhere a securities settlement facility conducts money settlements on its own books, it offers cash accounts to its participants, and a payment or settlement obligation is discharged by providing an FMI’sa securities settlement facility’s participants with a direct claim on the FMIsecurities settlement facility itself. The credit and liquidity risks associated with a claim on an FMIa securities settlement facility are therefore directly related to the FMI’ssecurities settlement facility’s overall credit and liquidity risks. One way an FMI could A securities settlement facility should look to minimise these risks is to limitby limiting its activities and operations to clearing and settlement and closely related processes. (see SSF Standard 1.1). Further, to settle payment obligations, the FMIsecurities settlement facility could be established as a supervised special-purpose financial institution and limit the provision of cash accounts to only participants. In some cases, an FMIa securities settlement facility can further mitigate risk by having participants fund and defund their cash accounts at the FMIsecurities settlement facility using central bank money. In such an arrangement, an FMIa securities settlement facility is able to back the settlements conducted on its own books with balances that it holds in its account at the central bank.
8.5.	An FMI’sA securities settlement facility’s legal agreements with any commercial bank money settlement agents, and participants’ agreements with commercial settlement banks, should state clearly when transfers on the books of the relevant commercial bankindividual settlement banks are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the FMIsecurities settlement facility and its participants to manage credit and liquidity risks. 
8.5.1.	3.9.8.	In settlements involving either central bank or commercial bank money, a critical issue is the timing of the finality of funds transfers. These transfers should be final when effected (see also PrincipleSSF Standard 1 on legal basis and Principle 8SSF Standard 7 on settlement finality). To this end, an FMI’sa securities settlement facility’s legal agreements with any settlement banks should state clearly when transfers on the books of individual commercial bank money settlement banks are expected to occur, that transfers are to be final when effected, and that agent should contain clear provisions regarding the finality of funds receivedtransfers. The securities settlement facility should be transferable as soon as possible, at a minimum bycommunicate the endeffect of the day and ideally intraday, in order to enable the FMI and its these provisions to participants to manage credit and liquidity risks.. Participants’ legal agreements with commercial settlement banks should similarly provide clarity in relation to these matters. If an FMIa securities settlement facility conducts intraday money settlements (for example, to collect intraday margin),, the arrangement should provide real-time finality or intraday finality at the times when an FMIa securities settlement facility wishes to effect money settlement. 
[The SSF Standards do not incorporate Principle 10 on physical deliveries] 
Principle 11Standard 9: Central securities depositories 
A CSDA securities settlement facility operating a central securities depository should have appropriate rules and procedures to help ensure the integrity of securities issues and minimise and manage the risks associated with the safekeeping and transfer of securities. A CSDA securities settlement facility operating a central securities depository should maintain securities in an immobilised or dematerialised form for their transfer by book entry.
Explanatory noteGuidance
3.11.1.	A CSD is an entity that provides securities accounts and, in many countries, operates an SSS. A CSD also providesA securities settlement facility may operate a central securities depository. A central securities depository provides securities accounts, central safekeeping and asset services, which may include the administration of corporate actions and redemptions, and plays an important role in helping to ensure the integrity of securities issues. Securities can be held at the CSDcentral securities depository either in physical (but immobilised) form or in dematerialised form (that is, as electronic records). The precise activities of a CSDcentral securities depository vary based on its jurisdiction and market practices. A CSDA central securities depository, for example, may be the official securities registrar and maintain the definitive record of legal ownership for a security; however, in some cases, another entity may serve as the official securities registrar. Further, the activities of a CSDcentral securities depository may vary depending on whether it operates in a jurisdiction with a direct or indirect holding arrangement or a combination of both. A CSDA central securities depository should have clear and comprehensive rules and procedures to ensure that the securities it holds on behalf of its participants are appropriately accounted for on its books and protected from risks associated with the other services that the CSDcentral securities depository may provide. 
9.1.	A CSDA securities settlement facility operating a central securities depository should have appropriate rules, procedures, and controls, including robust accounting practices, to safeguard the rights of securities issuers and holders, prevent the unauthorised creation or deletion of securities, and conduct periodic and at least daily reconciliation of securities issues it maintains. These rules and procedures should: 
(a)	identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility’s rules and procedures;
(b)	clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and
(c)	ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.
9.1.1.	3.11.2.	The preservation of the rights of issuers and holders of securities is essential for the orderly functioning of a securities market. Therefore, a CSD should employ appropriate rules, procedures, and controls to safeguard the rights of securities issuers and holders, prevent the unauthorised creation or deletion of securities, and conduct periodic and at least daily reconciliation of the securities issues that it maintains. A CSDThe rules and contractual arrangements of a securities settlement facility that operates a central securities depository that relate to title to securities should ensure that the securities settlement facility and its participants have a high degree of certainty regarding their rights and interests in securities held and recognised by the facility. The legal arrangements put in place by the facility should clearly state the title or interest held by participants. This Standard does not require that the securities settlement facility’s rules address all forms of title, interest or dealing available, merely those it purports to recognise. 
9.1.2.	A securities settlement facility should, in particular, maintain robust accounting practices and perform end-to-end auditing to verify that its records are accurate and provide a complete accounting of its securities issues. If a CSDsecurities settlement facility records the issuance of securities (alone or in conjunction with other entities), it should verify and account for the initial issuance of securities and ensure that newly issued securities are delivered in a timely manner. To further safeguard the integrity of the securities issues, a CSDsecurities settlement facility operating a central securities depository should conduct periodic and at least daily reconciliation of the totals of securities issues in the CSDit records for each issuer (or its issuing agent), and ensure that the total number of securities recorded in the CSD for a particular issue is equal to the amount of securities of that issue held on the CSD'ssecurities settlement facility’s books. Reconciliation may require coordination with other entities if the CSDsecurities settlement facility does not (or does not exclusively) record the issuance of the security or is not the official registrar of the security. For instance, if the issuer (or its issuing agent) is the only entity that can verify the total amount of an individual issue, it is important that the CSDsecurities settlement facility and the issuer cooperate closely to ensure that the securities in circulation in a system correspond to the volume issued into that system. If the CSDsecurities settlement facility is not the official securities registrar for the securities issuer, reconciliation with the official securities registrar should beis required. 
9.1.3.	The procedures of a securities settlement facility that operates a central securities depository should address the legal and operational mechanisms governing the transfer of title or interests between participants. The mechanisms for transfer should ensure that participants know with a high degree of certainty the timing of transfers, and the role of encumbrances, where relevant. Further, custody records should not be affected by any operational failure. Sufficient backup arrangements should be in place to ensure records are not lost even under extreme circumstances, and that they can be accessed in a reasonably timely fashion.
9.1.4.	The rules and arrangements relating to title to securities should ensure an effective separation between the assets of the securities settlement facility and assets that the facility holds on behalf of its participants through its operation of a central securities depository. In the event of a securities settlement facility's insolvency, participants should have a high degree of certainty that securities held by the facility are immune from the claims of the securities settlement facility’s creditors. Furthermore, effective separation will allow the transfer of assets from the insolvent securities settlement facility to participants or to an alternative securities settlement facility.
9.2.	A CSDsecurities settlement facility operating a central securities depository should prohibit overdrafts and debit balances in securities accounts.
9.2.1.	3.11.3.	A CSDA securities settlement facility operating a central securities depository should prohibit overdrafts and debit balances in securities accounts to avoid credit risk and reduce the potential for the creation of securities. If a CSDsecurities settlement facility were to allow overdrafts or a debit balance in a participant’s securities account in order to credit another participant’s securities account, a CSDthe securities settlement facility would effectively be creating securities and would affect the integrity of the securities issue. 
9.3.	A CSDA securities settlement facility operating a central securities depository should maintain securities in an immobilised or dematerialised form for their transfer by book entry. Where appropriate, a CSDsecurities settlement facility operating a central securities depository should provide incentives to immobilise or dematerialise securities. 
9.3.1.	3.11.4.	A securities settlement facility can maintain securities in physical form or dematerialised form. Securities held in physical form may be transferred via physical delivery or immobilised and transferred via book entry. The safekeeping and transferring of securities in physical form, however, creates additional risks and costs, such as the risk of destruction or theft of certificates, increased processing costs, and increased time to clear and settle securities transactions. By immobilising securities and transferring them via book entry, a CSDsecurities settlement facility can improve efficiency through increased automation and reduce the risk of errors and delays in processing.  Dematerialising securities also eliminates the risk of destruction or theft of certificates. A CSDWhere possible, a securities settlement facility should therefore maintain securities in an immobilised or dematerialised form and transfer securities via book entry. To facilitate the immobilisation of all physical securities of a particular issue, a global note representing the whole issue can be issued. In certain cases, however, immobilisation or dematerialisation within a CSDcentral securities depository operated by a securities settlement facility may not be legally possible or practicable. Legal requirements, for example, may limit the possible implementation or extent of immobilisation and dematerialisation. In such cases, a CSDsecurities settlement facility should provide incentives to immobilise or dematerialise securities.
9.4.	A CSDA securities settlement facility operating a central securities depository should protect assets against custody risk through appropriate rules and procedures consistent with its legal framework. 
9.4.1.	3.11.5.	A securities settlement facility should protect assets against custody risk, including the risk of loss because of the CSD’ssecurities settlement facility’s negligence, misuse of assets, fraud, poor administration, inadequate recordkeeping, or failure to protect a participant’s interests in securities or because of the CSD’ssecurities settlement facility’s insolvency or claims by the CSD’ssecurities settlement facility’s creditors. A CSDsecurities settlement facility should have rules and procedures consistent with its legal framework and robust internal controls to achieve these objectives. Where appropriate, a CSDsecurities settlement facility should consider insurance or other compensation schemes to protect participants against misappropriation, destruction, and theft of securities.
9.5.	A CSDsecurities settlement facility operating a central securities depository should employ a robust system that ensures segregation between the CSD’sits own assets and the securities of its participants, and segregation among the securities of participants. Where supported by the legal framework, the CSDa securities settlement facility operating a central securities depository should also support operationally the segregation of securities belonging to a participant’s customers on the participant’s books and facilitate the transfer of customer holdings.
9.5.1.	3.11.6	A securities settlement facility that operates a central securities depository should employ a robust system that ensures the segregation of its own assets from the securities belonging to its participants. In addition, the CSDsecurities settlement facility should segregate participants’ securities from those of other participants through the provision of separate accounts. While the title to securities is typically held in a CSD,securities settlement facility (as operator of a central securities depository), often the beneficial owner, or the owner depending on the legal framework, of the securities does not participate directly in the system. Rather, the owner establishes relationships with CSDthe securities settlement facility’s participants (or other intermediaries) that provide safekeeping and administrative services related to the holding and transfer of securities on behalf of customers. Where supported by the legal framework, a CSDsecurities settlement facility also should support operationally the segregation of securities belonging to a participant’s customers on the participant’s books and facilitate the transfer of customer holdings to another participant. Where relevant, the segregation of accounts typically helps provide appropriate protection against the claims of a CSD’ssecurities settlement facility’s creditors or the claims of the creditors of a participant in the event of its insolvency. 
9.6.	A CSDsecurities settlement facility operating a central securities depository should identify, measure, monitor, and manage its risks from other activities that it may perform; additional tools may be necessary in order to address these risks. 
9.6.1.	3.11.7.	If a CSD provides services other thanSince a securities settlement facility operating a central securities depository will typically provide services ancillary to central safekeeping and administration of securities, it should identify, measure, monitor, and manage the risks associated with those activities, particularly any credit and liquidity risks, consistent with the respective principles in this report. Additional tools may be necessary to address these risks, including the need for the FMI to separate legally the other activities.SSF Standards. For example, subject to SSF Standard 1.1, a CSD that operates an SSSsecurities settlement facility may provide a centralised securities lending facility to help facilitate timely settlement and reduce settlement fails, or may otherwise offer services that support the bilateral securities lending market. If the CSDsecurities settlement facility acts as a principal in a securities lending transaction, it should identify, monitor, and manage its risks, including potential credit and liquidity risks, under the conditions set in PrinciplesSSF Standard 4 on credit risk and 7.SSF Standard 6 on liquidity risk. For example, the securities lent by the CSDsecurities settlement facility may not be returned when needed because of a counterparty default, operational failure, or legal challenge. The CSDsecurities settlement facility would then need to acquire the lent securities in the market, perhaps at a cost, thus exposing the CSDsecurities settlement facility to credit and liquidity risks. 
Principle 12Standard 10: Exchange-of-value settlement systems
If an FMIIf a securities settlement facility settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other. 
Explanatory noteGuidance
3.12.1.	The settlement of a financial transaction by an FMIa securities settlement facility may involve the settlement of two linked obligations, such as the delivery of securities against payment of cash or securities or the delivery of one currency against delivery of another currency. In this context, principal risk may be created when one obligation is settled, but the other obligation is not (for example, the securities are delivered but no cash payment is received). Because this principal risk involves the full value of the transaction, substantial credit losses as well as substantial liquidity pressures may result from the default of a counterparty or, more generally, the failure to complete the settlement of both linked obligations. Further, a settlement default could result in high replacement costs (that is, the unrealised gain on the unsettled contract or the cost of replacing the original contract at market prices that may be changing rapidly during periods of stress). An FMIA securities settlement facility should eliminate or mitigate these risks through the use of a DvP, DvD, or PvP settlement mechanism. 
10.1.	An FMIA securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the FMIsecurities settlement facility settles on a gross or net basis and when finality occurs. 
10.1.1.	3.12.2.	An FMIA securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by linking the final settlement of one obligation to the final settlement of the other through an appropriate DvP, DvD, or PvP settlement mechanism (see also PrincipleSSF Standard 4 on credit risk, Principle 7SSF Standard 6 on liquidity risk, and Principle 8SSF Standard 7 on settlement finality). DvP, DvD, and PvP settlement mechanisms eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation occurs. If an FMIIf a securities settlement facility effects settlements using a DvP, DvD, or PvP settlement mechanism, it should settle a high percentage of obligations through that mechanism. In the securities market, for example, a DvP settlement mechanism is a mechanism that links a securities transfer and a funds transfer in such a way as to ensure that delivery occurs if and only if the corresponding payment occurs. DvP Similarly, a PvP settlement mechanism is a mechanism which ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency or currencies takes place, and a DvD settlement mechanism is a securities settlement mechanism which links two or more securities transfers in such a way as to ensure that delivery of one security occurs if and only if the corresponding delivery of the other security or securities occurs.
10.1.2.	A securities settlement facility should eliminate or mitigate credit risk by appropriate system design. This requires that the facility’s rules and procedures ensure that settlement of transactions in the facility occurs on a DvP basis. DvP (or PvP or DvD) can and should be achieved for both the primary and secondary markets. The settlement of two obligations can be achieved in several ways and varies by how trades or obligations are settled, either on a gross basis (trade-by-trade) or on a net basis, and the timing of when finality occurs.
10.2.	Where individual trade values are large, a securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by providing for contemporaneous real-time gross settlement of linked obligations. However, where trade values are small, a securities settlement facility that is an exchange-of-value settlement system may alternatively provide for contemporaneous settlement of linked obligations in a multilateral net batch. Only where trade values are small, and where operational requirements necessitate, may linked obligations settle non-contemporaneously.
10.2.1.	3.12.3.	The final settlement of two linked obligations can be achieved either on a gross basis or on a net basis. For example, an SSS  Typically, exchange-of-value settlement can settlebe achieved in one of three ways: 
•	where the final transfers of both payment and/or securities and funds between trade counterparties required to extinguish linked obligations occur contemporaneously and on a grosstrade-by-trade basis throughout the settlement day. Alternatively, an SSS can settlein real time (i.e. DvP model 1)
•	where final securities transfers are settled on a grosstrade-by-trade basis throughout the day but settle fundsin real time, with final payment transfers settled on a multilateral net basis at the end of the day or at certain times during the day. An SSS can also settle bothprocessing cycle (i.e. DvP model 2) 
•	where both final securities and funds transfers and/or final payment transfers required to extinguish linked obligations occur contemporaneously on a multilateral net basis at the end of the day or at certain times during the day. processing cycle (DvP model 3). 
Regardless of whether an FMIa securities settlement facility settles on a gross or net basis, the legal, contractual, technical, and risk-management framework should ensure that the settlement of an obligation is final if and only if the settlement of the corresponding obligation is final.
3.12.4.	DvP, DvD, and PvP can be achieved through different timing arrangements. Strictly speaking, DvP, DvD, and PvP do not require a simultaneous settlement of obligations. In some cases, settlement of one obligation could follow the settlement of the other. For example, when an SSS does not itself provide cash accounts for settlement, it may first block the underlying securities in the account of the seller. The SSS may then request a transfer of funds from the buyer to the seller at the settlement bank for funds transfers. The securities are delivered to the buyer or its custodian if and only if the SSS receives confirmation of settlement of the cash leg from the settlement bank. In such DvP arrangements, however, the length of time between the blocking of securities, the settling of cash, and the subsequent release and delivery of the blocked securities should be minimised. Further, blocked securities must not be subject to a claim by a third party (for example, other creditors, tax authorities, or even the SSS itself) because these claims would give rise to principal risk.
10.2.2.	The timing of exchange-of-value settlement of trades is important. Where the final contemporaneous transfers of securities and/or payments required to extinguish linked obligations occur either in real time throughout the day, or on a multilateral net basis at the end of the processing cycle, principal risk is eliminated. On the other hand, where final transfer of securities occurs in real time, but final payment is deferred until some later time, sellers of securities remain exposed to principal risk, which must therefore be managed.
10.2.3.	Where settlement involves the exchange of a security for payment (a DvP transaction), the settlement of obligations requires up to three steps: 
•	the security (or title over the security) needs to be transferred from seller to buyer 
•	payment must be transferred from the buyer to the seller, either across accounts with the securities settlement facility’s money settlement agent (which may be the central bank of issue), or using the services of a commercial settlement bank 
•	where the buyer and seller use a different commercial settlement bank, funds must be transferred from the account of the buyer's settlement bank to the account of the seller's settlement bank with the money settlement agent (see SSF Standard 8 on money settlements). 
10.2.4.	Contemporaneous performance of the three steps involved in a DvP transaction requires that: 
•	the transfer of money settlement assets is irrevocably linked with the DvP settlement of securities and payment obligations, such that one cannot occur without the other
•	where netting is used, securities blocked prior to transfer are not subject to claims by third parties
•	final and irrevocable settlement of all obligations arising from a securities trade occurs either simultaneously or within such a very small period of time that the benefits of DvP are achieved. 
10.2.5.	Notwithstanding that contemporaneous multilateral net settlement of securities and/or final payment transfers eliminates principal risk, there is a prospect that net obligations may be sufficiently large that a participant default triggering recalculation of the net settlement batch causes survivors to face liquidity pressures (see SSF Standard 6 on liquidity risk). Furthermore, even where batch recalculation does not give rise to sizeable swings in liquidity requirements for participants, the dependencies between participants in a net batch settlement model are such that problems with a single participant can nevertheless cause delays and uncertainty for all participants.  
10.2.6.	Where individual trade values are large, therefore, a securities settlement facility should settle linked obligations using trade-by-trade settlement on a real-time basis. Only where trade values are not large may the payment transfers and/or final securities transfers required to extinguish linked obligations occur on a multilateral net basis. Even where trade values are small, linked settlements should occur contemporaneously unless this is precluded by operational requirements. Where netting is involved, the securities settlement facility should ensure that it has taken steps to ensure the certainty of netting arrangements (see SSF Standard 1 on legal basis). The securities settlement facility should, at a minimum, ensure that the final and irrevocable settlement of obligations is completed by the end of the settlement day. 
10.2.7.	Operational requirements that necessitate non-contemporaneous settlement of linked obligations refer to practical matters arising out of the nature of the security and payment being exchanged that preclude contemporaneous settlement. This may occur, for example, where title must be exchanged by individual physical delivery and, as a practical matter, payment is by other than electronic transfer.
Principle 13Standard 11: Participant-default rules and procedures 
An FMIA securities settlement facility should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMIsecurities settlement facility can take timely action to contain losses and liquidity pressures and continue to meet its obligations. 
Explanatory noteGuidance
3.13.1.	Participant-default rules and procedures facilitate the continued functioning of an FMIa securities settlement facility in the event that a participant fails to meet its obligations. These rules and procedures help limit the potential for the effects of a participant’s failure to spread to other participants and undermine the viability of the FMI.securities settlement facility. Key objectives of default rules and procedures should, where relevant, include (a): ensuring timely completion of settlement, even in extreme but plausible market conditions; (b) minimising losses for the FMIsecurities settlement facility and for non-defaulting participants; (c) limiting disruptions to the market; (d) providing a clear framework for accessing FMIsecurities settlement facility liquidity facilities as needed; and (e) managing and closing out the defaulting participant’s positions and liquidating any applicable collateral in a prudent and orderly manner. In some instances, managing a participant default may involve hedging open positions, funding collateral so that the positions can be closed out over time, or both. An FMI may also decide to auction or allocate open positions to its participants. To the extent consistent with these objectives, an FMIa securities settlement facility should allow non-defaulting participants to continue to manage their positions and transactions as normal.
11.1.	An FMIA securities settlement facility should have default rules and procedures that enable the FMIsecurities settlement facility to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default. A securities settlement facility should ensure that financial and other obligations created for non-defaulting participants in the event of a participant default are proportional to the scale and nature of individual participants’ activities.
Rules and procedures
11.1.1.	3.13.2.	An FMIA securities settlement facility should have default rules and procedures that enable the FMIsecurities settlement facility to continue to meet itsany obligations to non-defaulting participants in the event of a participant default. An FMIA securities settlement facility should explain clearly in its rules and procedures what circumstances constitute a participant default, addressing both financial and operational defaults. An FMIA securities settlement facility should describe the method for identifying a default. In particular, an FMIa securities settlement facility should specify whether a declaration of default is automatic or discretionary, and if discretionary, which person or group shall exercise that discretion. Key aspects to be considered in designing the rules and procedures include (a): the actions that an FMIa securities settlement facility can take when a default is declared; (b) the extent to which such actions are automatic or discretionary; (c) potential changes to the normal settlement practices, should these changes be necessary in extreme circumstances, to ensure timely settlement; (d) the management of transactions at different stages of processing; (e) the expected treatment of proprietary and customer transactions and accounts; (f) the probable sequencing of actions; (g) the roles, obligations, and responsibilities of the various parties, including non-defaulting participants; and (h) the existence of other mechanisms that may be activated to contain the impact of a default. An FMIA securities settlement facility should involve its participants, the Reserve Bank and other relevant authorities, and other relevant stakeholders in developing its default rules and procedures (see PrincipleSSF Standard 2 on governance).  
11.1.2.	In the event of a participant default, financial and other obligations created for non-defaulting participants should be proportional to the scale and nature of participants’ activities. Disproportionate obligations may place undue demands on participants at a time of wider market distress. 
Use and sequencing of financial resources
11.1.3.	3.13.3.	An FMI’sA securities settlement facility’s default rules and procedures should enable the FMIsecurities settlement facility to take timely action to contain losses and liquidity pressures, before, at, and after the point of participant default (see also PrincipleSSF Standard 4 on credit risk and Principle 7SSF Standard 6 on liquidity risk). Specifically, an FMI’sWhere relevant, a securities settlement facility’s rules and procedures should allow the FMIsecurities settlement facility to use promptly any financial resources that it maintains for covering losses and containing liquidity pressures arising from default, including liquidity facilities. The rules of the FMIsecurities settlement facility should specify the order in which different types of resources will be used. This information enables participants to assess their potential future exposures from using the FMI’ssecurities settlement facility’s services. Typically, an FMIa securities settlement facility should first use assets provided by the defaulting participant, such as margin or other collateral, to provide incentives for participants to manage prudently the risks, particularly credit risk, they pose to an FMI.a securities settlement facility. The application of previously provided collateral should not be subject to prevention, stay, or reversal under applicable law and the rules of the FMI. An FMIsecurities settlement facility. A securities settlement facility should also have a credible and explicit plan for replenishing its resources over an appropriate time horizon following a participant default so that it can continue to operate in a safe and sound manner. In particular, the FMI’ssecurities settlement facility’s rules and procedures should define theany obligations of the non-defaulting participants to replenish the financial resources depleted during a default so that the time horizon of such replenishment is anticipated by non-defaulting participants without any disruptive effects.
3.13.4.	A CCP should have rules and procedures to facilitate the prompt close out or transfer of a defaulting participant’s proprietary and customer positions. Typically, the longer these positions remain open on the books of the CCP, the larger the CCP’s potential credit exposures resulting from changes in market prices or other factors will be. A CCP should have the ability to apply the proceeds of liquidation, along with other funds and assets of the defaulting participant, to meet the defaulting participant’s obligations. It is critical that a CCP has the authority to act promptly to contain its exposure, while having regard for overall market effects, such as sharp declines in market prices. A CCP should have the information, resources, and tools to close out positions promptly. In circumstances where prompt close out is not practicable, a CCP should have the tools to hedge positions as an interim risk-management technique. In some cases, a CCP may use seconded personnel from non-defaulting participants to assist in the close-out or hedging process. The CCP’s rules and procedures should clearly state the scope of duties and term of service expected from seconded personnel. In other cases, the CCP may elect to auction positions or portfolios to the market. The CCP’s rules and procedures should clearly state the scope for such action, and any participant obligations with regard to such auctions should be clearly set out. The close out of positions should not be subject to prevention, stay, or reversal under applicable law and the rules of the FMI.
11.2.	An FMIA securities settlement facility should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules. This requires that the securities settlement facility should:
(a)	require its participants to inform it immediately if they:
(i)	become subject to, or aware of the likelihood of external administration, or have reasonable grounds for suspecting that they will become subject to external administration; or
(ii)	have breached, or are likely to breach, a risk-control requirement of the securities settlement facility;
(b)	allow for the cancellation or suspension of a participant or commercial settlement bank from the securities settlement facility:
(i)	if the participant or commercial settlement bank is in external administration; or
(ii)	if there is a reasonable suspicion that the participant or commercial settlement bank may become subject to external administration; and 
(c)	allow participant users of a commercial settlement bank which becomes subject to external administration, or which is reasonably likely to become subject to external administration, to quickly nominate a new commercial settlement bank.
11.2.1.	This Standard is aimed at ensuring the timely settlement of obligations in the event that a participant or commercial settlement bank goes into external administration. The securities settlement facility should have a legally binding requirement for participants to notify it should they be in default or reasonably suspect that this is the case. Similar notification should be made in the event of a breach or likely breach of any risk-control requirement of the securities settlement facility. Any communication should be at an appropriately high level both within the participant organisation and the securities settlement facility. The impact that a participant or commercial settlement bank in external administration may have on other participants should be minimised through the existence of legally binding arrangements, the timely flow of information, and the institution of appropriate controls and procedures. For a commercial settlement bank, this should include rules and procedures allowing its participant users to quickly nominate a new provider in the event that it enters external administration or is reasonably likely to do so. There is a difference between external administration and cases where a participant may have sufficient assets to meet its obligations, yet be unable to complete settlement of its obligations due to operational failure or liquidity pressures. This distinction should be recognised in the rules of the securities settlement facility. 
11.2.2.	3.13.5.	An FMIA securities settlement facility should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in the rules. Management should ensure that the FMIsecurities settlement facility has the operational capacity, including sufficient well-trained personnel, to implement its procedures in a timely manner. An FMI’sA securities settlement facility’s rules and procedures should outline examples of when management discretion may be appropriate and should include arrangements to minimise any potential conflicts of interests. Management should also have internal plans that clearly delineate the roles and responsibilities for addressing a default and provide training and guidance to its personnel on how the procedures should be implemented. These plans should address documentation, information needs, and coordination when more than one FMIsecurities settlement facility or authority is involved. In addition, timely communication with stakeholders, in particular with the Reserve Bank and other relevant authorities, is of critical importance. (see also SSF Standard 19 on regulatory reporting). The FMIsecurities settlement facility, to the extent permitted, should clearly convey to affected stakeholders information that would help them to manage their own risks. The internal plan should be reviewed by management and the relevant board committees at least annually or after any significant changes to the FMI’ssecurities settlement facility’s arrangements.
11.3.	An FMIA securities settlement system should publicly disclose key aspects of its default rules and procedures. Where a securities settlement facility settles via a multilateral net batch, arrangements for dealing with any unsettled trades of a defaulting participant that are not guaranteed by a central counterparty, such as reconstituting the multilateral net batch excluding the settlement obligations of the defaulting participant, should be clear to all participants and should be capable of being executed in a timely manner.
11.3.1.	3.13.6.	To provide certainty and predictability regarding the measures that an FMIa securities settlement facility may take in a default event, an FMIa securities settlement facility should publicly disclose key aspects of its default rules and procedures, including: (a) the circumstances in which action may be taken; (b) who may take those actions; (c) the scope of the actions which may be taken, including the treatment of both proprietary and customer positions, funds, and other assets; (d) the mechanisms to address an FMI’sany obligations of a securities settlement facility to non-defaulting participants; and (e) where direct relationships exist with participants’ customers, the mechanisms to help address the defaulting participant’s obligations to its customers. This transparency fosters the orderly handling of defaults, enables participants to understand their obligations to the FMIsecurities settlement facility and to their customers, and gives market participants the information they need to make informed decisions about their activities in the market. An FMIA securities settlement facility should ensure that its participants and their customers, as well as the public, have appropriate access to the FMI’ssecurities settlement facility’s default rules and procedures and should promote their understanding of those procedures in order to foster confidence in the market in the event of a participant default. 
11.3.2.	Any arrangements for dealing with the unsettled trades of a defaulting participant should be clear to all securities settlement facility participants and capable of being executed in a timely manner. For example, in the case of a securities settlement facility that settles via a multilateral net batch, rules for any reconstitution of a multilateral net batch excluding any settlement obligations of a defaulting participant that have not been guaranteed by a central counterparty should be clearly stated and disclosed to participants. Sufficient information and tools should be made available to participants to assist in quantifying the potential magnitude of liquidity demands in the event of any such reconstitution of the batch, and taking appropriate steps to accommodate these demands (see SSF Standard 6.2 on liquidity risk). Reconstitution of the batch should provide for any requirements arising from a central counterparty’s own rules for dealing with the inability of a clearing participant to settle arising from its own failure or that of a commercial settlement bank.
11.4.	A securities settlement facility should involve its participants and other stakeholders in the testing and review of the FMI’ssecurities settlement facility’s default procedures, including any close-out procedures. Such testing and review should be conducted at least annually orand following material changes to the rules and procedures to ensure that they are practical and effective. 
11.4.1.	3.13.7.	An FMIA securities settlement facility should involve relevant participants and other stakeholders in the testing and review of its default procedures. Such testing and review should be conducted at least annually or and following material changes to the rules and procedures to ensure that they are practical and effective. The periodic testing and review of default procedures is important to help the FMIsecurities settlement facility and its participants understand fully the procedures and to identify any lack of clarity in, or discretion allowed by, the rules and procedures. Such tests should include all relevant parties, or an appropriate subset, that would likely be involved in the default procedures, such as members of the appropriate board committees, participants, linked or interdependent FMIs, the Reserve Bank and other relevant authorities, and any related service providers. This is particularly important where an FMIa securities settlement facility relies on non-defaulting participants or third parties to assist in the close-out process and where the default procedures have never been tested by an actual default. The results of these tests and reviews should be shared with the FMI’ssecurities settlement facility’s board of directors, risk committee, and the Reserve Bank and other relevant authorities.
11.4.2.	3.13.8.	Furthermore, part of an FMI’sa securities settlement facility’s participant-default testing should include the implementation of the resolution regime for an FMI’sa securities settlement facility’s participants, as relevant. An FMIA securities settlement facility should be able to take all appropriate steps to address the resolution of a participant. Specifically, the FMIsecurities settlement facility, or if applicable a resolution authority, should be able to transfer a defaulting participant’s open positions and customer accounts to a receiver, third party, or bridge financial company.
11.5.	A securities settlement facility should demonstrate that its default-management procedures take appropriate account of interests in relevant jurisdictions, and in particular any implications for pricing, liquidity and stability in relevant financial markets.
11.5.1.	A securities settlement facility should ensure that its default management procedures take appropriate account of interests across the jurisdictions in which it operates. A securities settlement facility’s governance arrangements should ensure that these interests are taken into account (see SSF Standard 2 on governance). The actions that a securities settlement facility takes in the event of a default, such as any reconstitution of a multilateral net batch, could, through the impact on participants, potentially impact on pricing, liquidity and stability in certain financial markets. A securities settlement facility should consider these wider market impacts of its default-management actions, and take mitigating action to minimise market impacts where appropriate. 
[The SSF Standards do not incorporate Principle 14 on segregation and portability]
Principle 15Standard 12: General business risk
An FMIA securities settlement facility should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.
Explanatory noteGuidance
3.15.1.	An FMIA securities settlement facility should have robust management and control systems to identify, monitor, and manage general business risk. General business risk refers to the risks and potential losses arising from an FMI’sa securities settlement facility’s administration and operation as a business enterprise that are neither related to participant default nor separately covered by financial resources under theSSF Standard 4 on credit risk or SSF Standard 6 on liquidity risk principles. General business risk includes any potential impairment of the FMI’ssecurities settlement facility’s financial position (as a business concern) as a consequence of a decline in its revenues or an increase in its expenses, such that expenses exceed revenues and result in a loss that must be charged against capital. Such impairment can be caused by a variety of business factors, including poor execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses. Business-related losses also may arise from risks covered by other principlesstandards, for example, legal risk (in the case of legal actions challenging the FMI’ssecurities settlement facility’s custody arrangements), investment risk affecting the FMI’ssecurities settlement facility’s resources, and operational risk (in the case of fraud, theft, or loss). In these cases, general business risk may cause an FMIa securities settlement facility to experience an extraordinary one-time loss as opposed to recurring losses.
12.1.	An FMIA securities settlement facility should have robust management and control systems to identify, monitor, and manage general business risks, including losses from poor execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses.
Identifying business risk
12.1.1.	3.15.2.	An FMIA securities settlement facility should identify and assess the sources of business risk and their potential impact on its operations and services, taking into account past loss events and financial projections. An FMIA securities settlement facility should assess and thoroughly understand its business risk and the potential effect that this risk could have on its cash flows, liquidity, and capital positions. In doing so, an FMIa securities settlement facility should consider a combination of tools, such as risk-management and internal-control assessments, scenario analysis, and sensitivity analysis. Internal-control assessments should identify key risks and controls and assess the impact and probability of the risks and the effectiveness of the controls. Scenario analysis should examine how specific scenarios would affect the FMI.securities settlement facility. Sensitivity analysis should test how changes in one risk affect the FMI’ssecurities settlement facility’s financial standing, for example, conducting the analysis of how the loss of a key customer or service provider might impact the FMI’ssecurities settlement facility’s existing business activities. In some cases, an FMIa securities settlement facility may want to consider an independent assessment of specific business risks.
12.1.2.	3.15.3.	An FMIA securities settlement facility should clearly understand its general business-risk profile so that it is able to assess its ability to either (a) to avoid, reduce, or transfer specific business risks, or (b) to accept and manage those risks. This requires the ongoing identification of risk-mitigation options that the FMIsecurities settlement facility may use in response to changes in its business environment. When planning an expansion of activity, an FMIa securities settlement facility should conduct a comprehensive enterprise risk assessment. In particular, when considering any major new product, service, or project, the FMIsecurities settlement facility should projectforecast potential revenues and expenses as well as identify and plan how it will cover any additional capital requirements. Further, an FMIa securities settlement facility may eliminate or mitigate some risks by instituting appropriate internal controls or by obtaining insurance or indemnity from a third party. 
Measuring and monitoring business risk
12.1.3.	3.15.4.	Once an FMIa securities settlement facility has identified and assessed its business risk, it should measure and monitor these risks on an ongoing basis and develop appropriate information systems as part of a robust enterprise risk-management program. Key components of a robust enterprise risk-management program include establishing strong financial- and internal-control systems so that the FMIsecurities settlement facility can monitor, manage, and control its cash flows and operating expenses and mitigate any business-related losses (see PrincipleSSF Standard 3 on framework for the comprehensive management of risks). In particular, an FMIa securities settlement facility should minimise and mitigate the probability of business-related losses and their impact on its operations across a range of adverse business and market conditions, including the scenario that its viability as a going concern is questioned. An FMIA securities settlement facility should also ensure that it has rigorous and appropriate investment guidelines and monitoring procedures (see Principle 16SSF Standard 13 on custody and investment risks). 
12.2.	An FMIA securities settlement facility should hold liquid net assets funded by equity (such as common stock, disclosed reserves, or other retained earnings) so that it can continue operations and services as a going concern if it incurs general business losses. The amount of liquid net assets funded by equity an FMIa securities settlement facility should hold should be determined by its general business risk profile and the length of time required to achieve a recovery or orderly wind-down, as appropriate, of its critical operations and services if such action is taken.
12.2.1.	3.15.5.	An FMIA securities settlement facility should hold liquid net assets funded by equity (such as common stock, disclosed reserves, or retained earnings) so that it can continue operations and services as a going concern if it incurs general business losses. Equity allows an FMIa securities settlement facility to absorb losses on an ongoing basis and should be permanently available for this purpose. The amount of liquid net assets funded by equity an FMIa securities settlement facility should hold should be determined by its general business-risk profile and the length of time required to achieve a recovery or orderly wind-down, as appropriate, of its critical operations and services if such action is taken. 
12.2.2.	3.15.6.	In order to estimate the amount of liquid net assets funded by equity that a particular FMIsecurities settlement facility would need, the FMIsecurities settlement facility should regularly analyse and understand how its revenue and operating expenses may change under a variety of adverse business scenarios as well as how it might be affected by extraordinary one-time losses. This analysis should also be performed when a material change to the assumptions underlying the model occurs, either because of changes to the FMI’ssecurities settlement facility’s business model or because of external changes. An FMIA securities settlement facility needs to consider not only possible decreases in revenues but also possible increases in operating expenses, as well as the possibility of extraordinary one-time losses, when deciding on the amount of liquid net assets to hold to cover general business risk. 
12.3.	An FMIA securities settlement facility should maintain a viable recovery or orderly wind-down plan and should hold sufficient liquid net assets funded by equity to implement this plan. At a minimum, an FMIa securities settlement facility should hold liquid net assets funded by equity equal to at least six months of current operating expenses. These assets are in addition to resources held to cover participant defaults or other risks covered under the financial resources principles.SSF Standards 4 and 6. However, equity held under international risk-based capital standards can be included where relevant and appropriate to avoid duplicate capital requirements. 
12.3.1.	[3.15.5]	Accordingly, an FMIA securities settlement facility should maintain a viable plan to achieve recovery and orderly wind-down and should hold sufficient liquid net assets funded by equity to implement this plan. The appropriate amount of liquid net assets funded by equity will depend on the content of the plan and, specifically, on the size of the FMIsecurities settlement facility, the scope of its activities, the types of actions included in the plan, and the length of time needed to implement them. An FMIA securities settlement facility should also take into consideration the operational, technological, and legal requirements for participants to establish and move to an alternative arrangement in the event of an orderly wind-down. At a minimum, however, an FMIa securities settlement facility should hold liquid net assets funded by equity equal to at least six months of current operating expenses.
12.3.2.	3.15.7.	Assets held by an FMIa securities settlement facility to cover risks or losses other than business risk (for example, where relevant, the financial resources required under the SSF Standard 4 on credit risk and SSF Standard 6 on liquidity risk principles) or to cover losses from other business lines that are unrelated to its activities as an FMI) should not be included when accounting for liquid net assets available to cover business risk. However, any equity held under international risk-based capital standards should be included where relevant and appropriate to avoid duplicate capital requirements.
12.4.	Assets held to cover general business risk should be of high quality and sufficiently liquid in order to allow the FMIsecurities settlement facility to meet its current and projected operating expenses under a range of scenarios, including in adverse market conditions.
12.4.1.	3.15.8.	To ensure the adequacy of its own resources, an FMIa securities settlement facility should regularly assess and report its liquid net assets funded by equity relative to its potential business risks to its regulators.the Reserve Bank and other relevant authorities (see also SSF Standard 19 on regulatory reporting).
12.5.	An FMIA securities settlement facility should maintain a viable plan for raising additional equity should its equity fall close to or below the amount needed. This plan should be approved by the board of directors and updated regularly.
12.5.1.	3.15.9.	An FMIA securities settlement facility should provide a viable capital plan for maintaining an appropriate level of equity. The capital plan should specify how an FMIa securities settlement facility would raise new capital if its equity capital were to fall close to or below the amount needed. This plan should be approved by the board of directors (or an appropriate board committee), reviewed at least annually and updated regularly. An FMIas appropriate. A securities settlement facility may also need to consult its participants and others during the development of its plan.
12.5.2.	3.15.10.	In developing a capital plan, an FMIa securities settlement facility should consider a number of factors, including its ownership structure and any insured business risks. For example, an FMIa securities settlement facility should determine if and to what extent specific business risks are covered by (a) explicit insurance from a third party, or (b) explicit indemnity agreements from a parent, owners, or participants (for example, general loss-allocation provisions and parent guarantees), which would be realisable within the recovery or orderly wind-down time frame. Given the contingent nature of these resources, an FMIa securities settlement facility should use conservative assumptions when taking them into account for its capital plan. Furthermore, these resources should not be taken into account when assessing the FMI’ssecurities settlement facility’s capital adequacy.
Principle 16Standard 13: Custody and investment risks
An FMIA securities settlement facility should safeguard its own and its participants’ assets and minimise the risk of loss on and delay in access to these assets. An FMI’sA securities settlement facility’s investments should be in instruments with minimal credit, market, and liquidity risks.
Explanatory noteGuidance
3.16.1.	An FMIA securities settlement facility has the responsibility to safeguard its assets, such as cash and securities, as well as theany assets that its participants have provided to the FMI. Custody risk is the risk of loss on assets held in custody in the event of a custodian’s (or subcustodian’s) insolvency, negligence, fraud, poor administration, or inadequate recordkeepingsecurities settlement facility. Assets that are used by an FMIa securities settlement facility to support its operating funds or capital funds or that have been provided by participants to secure their obligations to the FMIsecurities settlement facility should be held at supervised or regulated entities that have strong processes, systems, and credit profiles, including other FMIs (for example, CSDs).central securities depositories). In addition, assets should generally be held in a manner that assures the FMIsecurities settlement facility of prompt access to those assets in the event that the FMIsecurities settlement facility needs to draw on them. Investment risk refers to the risk of loss faced by an FMI when it invests its own or its participants’ assets.
A securities settlement facility should ensure that its investment strategy is consistent with its overall risk-management strategy. Resources held by a securities settlement facility to cover credit, liquidity or general business risks should not be exposed to credit, market or liquidity risks (including through concentrated exposures to investment counterparties) that may compromise the ability of the securities settlement facility to use these resources when needed.
13.1.	An FMIA securities settlement facility should hold its own and its participants’ assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures, and internal controls that fully protect these assets.
13.1.1.	3.16.2.	An FMIA securities settlement facility should mitigate its custody risk by using only supervised and regulated entities with robust accounting practices, safekeeping procedures, and internal controls that fully protect its own and its participants’ assets. (if any). It is particularly important that assets held in custody are protected against claims of a custodian’s creditors. The custodian should have a sound legal basis supporting its activities, including the segregation of assets (see also PrincipleSSF Standard 1 on legal basis and Principle 11SSF Standard 9 on CSDscentral securities depositories). The custodian also should have a strong financial position to be able to sustain losses from operational problems or ancillary non-custodial activities. An FMI
13.2.	An FMIA securities settlement facility should have prompt access to its assets and the assets provided by participants, when required.
13.2.1.	An FMIA securities settlement facility should confirm that its interest or ownership rights in the assets can be enforced and that it can have prompt access to its assets and theany assets provided by participants, when required. Timely availability and access should be ensured even if these securities are held in another time zone or jurisdiction. Furthermore, the FMIsecurities settlement facility should confirm it has prompt access to the assets in the event of a default of a participant.
13.3.	An FMIA securities settlement facility should evaluate and understand its exposures to its custodian bankscustodians, taking into account the full scope of its relationships with each.
13.3.1.	3.16.3.	An FMIA securities settlement facility should evaluate and understand its exposures to its custodians banks, taking into account the full scope of its relationships with each custodian bank. For example, a financial institution may serve as a custodian bank to an FMIto a securities settlement facility as well as a money settlement bank andagent or liquidity provider to the FMI.securities settlement facility. The custodian bank also might be a participant in the FMIsecurities settlement facility and offer clearing services to other participants. An FMIA securities settlement facility should carefully consider all of its relationships with a particular custodian bank to ensure that its overall risk exposure to an individual custodian remains within acceptable concentration limits. Where feasible, an FMIa securities settlement facility could consider using multiple custodians for the safekeeping of its assets to diversify its exposure to any single custodian. For example, a CCP may want to use one custodian for its margin assets and another custodian for its prefunded default arrangement. Such a CCP, however, mayThe securities settlement facility would, however, need to balance the benefits of risk diversification against the benefits of pooling resources at one or a small number of custodians. In any event, an FMIa securities settlement facility should monitor the concentration of risk exposures to, and financial condition of, its custodian bankscustodians on an ongoing basis.
13.4.	An FMI’sA securities settlement facility’s investment strategy should be consistent with its overall risk-‑management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.
13.4.1.	3.16.4.	An FMI’sA securities settlement facility’s strategy for investing its own and itsany participants’ assets should be consistent with its overall risk-management strategy and fully disclosed to its participants. When making its investment choices, the FMIsecurities settlement facility should not allow pursuit of profit to compromise its financial soundness and liquidity risk management. Investments should be secured by, or be claims on, high-quality obligors to mitigate the credit risk to which the FMIsecurities settlement facility is exposed. Within these parameters, a securities settlement facility should have a high degree of confidence that its own capital would be sufficient to withstand losses associated with the failure of any individual non-government investment counterparty. This implies the imposition of conservative limits on the size and concentration of counterparty exposures. In considering its overall credit-risk exposures to individual obligors, a securities settlement facility should also take into account other relationships with the obligor that create additional exposures, such as where an obligor is also a participant or an affiliate of a participant in the securities settlement facility. In addition, a securities settlement facility should not invest participant assets in the participant’s own securities or those of its affiliates.
13.4.2.	Also, because the value of an FMI’sBecause the value of a securities settlement facility’s investments may need to be realised quickly, investments should allow for quick liquidation with little, if any, adverse price effect. For example, an FMIa securities settlement facility could invest in overnight reverse repo agreements backed by liquid securities with low credit risk. An FMI should carefully consider its overall credit risk exposures to individual obligors, including other relationships with the obligor that create additional exposures such as an obligor that is also a participant or an affiliate of a participant in the FMI. In addition, an FMI should not invest participant assets in the participant’s own securities or those of its affiliates. If an FMI’sIn allowing for quick liquidation with minimal adverse price effect, a securities settlement facility should also impose limits on the concentration of certain assets in its investment portfolio. If a securities settlement facility’s own resources can be used to cover losses and liquidity pressures resulting from a participant default, the investment of those resources should not compromise the FMI’ssecurities settlement facility’s ability to use them when needed. 
Principle 17Standard 14: Operational risk 
An FMIA securities settlement facility should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business-continuity management should aim for timely recovery of operations and fulfilment of the FMI’ssecurities settlement facility’s obligations, including in the event of a wide-scale or major disruption.
Explanatory noteGuidance
3.17.1.	Operational risk is the risk that deficiencies in information systems, internal processes, and personnel, or disruptions from external events will result in the reduction, deterioration, or breakdown of services provided by an FMI.a securities settlement facility. Operational failures can damage an FMI’sa securities settlement facility’s reputation or perceived reliability, lead to legal consequences, and result in financial losses incurred by the FMIsecurities settlement facility, participants, and other parties. In certain cases, operational failures can also be a source of systemic risk. An FMIA securities settlement facility should establish a robust framework to manage its operational risks with appropriate systems, policies, procedures, and controls. As part of an FMI’s operational risk-management framework, the FMI, which should identify the plausible sources of operational risk; deploy appropriate systems; establish appropriate policies, procedures, and controls; set operational-reliability objectives; and develop a business-continuity plan. An FMIA securities settlement facility should take a holistic approach when establishing its operational risk-management framework.
Identifying sources ofand managing operational risk
14.1.	A securities settlement facility should establish a robust operational risk-management framework with appropriate systems, policies, procedures, and controls to identify, monitor, and manage operational risks.
14.1.1.	3.17.2.	An FMIA securities settlement facility should actively identify, monitor, and manage the plausible sources of operational risk and establish clear policies and procedures to address them. Operational risk can stem from both internal and external sources. Internal sources of operational risk include inadequate identification or understanding of risks and the controls and procedures needed to limit and manage them, inadequate control of systems and processes, inadequate screening of personnel, and, more generally, inadequate management. External sources of operational risk include the failure of critical-service providers or utilities or events affecting a wide metropolitan area such as natural disasters, terrorism, and pandemics. Both internal and external sources of operational risk can lead to a variety of operational failures that include (a): errors or delays in message handling, (b); miscommunication, (c); service degradation or interruption, (d); fraudulent activities by staff,; and (e) disclosure of confidential information to unauthorised entities. If an FMIIf a securities settlement facility provides services in multiple time zones, it may face increased operational risk due to longer operational hours and less downtime for maintenance. An FMIA securities settlement facility should identify all potential single points of failure in its operations. Additionally, an FMIa securities settlement facility should assess the evolving nature of the operational risk it faces on an ongoing basis (for example, pandemics and cyber-attacks), so that it can analyse its potential vulnerabilities and implement appropriate defence mechanisms.
3.17.3.	A TR typically serves as a single source of information for a particular market, and it may be the central registry for certain trades. Therefore, a TR’s failure to perform as expected could cause significant disruption. The key risk of a TR is operational. Deficiencies in business continuity management, data integrity, and the safeguarding of data are a particular concern. Inadequate disclosure or faulty delivery of data by a TR to relevant authorities or the public could undermine the primary purpose of the TR. Access to timely and reliable data provides greater insights into the derivatives market and improves the ability of relevant authorities to oversee the markets it serves and its participants. Data recorded by a TR may also be used as inputs by the TR’s participants and potentially by other relevant infrastructures and service providers. Therefore, continuous availability of data stored in a TR is critical. Also, a TR should carefully assess the additional operational risks related to its links to ensure the scalability and reliability of IT and related resources. Where a TR provides access to another type of FMI, such as a CCP, the linked FMIs may be exposed to additional risks if the interface is not properly designed. FMIs establishing a link to a TR should ensure that the system and communication arrangements between the linked entities are reliable and secure such that the operation of the link does not pose significant reliability and security risks.
14.2.	An FMI’sA securities settlement facility’s board of directors should clearly define the roles and responsibilities for addressing operational risk and should endorse the FMI’ssecurities settlement facility’s operational risk-management framework. Systems, operational policies, procedures, and controls should be reviewed, audited, and tested periodically and after significant changes.
14.2.1.	3.17.4.	An FMIA securities settlement facility should establish clear policies, procedures, and controls that mitigate and manage its sources of operational risk. Overall, operational risk management is a continuous process encompassing risk assessment, defining an acceptable tolerance for risk, and implementing risk controls. This process results in an FMIa securities settlement facility accepting, mitigating, or avoiding risks consistent with its operational-reliability objectives. An FMI’sA securities settlement facility’s governance arrangements are pertinent to its operational risk-management framework (see also PrincipleSSF Standard 2 on governance). In particular, an FMI’sa securities settlement facility’s board should explicitly define the roles and responsibilities for addressing operational risk and endorse the FMI’ssecurities settlement facility’s operational risk-management framework. 
14.2.2.	3.17.5.	To ensure the proper functioning of its risk controls, an FMIa securities settlement facility should have sound internal controls. For example, an FMIa securities settlement facility should have adequate management controls, such asprocesses for setting operational standards, measuring and reviewing performance, and correcting deficiencies. There are many relevantA securities settlement facility may draw on international, national, and industry-level standards, guidelines, or recommendations that an FMI may use in designing its operational risk-management framework. Conformity with commercial standards can help an FMIa securities settlement facility reach its operational objectives. For example, commercial standards exist for information security, business continuity, and project management. An FMIA securities settlement facility should regularly assess the need to integrate the applicable commercial standards into its operational risk-management framework. In addition, an FMIa securities settlement facility should seek to comply with relevant commercial standards in a manner commensurate with the FMI’ssecurities settlement facility’s importance and level of interconnectedness. 
14.2.3.	3.17.6.	An FMI’sA securities settlement facility’s arrangements with participants, operational policies, and operational procedures should be periodically, and whenever necessary, tested and reviewed, especially after significant changes occur to the system or a major incident occurs. In order to minimise any effects of the testing on operations, tests should be carried out in a “‘testing environment.”environment’. This testing environment should, to the extent possible, replicate the production environment (including the implemented security provisions, in particular, those regarding data confidentiality). Additionally, key elements of an FMI’sa securities settlement facility’s operational risk-management framework should be audited periodically and whenever necessary. In addition to periodic internal audits, external auditsindependent reviews may be necessary, depending on the FMI’ssecurities settlement facility’s importance and level of interconnectedness. Consistent with the evolving nature of operational-risk management, an FMI’sa securities settlement facility’s operational objectives should be periodically reviewed to incorporate new technological and business developments.
14.2.4.	3.17.8.	The FMI’sA securities settlement facility’s operational risk-management framework should include formal change-management and project-management processes to mitigate operational risk arising from modifications to operations, policies, procedures, and controls. Change-management processes should provide mechanisms for preparing, approving, tracking, testing, and implementing all changes to the system. Project-management processes, in the form of policies and procedures, should mitigate the risk of any inadvertent effects on an FMI’sa securities settlement facility’s current or future activities due to an upgrade, expansion, or alteration to its service offerings, especially for major projects. In particular, these policies and procedures should guide the management, documentation, governance, communication, and testing of projects, regardless of whether projects are outsourced or executed in-house.internally.
14.3.	An FMIA securities settlement facility should have clearly defined operational-reliability objectives and should have policies in place that are designed to achieve those objectives. These policies include, but are not limited to, having: exacting targets for system availability; scalable capacity adequate to handle increasing stress volumes; and comprehensive physical information security policies that address all potential vulnerabilities and threats.  
Operational reliability
14.3.1.	3.17.9	An FMIA securities settlement facility should have clearly defined operational-reliability objectives and should have policies in place that are designed to achieve those objectives. These objectives serve as benchmarks for an FMIa securities settlement facility to evaluate its efficiency and effectiveness and evaluate its performance against expectations. These objectives should be designed to promote confidence among the FMI’ssecurities settlement facility’s participants. Operational-reliability objectives should include the FMI’ssecurities settlement facility’s operational-performance objectives and committed service-level targets. Operational-performance objectives and service-level targets should define both qualitative and quantitative measures of operational performance and should explicitly state the performance standards the FMIsecurities settlement facility is intending to meet. The FMIsecurities settlement facility should monitor and assess regularly whether the system is meeting its established objectives and service-level targets. The system’s performance should be reported regularly to senior management, relevant board committees, participants, the Reserve Bank and other relevant authorities. In addition, an FMI’sa securities settlement facility’s operational objectives should be periodically reviewed to incorporate new technological and business developments.
System availability
14.3.2.	A securities settlement facility should set explicit and exacting benchmarks for the availability of key systems, commensurate with the criticality of the services it provides. Measures of system availability should be reported regularly to senior management, relevant board committees, participants, the Reserve Bank and other relevant authorities. A securities settlement facility should have procedures to investigate a failure to meet system-availability benchmarks, including external review where appropriate, and should implement any recommended changes to operations on a timely basis.
Operational capacity
14.3.3.	3.17.11.	An FMIA securities settlement facility should ensure that it has scalable capacity adequate to handle increasing stress volumes and to achieve its service-level objectives, such as the required processing speed. A TR, in particular, should have scalable capacity adequate to maintain historical data as required. Capacity management requires that the FMIsecurities settlement facility monitor, review, and test (including stress test) the actual capacity and performance of the system on an ongoing basis. The FMIThe securities settlement facility should carefully forecast demand and make appropriate plans to adapt to any plausible change in the volume of business or technical requirements. These plans should be based on a sound, comprehensive methodology so that the required service levels and performance can be achieved and maintained. As part of its capacity planning, an FMIa securities settlement facility should determine a required level of redundant capacity, taking into account the FMI’ssecurities settlement facility’s level of importance and interconnectedness, so that if an operational outage occurs, the system is able to resume operations and process all remaining transactions before the end of the day. (see SSF Standard 14.7).
Physical and information security
14.3.4.	3.17.12.	An FMIA securities settlement facility should have comprehensive physical- and information-security policies that address all potential vulnerabilities and threats. In particular, an FMIa securities settlement facility should have policies effective in assessing and mitigating vulnerabilities in its physical sites from attacks, intrusions, and natural disasters. An FMIA securities settlement facility also should have sound and robust information-security policies, standards, practices, and controls to ensure an appropriate level of confidence and trust in the FMIsecurities settlement facility by all stakeholders. These policies, standards, practices, and controls should include the identification, assessment, and management of security threats and vulnerabilities for the purpose of implementing appropriate safeguards into its systems. Data should be protected from loss and leakage, unauthorised access, and other processing risks, such as negligence, fraud, poor administration, and inadequate recordkeeping. An FMI’sA securities settlement facility’s information-security objectives and policies should conform to commercially reasonable standards for confidentiality, integrity, authentication, authorisation, non-repudiation, availability, and auditability (or accountability).
14.4.	A securities settlement facility should ensure that it can reliably access and utilise well-trained and competent personnel, as well as technical and other resources. These arrangements should be designed to ensure that all key systems are operated securely and reliably in all circumstances, including where a related body becomes subject to external administration.
Access to resources
14.4.1.	3.17.7.	Because the proper performance of an FMI’sa securities settlement facility’s employees is a core aspect of any operational risk-management framework, an FMI should employa securities settlement facility should be able to access and utilise sufficient, well-qualified personnel. An FMI’sA securities settlement facility’s personnel should be able to operate the system safely and efficiently and consistently follow operational and risk-management procedures during normal and abnormal circumstances. An FMIA securities settlement facility should implement appropriate human resources policies to hire, train, and retain qualified personnel, thereby mitigating the effects of high rates of personnel turnover or key-person risk. Additionally, an FMIa securities settlement facility should have appropriate human resources and risk-management policies to address fraud prevention. Where appropriate, a securities settlement facility should also have reliable access to technical expertise and other resources external to the securities settlement facility as necessary to ensure the security and reliability of key systems.
Resources shared with a related body
14.4.2.	In some cases a securities settlement facility may utilise personnel and other resources that are employed or owned by a related body. Agreements between a securities settlement facility and any related bodies governing such arrangements should ensure, to the extent permissible by law, that the securities settlement facility can continue to access key resources in all circumstances, including in the event of the related body’s insolvency or external administration.
14.5.	An FMIA securities settlement facility should identify, monitor, and manage the risks that key participants, other FMIs, and service and utility providers might pose to its operations. A securities settlement facility should inform the Reserve Bank of any critical dependencies on utilities or service providers. In addition, an FMIa securities settlement facility should identify, monitor, and manage the risks its operations might pose to its participants and other FMIs. Where a securities settlement facility operates in multiple jurisdictions, managing these risks may require it to provide adequate operational support to participants during the market hours of each relevant jurisdiction.
14.5.1.	3.17.18	A securities settlement facility is connected directly and indirectly to its participants, other FMIs, and its service and utility providers. Accordingly, the FMIsecurities settlement facility should identify both direct and indirect effects on its ability to process and settle transactions in the normal course of business and manage risks that stem from an external operational failure of connected entities. These effects include those transmitted through its participants, which may participate in multiple FMIs. In addition, an FMILikewise, a securities settlement facility should also identify, monitor, and manage the risks it poses to its participants and that it faces from and poses to other FMIs (see Principle 20SSF Standard 17 on FMI links). To the extent possible, interdependent FMIsa securities settlement facility should coordinate business-continuity arrangements. An FMI with interdependent FMIs. A securities settlement facility also should consider the risks associated with its service and utility providers and the operational effect on the FMIsecurities settlement facility if service or utility providers fail to perform as expected. An FMIA securities settlement facility should provide reliable service, not only for the benefit of its direct participants, but also for all entities that would be affected by its ability to process transactions.
Dependencies on service providers
14.5.2.	The securities settlement facility should have a formal policy, determined by its board, which sets out the process for entering into, maintaining and exiting key outsourcing arrangements. Before an outsourcing arrangement is established, senior management should identify the business, operational and other risks involved and ensure that these risks can be adequately monitored and controlled by the facility, and that the Reserve Bank and other relevant authorities are able to access sufficient information and effectively perform crisis-management actions (see SSF Standards 14.9, 14.10 and 14.11). The board should approve the establishment of any outsourcing arrangement for a key business activity and be informed on a regular basis of the performance of the service provider.
14.5.3.	3.17.21.	An FMIA securities settlement facility that outsources operations to critical-service providers should also disclose the nature and scope of this dependency to its participants. In addition to these service providers (such as financial messaging providers), an FMIa securities settlement facility is also typically dependent on the adequate functioning of utilities (such as power and telecommunication companies). As a result, an FMIa securities settlement facility should identify the risks from its critical-service providers and utilities and take appropriate actions to manage these dependencies through appropriate contractual and organisational arrangements. An FMIA securities settlement facility should inform its relevant authorities about the Reserve Bank of any suchcritical dependencies on criticalutilities or service providers and utilities ensure that both it and take measuresthe Reserve Bank are able to allow these authorities to be informed aboutaccess sufficient information on the performance of these criticalutilities or service providers and utilities.. To that end, the FMI cansecurities settlement facility may contractually provide for direct contacts between the critical-service provider and the relevant authority,Reserve Bank, or contractually ensure that the relevant authority canReserve Bank is able to obtain specific reports from the critical-service provider, or the FMI. Alternatively the securities settlement facility may provide full information to the authoritythe Reserve Bank with relevant information that it receives from the critical-service provider.
14.5.4.	[3.17.20]	Some service providers may be critical, such as those that generate environmental interdependencies, because several FMIs or some of their key participants rely upon their services. A contractual relationship should be in place between the FMI and the critical service provider allowing the FMI and relevant authorities to have full access to necessary information. The contract shouldA securities settlement facility’s contractual arrangements with critical-service providers should also ensure that the FMI’ssecurities settlement facility’s approval is mandatory before thea critical-service provider can itself outsource material elements of the service provided to the FMIsecurities settlement facility, and that in the event of such an arrangement, full access to the necessary information is preserved. Clear lines of communication should be established between the outsourcing FMIsecurities settlement facility and the critical-service provider to facilitate the flow of functions and information between parties in both ordinary and exceptional circumstances. (see SSF Standard 14.9). Additional controls may be required where outsourcing arrangements involve critical functions of the securities settlement facility or where relevant to crisis management (see SSF Standards 14.10 and 14.11).
14.5.5.	Where a securities settlement facility operates in multiple jurisdictions, managing the risks that it poses to its participants may require it to provide adequate operational support to participants during market hours of each relevant jurisdiction. In particular, where it has material Australian-based participation, the securities settlement facility should provide an appropriate degree of operational support to its Australian-based participants during Australian market hours.  The degree of operational support should be sufficient to allow participants to resolve operational issues on a timely basis during Australian market hours (or within a reasonable extension of these hours, where necessary).
14.6.	A participant of a securities settlement facility should have complementary operational and business-continuity arrangements that are appropriate to the nature and size of the business undertaken by that participant. The securities settlement facility’s rules and procedures should clearly specify operational requirements for participants.
14.6.1.	3.17.19.	To manage the operational risks associated with its participants, an FMIa securities settlement facility should consider establishingestablish minimum operational requirements for its participants (see also Principle 18SSF Standard 15 on access and participation requirements). For example, an FMI may want toA securities settlement facility should define operational and business-continuity requirements for participants in accordance with the participant’s role and importance to the system., taking into consideration the nature and size of the business undertaken by each participant. These requirements should complement the securities settlement facility’s own operational and business-continuity arrangements. Rules and procedures should clearly and fairly specify the requirements of participants in this regard. In some cases, an FMIa securities settlement facility may wantwish to identify critical participants based on the consideration of transaction volumes and values, services provided to the FMIsecurities settlement facility and other interdependent systems, and, more generally, the potential impact on other participants and the system as a whole in the event of a significant operational problem. Critical participants may need to meet some of the same operational risk-management requirements as the FMI itself. An FMIsecurities settlement facility itself. A securities settlement facility should have clear and transparent criteria, methodologies, or standards for critical participants to ensure that their operational risks are managed appropriately.
Business-continuity arrangements
14.7.	A securities settlement facility should have a business-continuity plan that addresses events posing a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption. The plan should incorporate the use of a secondary site and should be designed to ensure that critical information technology (IT) systems can resume operations within two hours following disruptive events. TheBusiness continuity arrangements should provide appropriate redundancy of critical systems and appropriate mitigants for data loss. The business-continuity plan should be designed to enable the FMIsecurities settlement facility to complete settlement by the end of the day of the disruption, even in case of extreme circumstances. The FMIsecurities settlement facility should regularly test these arrangements. 
Business-continuity management
14.7.1.	3.17.13.	Business-continuity management is a key component of an FMI’sa securities settlement facility’s operational risk-management framework. A business-continuity plan should have clearly stated objectives and should include policies and procedures that allow for the rapid recovery and timely resumption of critical operations following a disruption to a service, including in the event of a wide-scale or major disruption. An FMIA securities settlement facility should explicitly assign responsibility for business-continuity planning and devote adequate resources to this planning. The plan should identify and address events that pose a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption, and should focus on the impact on the operation of critical infrastructures and services. An FMI’sA securities settlement facility’s business-continuity plan should ensure that the FMIsecurities settlement facility can continue to meet agreed-upon service levels in such events. Both internal and external threats should be considered in the business-continuity plan, and the impact of each threat should be identified and assessed. In addition to reactive measures, an FMI’sa securities settlement facility’s business-continuity plan may need to include measures that prevent disruptions of critical operations. All aspects of the business-continuity plan should be clearly and fully documented and details of relevant procedures made available to participants.
14.7.2.	3.17.14.	The objectives of an FMI’sa securities settlement facility’s business-continuity plan should include the system’s recovery time and recovery point. An FMIA securities settlement facility should aim to be able to resume operations within two hours following disruptive events; however, backup systems ideally should commence processing immediately. This may imply maintenance of dual redundancy for critical systems at its primary site. The plan should be designed to enable the FMIsecurities settlement facility to complete settlement by the end of the day even in case of extreme circumstances. Depending on their Systems, including backup and data recovery-time objectives and designs, some FMIs may  procedures, should be abledesigned to resume operations with somea high degree of confidence that data will not be lost. This should include regular, and ideally real-time, replication of data across primary and secondary sites, and robust and timely procedures to recover data and transactions submitted in the interval between the last data replication and successful failover to a secondary site. Should data loss; however nevertheless occur, contingency plans for all FMIssecurities settlement facilities should ensure that the status of all transactions at the time of the disruption can be identified with certainty in a timely manner.
14.7.3.	3.17.15.	An FMIA securities settlement facility should set up a secondary site with sufficient resources, capabilities, and functionalities and appropriate staffing arrangements that would not be affected by a wide-scale disruption and would allow the secondary site to take over operations if needed. The secondary site should provide the level of critical services necessary to perform the functions consistent with the recovery-time objective and should be located at a geographical distance from the primary site that is sufficient to have a distinct risk profile. Depending on the FMI’ssecurities settlement facility’s importance and level of interconnectedness, the need and possibilities for a third site could be considered, in particular to provide sufficient confidence that the FMI’ssecurities settlement facility’s business-continuity objectives will be met in all scenarios. An FMIA securities settlement facility should also consider alternative arrangements (for example, manual paper-based procedures) to allow for the processing of time-critical transactions in extreme circumstances. Both primary and secondary (and any additional) sites should have sufficient capacity to process volumes that at least double projected stress volumes. This redundant capacity should be sufficient to ensure that each site is able to operate continuously and independently even in extreme circumstances.
14.7.4.	3.17.16.	An FMI’sA securities settlement facility’s business-continuity plan should also include clearly defined procedures for crisis and event management. The plan, for example, should address the need for rapid deployment of a multi-skilled crisis and event-management team as well as procedures to consult and inform participants, interdependent FMIs, the Reserve Bank and other relevant authorities, and others (such as service providers and, where relevant, the media) quickly.on a timely basis. Communication with regulators, supervisors, and overseers the Reserve Bank and other relevant authorities is critical in case of a major disruption to an FMI’sa securities settlement facility’s operations or a wider market distress that affects the FMIsecurities settlement facility, particularly where relevant authorities might rely on data held by the FMIsecurities settlement facility may be critical for crisis management. Depending on the nature of the problem, communication channels with local civil authorities (for physical attacks or natural disasters) or computer experts (for software malfunctions or cyber-attacks) may also need to be activated. If an FMIIf a securities settlement facility has global importance or critical linkages to one or more interdependent FMIs, it should set up, test, and review appropriate cross-system or cross-border crisis-management arrangements. 
14.7.5.	3.17.17.	An FMI’sA securities settlement facility’s business-continuity plan and its associated arrangements should be subject to periodic review and testing. Tests should address various scenarios that simulate wide-scale disasters and intersiteinter-site switchovers. An FMI’sA securities settlement facility’s employees should be thoroughly trained to execute the business-continuity plan and participants, critical-service providers, and linked FMIs should be regularly involved in the testing and be provided with a general summary of the testing results. The FMIdegree of participant involvement in the testing should be appropriate to the nature and size of the business undertaken by individual participants (see SSF Standard 14.8). The securities settlement facility should also consider the need to participate in industry-wide tests. An FMIA securities settlement facility should make appropriate adjustments to its business-continuity plans and associated arrangements based on the results of the testing exercises. 
Incident management
14.7.6.	3.17.10.	An FMIA securities settlement facility should have comprehensive and well-documented procedures in place to record, report, analyse, and resolve all operational incidents. After every significant disruption, an FMIa securities settlement facility should undertake a “‘post-incident”incident’ review to identify the causes and any required improvement to the normal operations or business-continuity arrangements. Such reviews should, where relevant, include the FMI’ssecurities settlement facility’s participants. The details of the incident and conclusions of the review should be provided to the Reserve Bank on a timely basis (see SSF Standard 19.1(h)).
14.8.	A securities settlement facility should consider making contingency testing compulsory for the largest participants to ensure they are operationally reliable and have in place tested contingency arrangements to deal with a range of operational stress scenarios that may include impaired access to the securities settlement facility.
14.8.1.	An operational disruption to the largest participants of a securities settlement facility may pose significant risks to the securities settlement facility’s own operational performance, either directly or through interdependencies with other participants or FMIs. A securities settlement facility should therefore consider requiring its largest participants to perform contingency tests for their own operations with a particular focus on reliability of access to the securities settlement facility, and to participate in the securities settlement facility’s own contingency testing. Where interdependencies between the securities settlement facility and its largest participants are significant, there will be a strong case for these participants to be involved in the securities settlement facility’s contingency tests. Large participants’ contingency tests should address the operational reliability of the participants and should cover a range of stress scenarios, including impaired access to the securities settlement facility.
Outsourcing
14.9.	A securities settlement facility that relies upon or outsources some of its operations to a related body, another FMI or a third-party service provider (for example, data processing and information systems management) should ensure that those operations meet the resilience, security and operational-performance requirements of these SSF Standards and equivalent requirements of any other jurisdictions in which it operates.
14.9.1.	3.17.20.	An FMIA securities settlement facility that relies upon or outsources some of its operations to a related body, another FMI, or a third-party service provider (for example, data processing and information systems management)), should ensure that those operations meet the sameresilience, security and operational requirements they would need to meet if they were provided internally.of the SSF Standards and equivalent requirements of any other jurisdiction in which it operates. Further, even when systems and processes are outsourced, the securities settlement facility remains responsible for those systems and processes. The FMIsecurities settlement facility should have robust arrangements for the selection and substitution of such providers, timely access to all necessary information, and the properappropriate controls and monitoring tools (see SSF Standard 14.5). 
3.17.22.	The relevant authority of the FMI may establish expectations specifically targeted at critical service providers, as presented in Annex F. Adherence to these expectations can be achieved in one of two ways, at the discretion of the authority: (a) the authority monitors adherence to the expectations itself in a direct relationship with the critical service provider or (b) the authority communicates the standards to the FMI, which obtains assurances from its critical service providers that they comply with the expectations. These expectations may also be relevant to an FMI as it reviews its contracts with critical service providers.
14.9.2.	Where a securities settlement facility outsources a critical function – a function that is integral to the safe and effective provision of its core services as a securities settlement facility – a greater degree of scrutiny of such outsourcing arrangements may be appropriate. In scrutinising service providers in accordance with this Standard, a securities settlement facility that outsources critical functions should ensure that each provider of these critical services:
•	identifies and manages relevant operational and financial risks to its critical services and ensures that its risk-management processes are effective
•	implements and maintains appropriate policies and procedures, and devotes sufficient resources to ensure the confidentiality and integrity of information and the availability of its critical services in order to fulfil the terms of its relationship with the securities settlement facility
•	implements appropriate policies and procedures to ensure that its critical services are available, reliable, and resilient. Its business-continuity management and disaster-recovery plans should therefore support the timely resumption of its critical services in the event of an outage so that the service provided fulfils the terms of its agreement with the securities settlement facility
•	has in place robust methods to plan for the entire lifecycle of the use of its technologies and the selection of technological standards
•	provides users, including the securities settlement facility and, where appropriate, its participants, with sufficient information to enable them to understand clearly their roles and responsibilities in managing risks related to their use of a critical-service provider.
The securities settlement facility should inform the Reserve Bank of the arrangements it has in place to ensure that critical-service providers meet these requirements (see SSF Standard 14.10).
14.10.	A securities settlement facility should consult with the Reserve Bank prior to entering into an outsourcing arrangement for critical functions. Any such arrangement should provide rights of access to the Reserve Bank to obtain sufficient information regarding the outsourcing provider’s operation of the outsourced function.
14.10.1.	Prior to entering into an outsourcing arrangement for a critical function, a securities settlement facility should consult with the Reserve Bank (see also SSF Standard 19 on regulatory reporting). As part of this consultation process, the securities settlement facility should provide the Reserve Bank with details of the arrangement, including provisions that satisfy the requirements of SSF Standards 14.5, 14.9, 14.10 and 14.11, and any other provisions necessary to comply with the operational requirements under the SSF Standards. The outsourcing arrangement should incorporate contractual rights of access for the Reserve Bank allowing it to seek information directly from the outsourcing provider in order to assess its operational performance and reliability with regard to the outsourced function (see SSF Standard 14.5).
14.11.	A securities settlement facility should organise its operations, including any outsourcing arrangements, in such a way as to ensure continuity of service in a crisis and to facilitate effective crisis-management actions by the Reserve Bank or other relevant authorities. These arrangements should be commensurate with the nature and scale of the securities settlement facility’s operations.
14.11.1.	A securities settlement facility should ensure that its operations, including any outsourcing arrangements, are organised in such a way that it is able to provide continuous and reliable service in a crisis, and that the Reserve Bank or other relevant authorities are able to take effective action to manage or resolve a crisis. A securities settlement facility may need to consider contractual arrangements with outsourcing providers or other service providers that contain explicit provisions safeguarding continuity of service in crisis scenarios, including financial distress to the securities settlement facility. 
14.11.2.	A systemically important securities settlement facility should have robust arrangements to ensure continuity of service and facilitate effective crisis-management actions by the Reserve Bank or other relevant authorities. In assessing the systemic importance of a securities settlement facility, the Reserve Bank will consider factors such as:
•	the size of the securities settlement facility in Australia (for example, the absolute number and value of transactions processed by the securities settlement facility in Australian dollar-denominated products, or its market share)
•	the availability of substitutes for the securities settlement facility’s services in Australia
•	the nature and complexity of the products settled by the securities settlement facility
•	the degree of interconnectedness with other parts of the Australian financial system.
14.11.3.	A systemically important securities settlement facility that also has a strong connection to the Australian real economy and financial system should also organise its operations so as to facilitate resolution actions taken by the Reserve Bank or other relevant authorities. This may require that the securities settlement facility directly operate critical functions, or, for outsourced functions and to the extent supported by law, provide for contractual rights of access to any appointed statutory manager in a resolution scenario. These rights of access would need to survive termination of the outsourcing agreement. In determining whether a systemically important securities settlement facility has a strong connection to the Australian real economy and financial system, the following factors are likely to be relevant:
•	whether the securities settlement facility offers services in a domestic or international market
•	the mix of domestic and international participants in the securities settlement facility
•	the potential for disruption to the securities settlement facility to affect the real economy
•	whether the market serviced by the securities settlement facility is retail or wholesale
•	whether the securities settlement facility settles a domestic securities market
•	links that the securities settlement facility has with other Australian FMIs.
Principle 18Standard 15: Access and participation requirements 
An FMIA securities settlement facility should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.
Explanatory noteGuidance
3.18.1.	Access refers to the ability to use an FMI’sa securities settlement facility’s services and includes the direct use of the FMI’ssecurities settlement facility’s services by participants, including other market infrastructures (for example, trading platforms) and, where relevant, service providers (for example, matching and portfolio compression service providers). In some cases, this includes the rules governing indirect participation. An FMIA securities settlement facility should allow for fair and open access to its services. It should control the risks to which it is exposed by its participants by setting reasonable risk-related requirements for participation in its services. An FMIA securities settlement facility should ensure that its participants and any linked FMIs have the requisite operational capacity, financial resources, legal powers, and risk-management expertise to prevent unacceptable risk exposure for the FMIsecurities settlement facility and other participants. An FMI’sA securities settlement facility’s participation requirements should be clearly stated and publicly disclosed so as to eliminate ambiguity and promote transparency.
3.18.2.	Fair and open access to FMI services encourages competition among market participants and promotes efficient and low-cost payment, clearing, and settlement. Because an FMI often benefits from economies of scale, there is typically only one FMI, or a small number of FMIs, for a particular market. As a result, participation in an FMI may significantly affect the competitive balance among market participants. In particular, limiting access to an FMI’s services may disadvantage some market participants (and their customers), other FMIs (for example, a CCP that needs access to a CSD), and service providers that do not have access to the FMI’s services. Further, access to one or more FMIs may play an important role in a marketwide plan or policy for the safe and efficient clearing of certain classes of financial instruments and the promotion of efficient financial markets (including the reporting and recording of transaction data). An FMI’s participation requirements should therefore allow for fair and open access, in all relevant jurisdictions, based on reasonable risk-related participation requirements. Moreover, open access may reduce the concentrations of risk that may result from highly tiered arrangements for payment, clearing, and settlement.
3.18.3.	For a TR, ensuring fair and open access may be essential because a wide set of stakeholders may need, or be required by law to have, access to the TR’s data warehousing services, both to store and retrieve data. This may be even more relevant when one TR is serving a particular market and serves multiple jurisdictions. Access is critical for participants reporting trade information to the TR and for platforms that may submit transaction data on behalf of participants, including exchanges, electronic trading venues, and confirmation or matching service providers. In addition, other FMIs or platforms that offer ancillary services may need to obtain trade information from the TR to use as an input to these services. 
3.18.4.	In addition, a TR should provide terms of use that are commercially reasonable and are designed to support interconnectivity with other FMIs and service providers, where requested, so that competition and innovation in post-trade processing are not impaired as a result of centralising recordkeeping activity. A TR should not engage in anti-competitive practices such as product or service tying, setting overly restrictive terms of use, or anti-competitive price discrimination. A TR also should not develop closed, proprietary interfaces that result in vendor lock-in or barriers to entry with respect to competing service providers that rely on the data maintained by the TR. 
15.1.	An FMIA securities settlement facility should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.
15.1.1.	Restrictions on access can result in highly tiered settlement arrangements and potentially give rise to concentration risks (see SSF Standard 16 on tiered participation arrangements). Care should therefore be taken that participation requirements allow for fair and open access, in all relevant jurisdictions, and do not arbitrarily limit access to a securities settlement facility’s services. 
15.1.2.	While pursuing the benefits of fair and open access, however, a securities settlement facility’s participation requirements should not compromise its risk-based controls or conflict with directors’ statutory duties. Indeed, [3.18.5]	An FMIa securities settlement facility should always consider the risks that an actual or prospective participant may pose, both to the FMIsecurities settlement facility and to other participants. Accordingly, an FMI should establishThis will typically entail risk-related participation requirements adequate to ensure that its participants meet appropriate operational, financial, and legal requirements to allow them to fulfil standards consistent with timely fulfilment of their obligations to the FMI, including the securities settlement facility and other participants, on a timely basis. Where participants act for other entities (indirect participants), it may be appropriate for the FMI to impose additional requirements to ensure that the direct participants have the capacity to do so (see also Principle 19 on tiered participation arrangements).
15.2.	An FMI’sA securities settlement facility’s participation requirements should be justified in terms of the safety and efficiency of the FMIsecurities settlement facility and the markets it serves, be tailored to and commensurate with the FMI’ssecurities settlement facility’s specific risks, and be publicly disclosed. Subject to maintaining acceptable risk-control standards, an FMIa securities settlement facility should endeavour to set requirements that have the least -restrictive impact on access that circumstances permit.
15.2.1.	A securities settlement facility’s participation requirements should be justified in terms of the safety of the securities settlement facility and the markets it serves, be tailored to the securities settlement facility’s specific risks, be imposed in a manner commensurate with such risks, and be set out in the securities settlement facility’s rules and publicly disclosed. The requirements should be objective and should not unnecessarily discriminate against particular classes of participants or introduce competitive distortions. Operational requirements may include reasonable criteria relating to the participant’s ability and readiness (for example, its ITinformation technology capabilities) to use an FMI’sa securities settlement facility’s services. Financial requirements may include reasonable risk-related capital requirements, contributions to prefunded default arrangementscollateralisation of exposures, and appropriate indicators of creditworthiness. Legal requirements may include appropriate licences and authorisations to conduct relevant activities as well as legal opinions or other arrangements that demonstrate that possible conflictconflicts of laws issueslaw would not impede the ability of an applicant (for example, a foreign entity) to meet its obligations to the FMI. An FMIsecurities settlement facility. A securities settlement facility also may require participants to have appropriate risk-management expertise. If an FMIIf a securities settlement facility admits non-regulated entities, it should take into account any additional risks that may arise from their participation and design its participation requirements and risk-management controls accordingly.
3.18.6.	An FMI’s participation requirements should be justified in terms of the safety and efficiency of the FMI and the markets it serves, be tailored to the FMI’s specific risks, be imposed in a manner commensurate with such risks, and be publicly disclosed. The requirements should be objective and should not unnecessarily discriminate against particular classes of participants or introduce competitive distortions. For example, participation requirements based solely on a participant’s size are typically insufficiently related to risk and deserve careful scrutiny. Subject to maintaining acceptable risk control standards, an FMI should endeavour to set requirements that have the least-restrictive impact on access that circumstances permit. While restrictions on access should generally be based on reasonable risk-related criteria, such restrictions may also be subject to the constraints of local laws and policies of the jurisdiction in which the FMI operates. Requirements should also reflect the risk profile of the activity; an FMI may have different categories of participation based on the type of activity. For example, a participant in the clearing services of a CCP may be subject to a different set of requirements than a participant in the auctioning process of the same CCP.
15.2.2.	3.18.7.	To help address the balance between open access and risk, an FMI shoulda securities settlement facility should set participation requirements and manage its participant-related risks through the use of real-time binding risk-management controls, risk-sharing arrangements, and other operational arrangements that have the least -restrictive impact on access and competition that circumstances permit. For example, an FMIwhere a securities settlement facility assumes credit risk as principal, it can usemanage participant-related risks by using real-time binding credit limits or collateral requirements to help it manage its credit exposure to a particular participant. The permitted level of participation may be different for participants maintaining different levels of capital. Where other factors are equal, participants holding greater levels of capital may be permitted less -restrictive risk limits or be able to participate in more functions within the FMI. The effectiveness ofsecurities settlement facility. Such risk-management controls may mitigate the need for an FMIa securities settlement facility to impose onerous participation requirements that limit access. An FMIA securities settlement facility could also differentiate its services to provide different levels of access at varying levels of cost and complexity. For example, an FMIa securities settlement facility may wantwish to limit full direct participation to certain types of entities, and to apply limits to the activities of, or provide indirect access to, others. Participation requirements (and other risk controls) can be tailored to each class or tier of participants based on the risks each class or tier poses to the FMIsecurities settlement facility and its participants. 
15.2.3.	When settling on behalf of other market participants, a direct participant assumes responsibility for the risks those market participants bring to the securities settlement facility and its participants. It is therefore important that the direct participant has appropriate financial and operational resources and risk-management arrangements to fulfil its obligations to the securities settlement facility and other participants arising from this activity. In some markets, there may be relatively few direct participants with the financial and operational resources to fulfil this role, and therefore the potential concentration of risks in a small number of direct participants may argue for closer monitoring and perhaps more stringent participation requirements for direct participants that provide settlement services to other market participants (see also SSF Standard 17 on tiered participation arrangements). Where tiering exists, each class of participation should be clearly defined and the participation requirements should be the same for all applicants of the same class. 
15.3.	An FMIA securities settlement facility should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements. 
15.3.1.	3.18.8.	An FMIA securities settlement facility should monitor compliance with its participation requirements on an ongoing basis through the receipt of timely and accurate information. Participants should be obligatedobliged to report any developments that may affect their ability to comply with an FMI’sa securities settlement facility’s participation requirements. An FMIA securities settlement facility should have the authority to impose more-stringent restrictions or other additional risk controls on a participant in situations where the FMIsecurities settlement facility determines the participant poses heightened risk to the FMI.securities settlement facility. For example, if a participant’s creditworthiness declinescredit standing comes into doubt, the FMIsecurities settlement facility may require the participant to provide additional collateral or reducemay place restrictions on the participant’s credit limit. An FMIlevel or types of activities that the participant can undertake (see SSF Standard 4 on credit risk). A securities settlement facility should consider additional reporting requirements for non-regulated institutions. An FMIA securities settlement facility should also have clearly defined and publicly disclosed procedures for, in extreme cases, facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements of the FMI.securities settlement facility (see SSF Standard 4 on credit risk and SSF Standard 11 on participant-default rules and procedures). 
15.3.2.	If a securities settlement facility has an appeals process for suspending or cancelling participation in the facility, the appeals process should not detract from the securities settlement facility's ability to suspend or cancel participation. For serious breaches, the preferable approach would provide for the suspension or cancellation to persist during an appeal, with reinstatement upon a successful appeal, rather than the suspension or cancellation being put on hold until an appeal is heard.
Principle 19Standard 16: Tiered participation arrangements
An FMIA securities settlement facility should identify, monitor, and manage the material risks to the FMIsecurities settlement facility arising from tiered participation arrangements.
Explanatory noteGuidance
3.19.1.	Tiered participation arrangements occur when some firms (indirect participants) rely on the services provided by other firms (direct participants) to use the FMI’s central payment, clearing,securities settlement, or recording facility’s settlement facilities.
3.19.2.	The dependencies and risk exposures (including credit, liquidity, and operational risks) inherent in these tiered arrangements can present risks to the FMIsecurities settlement facility and its smooth functioning, as well as to the participants themselves and the broader financial markets. For example, if an FMIa securities settlement facility has few direct participants but many indirect participants with large values or volumes of transactions, it is likely that a large proportion of the transactions processed by the FMIsecurities settlement facility depend on a few direct participants. This will increase the severity of the effect on the FMIsecurities settlement facility of a default of a direct participant or an operational disruption at a direct participant. The credit exposures in tiered relationships can also affect the FMI.securities settlement facility. If the value of an indirect participant’s transactions is large relative to the direct participant’s capacity to manage the risks, this may increase the direct participant’s default risk. In some cases, for example, CCPs offering indirect clearing will face credit exposures to indirect participants or arising from indirect participants’ positions if a direct participant defaults. There may also be legal or operational risk to the FMIsecurities settlement facility if there is uncertainty about the liability for indirect participant transactions and how these transactions will be handled in the event of a default. (see SSF Standard 1 on legal basis). 
3.19.3.	The nature of these risks is such that they are most likely to be material where there are indirect participants whose business through the FMIsecurities settlement facility is a significant proportion of the FMI’ssecurities settlement facility’s overall business or is large relative to that of the direct participant through which they access the FMI’ssecurities settlement facility’s services. Normally, the identification, monitoring, and management of risks from tiered participation will therefore be focused on financial institutions that are the immediate customers of direct participants and depend on the direct participant for access to an FMI’sa securities settlement facility’s services. In exceptional cases, however, tiered participation arrangements may involve a complex series of financial intermediaries or agents, which may require the FMIsecurities settlement facility to look beyond the direct participant and its immediate customer. An important source of tiering is participants’ use of commercial settlement banks to effect money settlements and carry out funding and defunding activities. This source of tiering is not directly addressed in this Standard, but rather is considered in SSF Standard 8.  
3.19.4.	There are limits on the extent to which an FMIa securities settlement facility can, in practice, observe or influence direct participants’ commercial relationships with their customers. However, an FMIa securities settlement facility will often have access to information on transactions undertaken on behalf of indirect participants and can set direct participation requirements that may include criteria relating to how direct participants manage relationships with their customers in-so-farinsofar as these criteria are relevant for the safe and efficient operation of the FMI.securities settlement facility. At a minimum, an FMIa securities settlement facility should identify the types of risk that could arise from tiered participation and should monitor concentrations of such risk. If an FMIa securities settlement facility or its smooth operation is exposed to material risk from tiered participation arrangements, the FMIsecurities settlement facility should seek to manage and limit such risk.
16.1.	An FMIA securities settlement facility should ensure that its rules, procedures, and agreements allow it to gather basic information about indirect participation in order to identify, monitor, and manage any material risks to the FMIsecurities settlement facility arising from such tiered participation arrangements. 
16.1.1.	3.19.5.	An FMIA securities settlement facility may be able to obtain information relating to tiered participation through its own systems or by collecting it from direct participants. An FMIA securities settlement facility should ensure that its procedures, rules, and agreements with direct participants allow it to gather basic information about indirect participants in order to identify, monitor, and manage any material risks to the FMIsecurities settlement facility arising from such tiered participation arrangements. This information should enable the FMIsecurities settlement facility, at a minimum, to identify (a): the proportion of activity that direct participants conduct on behalf of indirect participants, (b); direct participants that act on behalf of a material number of indirect participants, (c); indirect participants with significant volumes or values of transactions in the system,; and (d) indirect participants whose transaction volumes or values are large relative to those of the direct participants through which they access the FMIsecurities settlement facility. 
16.2.	An FMIA securities settlement facility should identify material dependencies between direct and indirect participants that might affect the FMIsecurities settlement facility. 
16.2.1.	3.19.6.	An FMIA securities settlement facility should identify material dependencies between direct and indirect participants that can affect the FMI.securities settlement facility. Indirect participants will often have some degree of dependencydependence on the direct participant through which they access the FMI.securities settlement facility. In the case of an FMIa securities settlement facility with few direct participants but many indirect participants, it is likely that a large proportion of the transactions processed by the FMIsecurities settlement facility would depend on the operational performance of those few direct participants. Disruption to the services provided by the direct participants – whether for operational reasons or because of a participant’s default – could therefore present a risk to the smooth functioning of the system as a whole. The FMIsecurities settlement facility should identify and monitor material dependencies of indirect participants on direct participants so that the FMIsecurities settlement facility has readily available information on which significant indirect participants may be affected by problems at a particular direct participant. 
16.2.2.	3.19.7.	In some cases, issues at an indirect participant could affect the FMI.securities settlement facility. This is most likely to occur where a large indirect participant accesses an FMI’sa securities settlement facility’s facilities through a relatively small direct participant. (see SSF Standard 16.3). Failure of this significant indirect participant to perform as expected, such as by failing to meet its payment obligations, or stress at the indirect participant, such as that which causes others to delay payments to the indirect participant, may affect the direct participant’s ability to meet its obligations to the FMI. FMIssecurities settlement facility. Securities settlement facilities should therefore identify and monitor the material dependencies of direct participants on indirect participants so that the FMIsecurities settlement facility has readily available information on how the FMIsecurities settlement facility may be affected by problems at an indirect participant, including which direct participants may be affected. 
16.3.	An FMIA securities settlement facility should identify indirect participants responsible for a significant proportion of transactions processed by the FMIsecurities settlement facility and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the FMIsecurities settlement facility in order to manage the risks arising from these transactions. 
Credit and liquidity risks in tiered participation arrangements
16.3.1.	3.19.8.	Tiered participation arrangements typically create credit and liquidity exposures between direct and indirect participants. The management of these exposures is the responsibility of the participants and, where appropriate, subject to supervision by their regulators. An FMIA securities settlement facility is not expected to manage the credit and liquidity exposures between direct and indirect participants, although the FMIsecurities settlement facility may have a role in applying credit or position limits in agreement with the direct participant. An FMIA securities settlement facility should, however, have access to information on concentrations of risk arising from tiered participation arrangements that may affect the FMIsecurities settlement facility, allowing it to identify indirect participants responsible for a significant proportion of the FMI’ssecurities settlement facility’s transactions or whose transaction volumes or values are large relative to those of the direct participants through which they access the FMI. An FMIsecurities settlement facility. A securities settlement facility should identify and monitor such risk concentrations.
16.3.2.	3.19.9.	In a CCP, direct participants are responsible for the performance of their customers' financial obligations to the CCP. The CCP may, however, face an exposure to indirect participants (or arising from indirect participants’ positions) if a direct participant defaults, at least until such time as the defaulting participant’s customers’ positions are ported to another participant or closed out. If a participant default would leave the FMIa securities settlement facility with a potential credit exposure related to an indirect participant’s positions, the FMIsecurities settlement facility should ensure it understands and manages the exposure it would face. For example, the FMIsecurities settlement facility may set participation requirements that require the direct participant, on the FMI’ssecurities settlement facility’s request, to demonstrate that it is adequately managing relationships with its customers to the extent that they may affect the FMI. An FMIsecurities settlement facility. A securities settlement facility should also consider establishing concentration limits on exposures to indirect participants, where appropriate.
Indirect participation and default scenarios
16.3.3.	3.19.10.	Default scenarios can create uncertainty about whether indirect participants’ transactions have been settled or will be settled and whether any settled transactions will be unwound. Default scenarios can also raise legal and operational risks for the FMIsecurities settlement facility if there is uncertainty about whether the indirect or direct participant is liable for completing the transaction. An FMIA securities settlement facility should ensure that a default, whether by a direct participant or by an indirect participant, does not affect the finality of indirect participants’ transactions that have been processed and settled by the FMI. An FMIsecurities settlement facility. A securities settlement facility should ensure that its rules and procedures are clear regarding the status of indirect participants’ transactions at each point in the settlement process (including the point at which they become subject to the rules of the system and the point after which the rules of the system no longer apply) and whether such transactions would be settled in the event of an indirect or direct participant default. An FMIA securities settlement facility should also ensure that it adequately understands its direct participants' processes and procedures for managing an indirect participant’s default. For example, the FMIsecurities settlement facility should know whether the indirect participant’s queued payments can be removed or future-dated transactions rescinded and whether such processes and procedures would expose the FMIsecurities settlement facility to operational, reputational, or other risks.
Encouraging direct participation 
16.3.4.	3.19.11.	Direct participation in an FMIa securities settlement facility usually provides a number of benefits, some of which may not be available to indirect participants, such as real-time gross settlement, exchange-of-value settlement, or settlement in central bank money. Moreover, indirect participants are vulnerable to the risk that their access to an FMIa securities settlement facility, their ability to make and receive payments and their ability to undertake and settle other transactions is lost if the direct participant on whom these indirect participants rely defaults or declines to continue their business relationship. If these indirect participants have large values or volumes of business through the FMIsecurities settlement facility, this may affect the smooth functioning of the FMIsecurities settlement facility. For these reasons, where an indirect participant accounts for a large proportion of the transactions processed by an FMIa securities settlement facility, it may be appropriate to encourage direct participation. For example, an FMIa securities settlement facility may in some cases establish objective thresholds above which direct participation would normally be encouraged (provided that the firm satisfies the FMI’ssecurities settlement facility’s access criteria). Setting such thresholds and encouraging direct participation should be based on risk considerations rather than commercial advantage.
16.4.	An FMIA securities settlement facility should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate. 
16.4.1.	3.19.12.	An FMIA securities settlement facility should regularly review risks to which it may be exposed as a result of tiered participation arrangements. If material risks exist, the FMIsecurities settlement facility should take mitigating action when appropriate. The results of the review process should be reported to the board of directors and updated periodically and after substantial amendments to an FMI’sa securities settlement facility’s rules.
Principle 20Standard 17: FMI links 
An FMIA securities settlement facility that establishes a link with one or more FMIs should identify, monitor, and manage link-related risks. 
Explanatory noteGuidance
3.20.1.	A link is a set of contractual and operational arrangements between two or more FMIs that connect the FMIs directly or through an intermediary. An FMIA securities settlement facility may establish a link with a similar type of FMIanother securities settlement facility for the primary purpose of expanding its services to additional financial instruments, markets, or institutions. For example, a CSDsecurities settlement facility operating a central securities depository (referred to as an investor CSDcentral securities depository) may establish a link to another CSDcentral securities depository in which securities are issued or immobilised (referred to as an issuer CSDcentral securities depository) to enable a participant in the investor CSDsecurities settlement facility to access the services of the issuer CSDcentral securities depository through the participant’s existing relationship with the investor CSD.securities settlement facility. A CCP may establish a link with another CCP to enable a participant in the first CCP to clear trades with a participant in the second CCP through the participant’s existing relationship with the first CCP. An FMIsecurities settlement facility may also establish a link with a different type of FMI. For example, a CCPcentral counterparty for securities markets mustmay establish and use a link to a CSDsecurities settlement facility operating a central securities depository to receive and deliver securities. This principleStandard covers links between CSDs, CCPs, and TRssecurities settlement facilities, as well as CSD-CCP links and links between TRsa securities settlement facility and other FMIstypes of FMI such as central counterparties, central securities depositories and trade repositories. If an FMIa securities settlement facility establishes a link, it should identify, monitor, and manage its linkslink-related risks, including legal, operational, credit, and liquidity risks. Further, an FMIa securities settlement facility that establishes multiple links should ensure that the risks generated in one link do not affect the soundness of the other links and linked FMIs. Mitigation of such spill-over effects requires the use of effective risk-management controls, including additional financial resources or the harmonisation of risk-management frameworks across linked FMIs.
17.1.	Before entering into a link arrangement, and on an ongoing basis once the link is established, an FMIa securities settlement facility should identify, monitor, and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that each FMIthe securities settlement facility is able to observe the other principles in this reportcomply with these SSF Standards. 
Identifying link-related risks
17.1.1.	3.20.2.	Before entering into a link arrangement and on an ongoing basis once the link is established, an FMIa securities settlement facility should identify and assess all potential sources of risk arising from the link arrangement. The type and degree of risk varies according to the design and complexity of the FMIssecurities settlement facility and linked FMIs and the nature of the relationship between them. In a simple case of a vertical link, for example, an FMIa securities settlement facility may provide basic services to another FMI, or vice versa, such as a CSDcentral securities depository that provides securities transfer services to an SSS.a securities settlement facility. Such links typically pose only operational and custody risks. Other links, such as an arrangement in which a CCP provides clearing services to another CCP, may be more complex and may pose additional risk to FMIsrisks to the securities settlement facility, such as credit and liquidity risk. Cross-margining by two or more CCPs may also pose additional risk because the CCPs may rely on each other’s risk-management systems to measure, monitor, and manage credit and liquidity risk (see Principle 6 on margin).risks. In addition, links between different types of a securities settlement facility and other FMIs may pose specific risks to one or all of the securities settlement facility or other FMIs in the link arrangement. For example, a CCPcentral counterparty may have a link with a CSDsecurities settlement facility that operates an SSSa central securities depository for the delivery of securities and settlement of margins. If the CCPcentral counterparty poses risks to the CSDsecurities settlement facility, the CSDfacility should manage those risks. In all cases, link arrangements should be designed such that each FMIthe securities settlement facility is able to observe the other principles in this reportSSF Standards.
Managing operational risk
17.1.2.	3.20.4.	Linked FMIsThe securities settlement facility should provideobtain an appropriate level of information about theireach linked FMI’s operations to each other in order for each FMIthe securities settlement facility to perform effective periodic assessments of the operational risk associated with the link. In particular, FMIssecurities settlement facilities should ensure that risk-management arrangements and processing capacity are sufficiently scalable and reliable to operate the link safely for both the current and projected peak volumes of activity processed over the link (see Principle 17SSF Standard 14 on operational risk). Systems and communication arrangements between the securities settlement facility and linked FMIs also should be reliable and secure so that the link does not pose significant operational risk to the securities settlement facility and the linked FMIs. Any reliance by a linked FMI securities settlement facility on a critical-service provider should be disclosed as appropriate to the other FMI.linked FMI and the securities settlement facility should require reciprocal disclosure from the linked FMI. In addition, a linked FMIsecurities settlement facility should identify, monitor, and manage operational risks due to complexities or inefficiencies associated with differences in time zones, particularly as these affect staff availability. Governance arrangements and change-management processes should ensure that changes in onethe securities settlement facility or a linked FMI will not inhibit the smooth functioning of the link, related risk-management arrangements, or non-discriminatory access to the link (see PrincipleSSF Standard 2 on governance and Principle 18SSF Standard 15 on access and participation requirements).
Managing financial risk
17.1.3.	3.20.5.	FMIsA securities settlement facility in a link arrangement should effectively measure, monitor, and manage theirits financial risk, including custody risk, arising from the link arrangement. FMIsA securities settlement facility should ensure that theyit and theirits participants have adequate protection of assets in the event of the insolvency of a linked FMI or a participant default in a linked FMI. Specific guidance on mitigating and managing these risks in CSD-CSD links and CCP-CCP links is provided below.
17.2.	A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the securities settlement facility and other FMIs involved in the link. 
17.2.1.	3.20.3.	A linkA link involving a securities settlement facility should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the FMIs involved in the link.securities settlement facility. Cross-border links may present legal risk arising from differences between the laws and contractual rules governing the linked FMIs and their participants, including those relating to rights and interests, collateral arrangements, settlement finality, and netting arrangements (see PrincipleSSF Standard 1 on legal basis). For example, differences in law and rules governing settlement finality may lead to a scenario where a transfer is regarded as final in one FMI but not final in the linked FMI. In some jurisdictions, differences in laws may create uncertainties regarding the enforceability of CCP obligations assumed by novation, open offer, or other similar legal device. Differences in insolvency laws may unintentionally give a participant in one CCP a claim on the assets or other resources of the linked CCP in the event of the first CCP’s default. To limit these uncertaintiesthe securities settlement facility but not final in the linked FMI, or vice versa. To limit any uncertainties arising from such a scenario, the respective rights and obligations of the linked FMIs and, where necessary, their participants should be clearly defined in the link agreement. The terms of the link agreement should also set out, in cross-jurisdictional contexts, an unambiguous choice of law that will govern each aspect of the link. 
17.3.	Where relevant to its operations in Australia, a securities settlement facility should consult with the Reserve Bank prior to entering into a link arrangement with another FMI. 
17.3.1.	Prior to entering into a link arrangement with another FMI that is relevant to its operations in Australia, a securities settlement facility should consult with the Reserve Bank. As part of this consultation, the securities settlement facility should provide the Reserve Bank with a comprehensive description of the link arrangement. This description should include details of the legal basis of the link, and any financial obligations or operational interdependencies created by the link, including obligations created for both the securities settlement facility and the linked FMI. A securities settlement facility should provide sufficient detail to demonstrate that the link arrangement will not adversely affect its compliance with the SSF Standards. Where the Reserve Bank identifies aspects of the proposal that may create unacceptable risks for the securities settlement facility, the securities settlement facility should make any necessary changes to the proposal to control or mitigate these risks prior to implementation. These changes may be necessary to ensure that the securities settlement facility continues to comply with the SSF Standards and equivalent standards in other relevant jurisdictions. 
17.3.2.	Where a linked FMI’s principal place of business is not in Australia, the Reserve Bank may also consult with regulator of the linked FMI in its principal place of business, in order to understand the overseas regulator’s assessment of the link arrangement and to ensure that all relevant legal, regulatory, operational and financial-risk issues have been considered and addressed. 
17.4.	Linked CSDsA securities settlement facility operating a central securities depository that links to another central securities depository should measure, monitor, and manage the credit and liquidity risks arising from each othersuch links. Any credit extensions between CSDsextended to the linked central securities depository should be covered fully with high-quality collateral and be subject to limits. 
17.4.1.	3.20.6.	As part of its activities, an investor CSDa securities settlement facility operating a central securities depository may choose to establish a link with another CSDcentral securities depository. If such a link is improperly designed, the settlement of transactions across the link could subject participants to new or increased risks. In addition to legal and operational risks, linked CSDsthe securities settlement facility and theirits participants could also face credit and liquidity risks. For example, an operational failure or default in one CSDa linked central securities depository may cause settlement failures or defaults in a linked CSDsecurities settlement facility and expose participants in the linked CSDsecurities settlement facility, including participants that did not settle transactions across the link, to unexpected liquidity pressures or outright losses. A CSD’sThe default procedures of a linked central securities depository, for example, could affect a linked CSDsecurities settlement facility through loss-sharing arrangements. Linked CSDsA securities settlement facility operating a central securities depository that has a link with another central securities depository should therefore identify, monitor, and manage theits credit and liquidity risks arising from the linked entity.link arrangement. In addition, any credit extensions between CSDsextended to the linked central securities depository should be fully covered fully by high-quality collateral and be subject to limits. Further,  
17.4.2.	3.20.8.	Furthermore, a securities settlement facility operating a central securities depository and any linked CSDscentral securities depository should have robust reconciliation procedures to ensure that their respective records are accurate and current. Reconciliation is a procedure to verify that the records held by the linked CSDs match for transactions processed across the link. This process is particularly important when three or more CSDscentral securities depositories are involved in settling transactions (that is, the securities are held in safekeeping by one CSDcentral securities depository or custodian while the seller and the buyer participate in one or more of the linked CSDs) (see also Principle 11 on CSDscentral securities depositories).
17.5.	Provisional transfers of securities between linked CSDsa securities settlement facility operating a central securities depository and another central securities depository should be prohibited or, at a minimum, the retransfer of provisionally transferred securities should be prohibited prior to the transfer becoming final.
17.5.1.	Some practices that may be utilised in links between a securities settlement facility operating a central securities depository and other central securities depositories deserve particularly rigorous attention and controls. In particular, provisional transfers of securities between linked CSDsa securities settlement facility operating a central securities depository and the linked central securities depository should be prohibited or, at a minimum, the retransfer of provisionally transferred securities should be prohibited prior to the transfer becoming final.
3.20.7.	An investor CSD should only establish links with an issuer CSD if the link arrangement provides a high level of protection for the rights of the investor CSD’s participants. In particular, the investor CSD should use issuer CSDs that provide adequate protection of assets in the event that the issuer CSD becomes insolvent (see Principle 11 on CSDs). In some cases, securities held by an investor CSD can be subject to attachment by the creditors of the CSD or its participants and, as such, can also be subject to freezing or blocking instructions from local courts or other authorities. Further, if an investor CSD maintains securities in an omnibus account at an issuer CSD and a participant at the investor CSD defaults, the investor CSD should not use the securities belonging to other participants to settle subsequent local deliveries of the defaulting participant. The investor CSD should have adequate measures and procedures to avoid effects on the use of securities belonging to non-defaulting participants in a participant-default scenario. 
17.6.	An investor CSDA securities settlement facility operating an investor central securities depository that uses an intermediary to operate a link with an issuer CSDcentral securities depository should measure, monitor, and manage the additional risks (including custody, credit, legal, and operational risks) arising from the use of the intermediary.
17.6.1.	3.20.9.	If an investor CSD uses an intermediary to operate a link with an issuer CSD, the investor CSD should measure, monitor, and manage the additional risks (including custody, credit, legal, and operational risks) arising from the use of the intermediary. In an indirect CSD-CSD link, arrangement, a securities settlement facility operating an investor CSDcentral securities depository uses an intermediary (such as a custodian bank) to access the issuer CSD.central securities depository. In such cases, the investor CSDsecurities settlement facility faces the risk that the custodian bank may become insolvent, act negligently, or commit fraud. Although a securities settlement facility operating an investor CSDcentral securities depository may not face a loss on the value of the securities, the ability of the investor CSDfacility to use its securities might temporarily be impaired. The investor CSDThe securities settlement facility should measure, monitor, and manage on an ongoing basis its custody risk (see also Principle 16SSF Standard 13 on custody and investment risks) and provide evidence to the Reserve Bank and other relevant authorities that adequate measures have been adopted to mitigate this custody risk. In addition, the investor CSDsecurities settlement facility should ensure that it has adequate legal, contractual, and operational protections to ensure that its assets held in custody are segregated and transferable (see Principle 11SSF Standard 9 on CSDs).central securities depositories). Similarly, a securities settlement facility operating an investor CSDcentral securities depository should ensure that itsany money settlement banks or cash correspondentsagents can perform as expected. In that context, the investor CSDsecurities settlement facility should have adequate information on the business-continuity plans of its intermediary and the issuer CSDcentral securities depository to achieve a high degree of confidence that both entities will perform as expected during a disruptive event. 
3.20.10.	A CCP may establish links with one or more other CCPs. Although the details of individual link arrangements among CCPs differ significantly because of the varied designs of CCPs and the markets they serve, there are currently two basic types of CCP links: peer-to-peer links and participant links. 
3.20.11.	In a peer-to-peer link, a CCP maintains special arrangements with another CCP and is not subject to normal participant rules. Typically, however, the CCPs exchange margin and other financial resources on a reciprocal basis. The linked CCPs face current and potential future exposures to each other as a result of the process whereby they each net the trades cleared between their participants so as to create novated (net) positions between the CCPs. Risk management between the CCPs is based on a bilaterally approved framework, which is different from that applied to a normal participant.
3.20.12.	In a participant link, one CCP (the participant CCP) is a participant in another CCP (the host CCP) and is subject to the host CCP’s normal participant rules. In such cases, the host CCP maintains an account for the participant CCP and would typically require the participant CCP to provide margin, as would be the case for a participant that is not a CCP. A participant CCP should mitigate and manage its risk from the link separately from the risks in its core clearing and settlement activities. For example, if the host CCP defaults, the participant CCP may not have adequate protection because the participant CCP does not hold collateral from the host CCP to mitigate the counterparty risk posed to it by the host CCP. Risk protection in a participant link is one-way, unlike in a peer-to-peer link. The participant CCP that provides margin but does not collect margin from another linked CCP should therefore hold additional financial resources to protect itself against the default of the host CCP.
3.20.13.	Both types of links – peer-to-peer and participant links – may present new or increased risks that should be measured, monitored, and managed by the CCPs involved in the link. The most challenging issue with respect to CCP links is the risk management of the financial exposures that potentially arise from the link arrangement. Before entering into a link with another CCP, a CCP should identify and assess the potential spillover effects from the default of the linked CCP. If a link has three or more CCPs, each CCP should identify and assess the risks of the collective link arrangement. A network of links between CCPs that does not properly acknowledge and address the inherent complexity of multi-CCP links could have significant implications for systemic risk. 
3.20.14.	Exposures faced by one CCP from a linked CCP should be identified, monitored, and managed with the same rigour as exposures from a CCP’s participants to prevent a default at one CCP from triggering a default at a linked CCP. Such exposures should be covered fully, primarily through the use of margin or other equivalent financial resources. In particular, each CCP in a CCP link arrangement should be able to cover, at least on a daily basis, its current and potential future exposures to the linked CCP and its participants, if any, fully with a high degree of confidence without reducing the CCP’s ability to fulfil its obligations to its own participants at any time (see Principle 6 on margin). Financial resources used to cover inter-CCP current exposures should be prefunded with highly liquid assets that exhibit low credit risk. Best practice is for CCPs to have near real time inter-CCP risk management. However, at a minimum, financial exposures among linked CCPs should be marked to market and covered on a daily basis. CCPs also need to consider and address the risks arising from links in designing their stress tests and calibrating their prefunded default arrangements.  Linked CCPs should also take into account the effects that possible contributions to each other’s prefunded default arrangements, exchange of margin, common participants, major differences in their risk-management tools, and other relevant features may have on their risk-management frameworks, especially in relation to the legal, credit, liquidity, and operational risks they face.
3.20.15.	Because of the different possible types of link arrangements, different types of CCPs, and differences in the legal and regulatory frameworks in which CCPs may operate, different combinations of risk-management tools may be used by the CCP. When linked CCPs have materially different risk-management frameworks, the risks stemming from the link are more complex. In this case, the linked CCPs should carefully assess the effectiveness of their risk-management models and methodologies, including their default procedures, in order to determine whether and to what extent their inter-CCP risk-management frameworks should be harmonised or whether additional risk-mitigation measures would be sufficient to mitigate risks arising from the link.
3.20.16.	A CCP (the first CCP) will usually have to provide margin to a linked CCP for open positions. In some cases, the first CCP may not be able to provide margin that it has collected from its participants to the linked CCP because the first CCP’s rules may prohibit the use of its participants’ margin for any purpose other than to cover losses from a default of a participant in the first CCP, or the first CCP’s legal or regulatory requirements may not permit such reuse of its participants’ collateral. As such, the CCP would need to use alternative financial resources to cover its counterparty risk to the linked CCP, which is normally covered by margin. If a CCP is allowed to reuse its participants’ collateral to meet an inter-CCP margin requirement, such collateral provided by the first CCP must be unencumbered and its use by the linked CCP in the event of the default of the first CCP must not be constrainable by actions taken by the participants of the first CCP. The credit and liquidity risk arising from the reuse of margin should be adequately mitigated by the CCPs. This can be achieved through segregation, protection, and custody of margin exchanged between CCPs in a manner that allows for its swift and timely return to the CCP in case of a decrease in the exposures and that allows for supplemental margin (and, if necessary, supplemental default fund contributions) needed to cover the counterparty risk between the linked CCPs to be charged directly to the participants who use the link service, if applicable. 
3.20.17.	Linked CCPs should maintain arrangements that are effective in managing the risks arising from the link; such arrangements often involve a separate default fund to cover that risk. In principle, the risk-management measures related to the link should not reduce the resources that a CCP holds to address other risks. The most direct way to achieve this outcome is for CCPs not to participate in each other’s default funds, which may in turn mean that the CCP will need to provide additional margin. However, in arrangements in which CCPs have agreed, consistent with their regulatory framework, to contribute to each other’s default funds, the linked CCPs should assess and mitigate the risks of making such contributions via specific conditions. In particular, funds used by a CCP to contribute to another CCP's default fund must represent prefunded additional financial resources and must not include resources used by the CCP to satisfy its regulatory requirements to hold sufficient capital or participant margin funds (or any other funds, including independent default fund resources) held by the CCP to mitigate the counterparty risk presented by its participants. The contributing CCP should further ensure that any consequent exposure of its own participants to the risk of a participant default in the linked CCP is fully transparent to and understood by its participants. The contributing CCPs may, for example, consider it appropriate to ensure the default fund contribution is made only by those of its participants that use the link, if applicable. Moreover, the resources provided by one CCP to another should be held in such a way that they are ring fenced from other resources provided to that CCP. For example, securities could be held in a separate account at a custodian. Cash would need to be held in segregated accounts to be considered as acceptable collateral in this case. Finally, in case of a participant default in the first CCP, the use of the linked CCP’s contribution to the default fund of the first CCP could be restricted or limited. For example, the linked CCP’s contribution to the default fund could be put at the bottom of the first CCP’s default waterfall. 
3.20.18.	Link arrangements between CCPs will expose each CCP to sharing in potentially uncovered credit losses if the linked CCP’s default waterfall has been exhausted. For example, a CCP may be exposed to loss mutualisation from defaults of a linked CCP’s participants. This risk will be greater to the extent that the first CCP is unable directly to monitor or control the other CCP’s participants. Such contagion risks can be even more serious in cases where more than two CCPs are linked, directly or indirectly, and a CCP considering such a link should satisfy itself that it can manage such risks adequately. Each CCP should ensure that the consequent exposure of its own participants to a share in these uncovered losses is fully understood and disclosed to its participants. CCPs may consider it appropriate to devise arrangements to avoid sharing in losses that occur in products other than those cleared through the link and to confine any loss sharing to only participants that clear products through the link. Depending on how losses would be shared, CCPs may need to increase financial resources to address this risk. 
3.20.19.	Any default fund contributions or allocation of uncovered losses should be structured to ensure that (a) no linked CCP is treated less favourably than the participants of the other CCP and (b) each CCP’s contribution to the loss sharing arrangements of the other is no more than proportionate to the risk the first CCP poses to the linked CCP. 
3.20.20.	A TR should carefully assess the additional operational risks related to its links to ensure the scalability and reliability of IT and related resources. A TR can establish links with another TR or with another type of FMI. Such links may expose the linked FMIs to additional risks if not properly designed. Besides legal risks, a link to either another TR or to another type of FMI may involve the potential spillover of operational risk. The mitigation of operational risk is particularly important because the information maintained by a TR can support bilateral netting and be used to provide services directly to market participants,  service providers (for example, portfolio compression service providers), and other linked FMIs. FMIs establishing a link to a TR should ensure that the system and communication arrangements between the linked entities are reliable and secure such that the operation of the link does not pose significant reliability and security risks. Moreover, given the role that a TR may play at the beginning of the clearing and settlement process for derivatives transactions, a TR should have governance arrangements that ensure the management of the linked entities would not inhibit the smooth functioning of the link, related risk-management arrangements, and non-discriminatory access to the link. Therefore, the scalability of IT and related resources may be especially important.
[The CCP Standards do not incorporate Principle 21 on efficiency and effectiveness]
[The CCP Standards do not incorporate Principle 22 on communication procedures and standards]
Principle 23Standard 18: Disclosure of rules, key policies and procedures, and market data 
An FMIA securities settlement facility should have clear and comprehensive rules, policies and procedures and should provide sufficient information and data to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI.securities settlement facility. All relevant rules and key policies and procedures should be publicly disclosed.
Explanatory noteGuidance
3.23.1. 	An FMIA securities settlement facility should provide sufficient information to its participants and prospective participants to enable them to identify clearly and understand fully the risks and responsibilities of participating in the system. To achieve this objective, an FMIa securities settlement facility should adopt and disclose written rules, policies and procedures that are clear and comprehensive and that include explanatory material written in plain language so that participants can fully understand the system’s design and operations, their rights and obligations, and the risks of participating in the system. An FMI’s rulesA securities settlement facility’s rules, policies, procedures, and explanatory material need to be accurate, up-to-date, and readily available to all current and prospective participants. Moreover, an FMIa securities settlement facility should disclose to participants and the public information on its fee schedule, basic operational information, and responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures. 
18.1.	A securities settlement facility should adopt clear and comprehensive rules, policies and procedures that are fully disclosed to participants. Relevant rules and key policies and procedures should also be publicly disclosed (including specific requirements relating to SSF Standards 1.4, 2.2, 11.3, 13.4, 15.2 and 15.3). 
18.1.1.	3.23.2. An FMIA securities settlement facility should adopt clear and comprehensive rules, policies and procedures that are fully disclosed to participants. Relevant rules and key policies and procedures should also be publicly disclosed. A securities settlement facility’s rules, policies and procedures are typically the foundation of the FMIsecurities settlement facility and provide the basis for participants’ understanding of the risks they incur by participating in the FMI. securities settlement facility.
18.2.	An FMIA securities settlement facility should disclose clear descriptions of the system’s design and operations, as well as the FMI’ssecurities settlement facility’s and participants’ rights and obligations, so that participants can assess the risks they would incur by participating in the FMI.securities settlement facility (see SSF Standards 2.8 and 8.5). 
18.2.1.	As such, Relevant rules, policies and procedures should include clear descriptions of the system’s design and operations, as well as the FMI’s and participants’ rights and obligations of the securities settlement facility and its participants, so that participants can assess the risk they would incur by participating in the FMIsecurities settlement facility. They should clearly outline the respective roles of participants and the FMIsecurities settlement facility as well as the rules, policies and procedures that will be followed in routine operations and non-routine, though foreseeable, events, such as a participant default (see Principle 13SSF Standard 11 on participant-default rules and procedures). In particular, an FMIa securities settlement facility should have clear and comprehensive rules, policies and procedures for addressing financial and operational problems within the system. For example, rules, policies and procedures should identify which parties are to be notified of specific events and the timetables for decision-making and notification. They should make clear the degree of discretion parties are able to exercise in taking decisions that can have a direct effect on the operation of the system.
18.2.2.	3.23.3. 	In addition to disclosing all relevant rules, and key policies and procedures, an FMIa securities settlement facility should have a clear and fully disclosed process for proposing and implementing changes to its rules, policies and procedures and for informing participants, and the Reserve Bank and other relevant authorities, of these changes. Similarly, the rules, policies and procedures should clearly disclose the degree of discretion that an FMIa securities settlement facility can exercise over key decisions that directly affect the operation of the system, including in crises and emergencies (see also PrincipleSSF Standard 1 on legal basis and PrincipleSSF Standard 2 on governance). For example, an FMI’sa securities settlement facility’s procedures may provide for discretion regarding the extension of operating hours to accommodate unforeseen market or operational problems. An FMIA securities settlement facility also should have appropriate procedures to minimise any conflict-of-interest issues that may arise when authorised to exercise its discretion. 
18.3.	An FMIA securities settlement facility should provide all necessary and appropriate documentation and training to facilitate participants’ understanding of the FMI’ssecurities settlement facility’s rules, policies and procedures and the risks they face from participating in the FMIsecurities settlement facility.
18.3.1.	3.23.4. 	Participants bear primary responsibility for understanding the rules, policies, procedures, and risks of participating in an FMIa securities settlement facility as well as the risks they may incur when the FMIsecurities settlement facility has links with other FMIs. An FMIA securities settlement facility, however, should provide all documentation, training, and information necessary to facilitate participants’ understanding of the FMI’ssecurities settlement facility’s rules, policies and procedures and the risks they face from participating in the FMIsecurities settlement facility. New participants should receive training before using the system, and existing participants should receive, as needed, additional periodic training. An FMIA securities settlement facility should disclose to each individual participant stress test scenarios used, individual results of stress tests, and other data to help each participant understand and manage the potential financial risks stemming from participation in the FMI.securities settlement facility. For instance, participants should have access to sufficiently timely and broadly comprehensive data on equities securities lending to enable them to assess the potential implications for settlement risk. This is particularly important where equities securities loans are bilaterally negotiated and not novated to (or otherwise cleared through) a central counterparty, but nevertheless settled alongside centrally cleared exchange-traded transactions. Other relevant information that should be disclosed to participants, but typically not to the public, includes key highlightsrelevant aspects of the FMI’ssecurities settlement facility’s business-continuity arrangements.
18.3.2.	3.23.5.	An FMIA securities settlement facility is well placed to observe the performance of its participants and should promptly identify those participants whose behaviour demonstrates a lack of understanding of, or compliance with, applicable rules, policies, procedures, and risks of participation. In such cases, an FMIa securities settlement facility should take steps to rectify any perceived lack of understanding by the participant and take other remedial action necessary to protect the FMIsecurities settlement facility and its participants. This may include notifying senior management within the participant institution. In cases in which the participant’s actions present significant risk or present cause for the participant’s suspension, the FMIsecurities settlement facility should notify the appropriate regulatory, supervisory,Reserve Bank and oversightother relevant authorities.
3.23.6. 	An FMI should publicly disclose its fees at the level of the individual services it offers as well as its policies on any available discounts. The FMI should provide clear descriptions of priced services for comparability purposes. In addition, an FMI should disclose information on the system design, as well as technology and communication procedures, that affect the costs of operating the FMI. These disclosures collectively help participants evaluate the total cost of using a particular service, compare these costs to those of alternative arrangements, and select only the services that they wish to use. For example, large-value payment systems typically have higher values and lower volumes than retail payment systems, and, as a result, processing costs can be less important to participants than the costs of providing liquidity to fund payments throughout the day. The FMI’s design will influence not only how much liquidity participants need to hold in order to process payments but also opportunity costs of holding such liquidity. An FMI should provide timely notice to participants and the public of any changes to services and fees. 
18.4.	An FMIA securities settlement facility should complete regularly and disclose publicly responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures. An FMIA securities settlement facility also should, at a minimum, disclose basic data on transaction volumesrisk and valuesactivity data, as directed by the Reserve Bank from time to time.
Disclosure framework and other information
18.4.1.	3.23.7. 	An FMIA securities settlement facility should complete regularly, and disclose publicly, responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures. The FMIThe securities settlement facility should provide comprehensive and appropriately detailed disclosures to improve the overall transparency of the FMIsecurities settlement facility, its governance, operations, and risk-management framework. In order for the disclosures to reflect correctly the FMI’ssecurities settlement facility’s current rules, policies, procedures, and operations, the FMIsecurities settlement facility should update its responses following material changes to the system or its environment. At a minimum, an FMIa securities settlement facility should review its responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures every two yearseach year to ensure continued accuracy and usefulness. 
18.4.2.	3.23.8. 	Other relevant information for participants and, more generally, the public could include general information on the FMI’ssecurities settlement facility’s full range of activities and operations, such as the names of direct participants in the FMIsecurities settlement facility, key times and dates in FMIits operations, and its overall risk-management framework (including its margin methodology and assumptions). An FMI also should. A securities settlement facility should also disclose its financial condition, financial resources to withstand potential losses, (where relevant), timeliness of settlements, and other performance statistics. With respect to data, an FMIa securities settlement facility should, at a minimum, disclose basic data on transaction volumes and values.  The securities settlement facility should also disclose any additional data that the Reserve Bank may direct it to disclose from time to time.
Forms of disclosure
18.4.3.	3.23.9. 	An FMIA securities settlement facility should make the relevant information and data it discloses as set forth in this reportthese SSF Standards readily available through generally accessible media, such as the internet, in a language commonly used in financial marketsEnglish in addition to theany other domestic language(s) of the jurisdiction in which the FMIsecurities settlement facility is located. The data should be accompanied by robust explanatory documentation that enables users to understand and interpret the data correctly. 
[The CCP Standards do not incorporate Principle 24 on disclosure of market data by trade repositories]
Standard 19: Regulatory reporting
A securities settlement facility should inform the Reserve Bank in a timely manner of any events or changes to its operations or circumstances that may materially impact its management of risks or ability to continue operations. A securities settlement facility should also regularly provide information to the Reserve Bank regarding its financial position and risk controls on a timely basis.
Guidance
The Corporations Act 2001 and the SSF Standards impose requirements for notification to the Reserve Bank in certain circumstances. This Standard imposes additional reporting requirements. 
Oral notification to the Reserve Bank may be appropriate, particularly in circumstances where timely communication is needed. In practice, this should be followed by notification in writing. 
To assist in meeting this Standard, formal points of liaison will be agreed upon between the securities settlement facility and the Reserve Bank. 
19.1.	A securities settlement facility should inform the Reserve Bank as soon as reasonably practicable if:
(a)	it breaches, or has reason to believe that it will breach:
(i)	an SSF Standard; or 
(ii)	its broader legislative obligation to do, to the extent that it is reasonably practicable to do so, all things necessary to reduce systemic risk; 
(b)	it becomes subject to external administration, or has reasonable grounds for suspecting that it will become subject to external administration; 
(c)	a related body to the securities settlement facility becomes subject to external administration, or if the securities settlement facility has reasonable grounds for suspecting that a related body will become subject to external administration; 
(d)	a participant becomes subject to external administration, or if the securities settlement facility has reasonable grounds for suspecting that a participant will become subject to external administration; 
(e)	a participant fails to meet its obligations under the securities settlement facility’s risk-control requirements or has its participation suspended or cancelled because of a failure to meet the securities settlement facility’s risk-control requirements; 
(f)	it fails to enforce any of its own risk-control requirements; 
(g)	it plans to make significant changes to its risk-control requirements or its rules, policies and procedures; 
(h)	it or a service it relies on from a third party or outsourced provider experiences a significant operational disruption, including providing the conclusions of its post-incident review;
(i)	any internal audits or independent external expert reviews are undertaken of its operations, risk-management processes or internal control mechanisms;
(j)	its operations or risk controls are affected, or are likely to be affected, by distress in financial markets;
(k)	it has critical dependencies on utilities or service providers, including providing a description of the dependency and an update if the nature of this relationship changes;
(l)	it proposes to grant a security interest over its assets (other than a lien, right of retention or statutory charge that arises in the ordinary course of business); 
(m)	it proposes to incur or permit to subsist any loans from participants or members unless such loans are subordinated to the claims of all other creditors of the securities settlement facility; or 
(n)	any other matter arises which has or is likely to have a significant impact on its risk-control arrangements (see also SSF Standards 1.6, 14.10 and 17.3). 
19.2.	A securities settlement facility should also provide to the Reserve Bank, on a timely basis:
(a)	audited annual accounts;
(b)	management accounts on a regular basis, and at least quarterly;
(c)	risk-management reports on a regular basis, and at least quarterly;
(d)	periodic activity, risk and operational data, as agreed with the Reserve Bank; and
(e)	any other information as specified by the Reserve Bank from time to time.