Currency Program Explanation of Phases

Transcription

1 for onboarding a prospective currency A practical guide for central banks

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3 Contents SECTION TITLE PAGE Appendix I: Introduction...04 Summary of phases - key steps, processes and requirements...06 Currency eligibility criteria...07 Project organization...08 Engagement Phase...09 Diligence Phase...11 Implementation Phase...14 After go-live...17 CLS operational timeline...18 Appendix II: CLS testing and trialing process...18 We operate the world s largest multicurrency cash settlement service to mitigate FX settlement risk for our settlement members and their clients globally.

4 01 Introduction CLS enhances financial stability by providing risk mitigation and operational services for the global FX market. We operate the world s largest multicurrency cash settlement service to mitigate FX settlement risk for our settlement members and their clients globally. With more than 60 settlement members, comprising the world s largest financial institutions, and third-party clients, including banks, funds, non-bank financial institutions and multinational corporations, we settle FX trades across 18 currencies 1. How we mitigate settlement risk We mitigate settlement risk by simultaneously settling the payments on both sides of an FX trade on a real time basis. We do this using our unique payment-versuspayment (PvP) settlement service which is linked to the real time gross settlement (RTGS) payment systems of the 18 currencies eligible for CLS settlement. The settlement of these payments and associated funding is final and irrevocable. 04

5 Regulation and oversight CLS is a financial market infrastructure (FMI) and a designated systemically important financial market utility (FMU) 2. It is also subject to regulation and supervision by the Federal Reserve as well as co-operative oversight by the CLS Oversight Committee (OC), which includes the 18 central banks whose currencies are settled in CLS, as well as five other Eurosystem central banks 3. As a systemically important FMI, CLS is subject to the Principles for financial market infrastructures published by the Committee on Payment and Settlement Systems (CPSS) 4 and the Technical Committee of the International Organization of Securities Commissions (IOSCO). These principles are designed to ensure that the infrastructure supporting global financial markets is robust and able to withstand financial shocks 5. In line with these regulatory requirements, in December 2014, CLS published a disclosure framework document 6. In addition, supervisory guidance has stressed the importance of reducing or managing the risks arising from FX settlement, as well as increasing the scope of currencies, products and counterparties that are eligible for settlement through PvP arrangements. In line with this guidance 7 and our aim to enhance financial stability by providing risk mitigation and operational services for the global FX market, we have created a comprehensive process to efficiently onboard new currencies to the CLS settlement service. CLS s currency eligibility criteria are described later in this document (section 3). More information on the currency onboarding process can be found in the Briefing Book. 8 We also have a number of case studies available which provide valuable insight into the onboarding process from a central bank s perspective. 9 The following guide has been designed to support you, as a central bank, in your decision making and guide you through the process of onboarding your currency to the CLS settlement service. It provides details of activities that typically must occur before a currency is designated eligible for settlement, as well as the key steps and milestones for each of the three phases of CLS s currency onboarding process: (I) Engagement, (II) Diligence, and (III) Implementation 10. 1/ Australian dollar, Canadian dollar, Danish krone, euro, Hong Kong dollar, Hungarian forint, Israeli shekel, Japanese yen, Korean won, Mexican peso, New Zealand dollar, Norwegian krone, Singapore dollar, South African rand, Swedish krona, Swiss franc, UK pound and US dollar. 2/ In 2012, CLS Bank was designated a systemically important FMU by the United States Financial Stability Oversight Council under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 3/ For more information please see the Protocol for the Cooperative Oversight Arrangement of CLS at paymentsystems/cls_protocol.htm. 4/ As of 1 September 2014 the Committee on Payment and Settlement Systems (CPSS) has changed its name to Committee on Payments and Market Infrastructures (CPMI). 5/ More information can be found on the CLS website: CorePrinciples.aspx. 6/ The document can be found at PFMI%20Disclosure%20Framework% pdf 7/ Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions, BCBS, February / Currency_Program_Briefing_Book.pdf. 9/ A copy of the Case Studies can be requested by contacting currencyprogram@cls-group.com. 10/ Although the eligibility criteria are the same for all currencies, the onboarding process may vary somewhat across currencies and jurisdictions. 05

6 02 Summary of phases - key steps, processes and requirements To aid the co-ordination between the central bank and CLS, we have structured the onboarding process in three distinct phases. Throughout each phase, we will work closely with the central bank to address any questions or concerns. Phase One: Engagement Phase Two: Diligence Phase Three: Implementation TYPICAL ACTIVITIES CLS and the central bank discuss features of the CLS settlement system, additional risk mitigation services and the eligibility criteria to join CLS CLS and the central bank's Operations and Technology departments agree on periodic meetings CLS and the central bank create a joint, high-level Steering Committee CLS and the central bank undertake a gap analysis and diligence assessments in key functional areas, including technical, operational, risk, regulatory, legal and compliance, based on CLS s eligibility criteria to onboard the currency Gaps identified during the Diligence Phase are addressed and resolved Tests and trials with the central bank, existing settlement members and nostros are conducted CLS seeks regulatory approval for the currency to be designated as eligible for settlement CLS engages local market participants to highlight risk mitigation and liquidity benefits of participating in CLS and to discuss eligibility criteria CLS and the central bank agree on the Operations Co-ordination Manual CLS performs a liquidity risk analysis CLS and the central bank agree next steps to resolve any issues identified in the gap analysis, including the potential need for legislative amendments KEY OUTCOMES Non-disclosure agreement (NDA) is executed by the central bank and CLS Letter of intent (LOI) is sent to CLS by the central bank to pursue the onboarding of the currency CLS Board approves moving the currency into the Implementation Phase based on the results of the diligence assessments and remediation plans for any gaps identified Operational testing and trialing is successfully completed Regulatory approval is granted CLS Board designates the currency as eligible for settlement 06

7 03 Currency eligibility criteria CLS s currency eligibility criteria address business, risk, regulatory, legal, compliance and system functionality requirements. The key points are summarized below. 11/ CLS maintains a single multicurrency account on its books for each settlement member. CLS must be entitled in all cases to treat the settlement member s multicurrency account as a single net balance in accordance with the CLS Bank International Rules. 12/ CLS main settlement session occurs between 07:00 and 09:00 CET while funding is required between 06:30 and 10:00 CET for earlier closing currencies or 06:30 and 12:00 CET for later closing currencies. Requirement Domestic support Sovereign credit rating Legal and compliance Main aspects Strong commitment from central bank and other authorities to support settling the currency in CLS Minimum long-term local and foreign currency sovereign credit rating of BB - (S&P or Fitch) or Ba3 (Moody s) Domestic legislation supports: Finality of the settlement of payment instructions across CLS s books Finality of funding to and from CLS s account with the central bank Unity of account 11 Acceptable rule of law Acceptable Anti-Money Laundering (AML) regime 13/ CLS Bank International Rules are available on the CLS website: Membership/Pages/Criteria.aspx Currency Operational and technical Sufficient convertibility Any exchange controls should not inhibit the safe operation of CLS RTGS system operating hours in line with CLS s operational and settlement cycle 12 RTGS system capacity to meet CLS standards, including ability to securely process payments on a real time basis with no manual intervention required, as well as allowance for contingencies in line with regulatory requirements RTGS system messages are SWIFT compliant CLS opens an account at the central bank Comprehensive details on the eligibility criteria are also provided in the CLS Bank International Rules

8 04 Project organization Onboarding a currency to CLS is typically a multi-year project involving various departments within CLS as well as the central bank. CLS: At the outset of the onboarding process, we assign a primary contact from our team to facilitate CLS activities as well as those agreed with the central bank. We also establish an internal working group with representatives from our, Operations, Information Technology, Legal, Communications, Compliance, Relationship Management and Risk Management teams. 14/ The Steering Committee usually consists of senior leadership at both institutions and convenes twice a year at the outset of the process, with increased frequency as the initiative progresses. 15/ An NDA provides protection for each institution against the disclosure of confidential information, subject to certain limited exceptions. Central bank: We recommend that the central bank appoints a primary contact to co-ordinate dialogue with CLS and the necessary commitments within the central bank. This usually takes place at the beginning of the Diligence Phase. In addition, to maximize knowledge and align workstreams with CLS, we recommend the involvement of the departments and/or functional groups listed below. At relevant stages during the onboarding process, representatives from these departments will be required to assess and provide recommendations to fill any gaps identified in local policy and regulation. Anti-money laundering (AML) and compliance Financial stability Foreign exchange control Front office or market operations for daily liquidity management Information technology and security Internal audit Legal Monetary policy Payments and settlement systems policy RTGS system operations We also ask that the primary contact at the central bank co-ordinate engagement with other relevant authorities in the jurisdiction, in particular those responsible for financial matters, exchange controls, AML and/or amending legislation, if necessary. Steering Committee: At the beginning of the Diligence Phase, CLS and the central bank will formalize a joint Steering Committee 14 to oversee the currency implementation process and address any challenges. 08

9 05 Engagement Phase Through a series of written interactions, phone calls and bilateral meetings (as necessary), we will engage with senior central bank representatives to discuss CLS s role and the settlement risk mitigation benefits it provides to the global FX market. The Engagement Phase allows CLS and the central bank to undertake an assessment of the relevant local market practices and policies and identify specific characteristics likely to require further investigation. Examples include RTGS system operations, the availability of sufficient liquidity during the CLS operational timeline, nostro services for CLS payments, existing FX controls and payment system regulation. We will also engage with relevant authorities in the jurisdiction and representative financial system organizations, such as banking associations and organizations supporting domestic systemic stability. A key outcome of the Engagement Phase is a signed NDA between CLS and the central bank (and other organizations, if required) 15. This must be in place before any confidential information and documents required for onboarding the currency can be shared between CLS and the central bank. The Engagement Phase is complete and the currency is moved into the next phase once we receive a LOI from the central bank. The LOI, while non-binding, indicates the central bank s commitment and willingness to dedicate sufficient and necessary resources to support onboarding its currency to CLS. Key outcomes of the Engagement Phase Non-disclosure agreement (NDA) Letter of intent (LOI) In parallel, we will work with existing settlement members and separately contact local market participants that may be considering direct or indirect participation to help them understand the benefits of CLS s settlement risk mitigation service and aid their business case analysis. CLS may organize focused workshops for prospective participants. Although we no longer require new settlement members from the jurisdiction of a prospective currency, we do strongly encourage local participation to maximize the benefits for the jurisdiction s FX market. 09

10 To successfully complete the Engagement Phase, the central bank should plan to: Provide an executed NDA Participate in workshops that may be organized by CLS Support CLS in the preliminary research on the jurisdiction s legal regime and finality legislation Advise on appropriate local market communication channels for conveying the benefits of participating in CLS and the membership requirements Provide an executed LOI. While each LOI may include different details that are unique to the central bank or jurisdiction, generally in the LOI the central bank indicates its willingness to: Commit necessary resources to satisfying the eligibility criteria for including its currency in CLS Provide CLS with information necessary to perform its diligence and gap analysis Assist and support any necessary legislative or regulatory changes identified during the diligence process Work with CLS to establish a central bank account and provide access to the RTGS system. During the Engagement Phase CLS will provide: Answers to any questions regarding the currency eligibility criteria A high-level project timeline to support discussions on the onboarding process Details about the CLS risk management framework and processes, such as those related to liquidity A high-level overview of CLS s operational timeline and requirements, including but not limited to: CLS operational timeline (see Appendix I) The 24-hour, 5.5-day-a-week operational and systems capability CLS-specific contingency arrangements for payments and messages CLS best practice of operational and technical resilience Escalation and incident management processes The Operations Co-ordination Manual 16. Further material regarding SWIFT message requirements An opportunity to discuss legal and compliance issues related to onboarding the currency, including the finality of settlement and funding, opening an account at the central bank, legislation and protections regarding payments and netting, the existence of any exchange controls and the AML regime Assistance to address any concerns the central bank may have. 10

11 06 Diligence Phase The goal of this phase is for the central bank and CLS to identify the next steps needed for the currency and jurisdiction to meet CLS s currency eligibility requirements. As part of this effort, various CLS representatives will perform on - and/or off-site diligence assessments with central bank counterparts, other authorities (as necessary), existing and potential settlement members and other relevant organizations. Key outcomes of the Diligence Phase Liquidity risk analysis Country/sovereign risk analysis Finality legislation analysis Account opening requirements analysis 16/ The Operations Co-ordination Manual documents operational and contingency procedures between the central bank and CLS. 17/ Settlement members are direct participants in the CLS system. They are subject to eligibility criteria and must be CLS shareholders or affiliated with a CLS shareholder. Settlement members may submit payment instructions related to FX transactions to CLS directly. They also maintain an account on the books of CLS and submit funding to CLS, all relating to their own and, if they provide third party settlement services, their customers FX transactions. Third parties are customers of settlement members and have no contractual relationship with CLS. All third-party service providers adding or modifying the scope of third-party service for an FMI or G-SIFI are now subject to a prior notice and consent requirement by CLS. Third parties can be commercial banks, central banks, non-bank financial institutions, corporations and investment funds. Nostros are correspondent banks that make and receive funding payments to and from CLS on behalf of settlement members, based on bilateral agreements with their settlement members. Nostros are usually settlement members (or affiliates of settlement members) with sufficient liquidity to support their own and their customers financial commitments to CLS during the settlement sessions. AML and compliance analysis Message requirement specification Operational requirements analysis Preliminary Operations Co-ordination Manual To complete the diligence assessments, we require detailed FX trade data from local banks and existing settlement members. This will enable us to assess the size and liquidity profile of the currency, the netting benefits from settling the currency in CLS, as well as the liquidity and settlement risk impact of adding the currency to CLS. Subject to any confidentiality limitations, the results will be shared with participating institutions and the central bank. The diligence process will allow the central bank to benchmark its operational framework against international standards and best practices. During the Diligence Phase, we will continue to engage with the market to determine whether, and to what extent, local institutions are interested in participating either as settlement members, third parties and/or nostros 17. We will collaborate with local banking and FX traders associations to provide market participants with further details regarding CLS to aid their business assessment. 11

12 The result of the diligence analysis will be shared with the CLS Risk Management Committee (RMC) 18 for its review and recommendation to the CLS Board of Directors. A favourable recommendation by the RMC to proceed with the currency to the Implementation Phase will be presented to the CLS Board of Directors for its endorsement. Board endorsement is the key milestone for completing the Diligence Phase. We will notify the Federal Reserve and the OC of the Board of Directors endorsement. 18/ The RMC is a CLS Board committee which assesses areas of risk and provides advice, counsel and makes recommendations to the Board on the key risk management policies and practices of CLS. In parallel, CLS will support the central bank s own governance processes. To successfully complete the Diligence Phase: The central bank department responsible for monetary policy / financial markets should plan to: Issue or co-ordinate requests for detailed FX trade data from local banks for the modeling of flows and values of the prospective currency. This will enable CLS to assess the netting benefits, as well as the anticipated liquidity impact, of adding the currency to CLS, under both business-as-usual and contingency scenarios. The central bank department responsible for financial stability should plan to: Meet with the CLS Risk Management team to discuss the jurisdiction s risk profile Help facilitate meetings with other government and regulatory agencies to discuss the jurisdiction s financial/economic outlook. The central bank department responsible for legal and compliance issues should plan to: Meet with CLS s Legal team and local counsel retained by CLS to assist in identifying and addressing any gaps, in particular with regard to finality legislation. This will include determining appropriate legislative amendments (if necessary), an assessment of any exchange controls, as well as the requirements for opening a central bank account and access to the RTGS system Where necessary, co-ordinate the legislative process (if necessary, in co-operation with relevant ministries) to agree and draft legislative amendments Discuss the local AML regime with the CLS Legal and Compliance teams and arrange meetings with the financial intelligence unit, the prosecutor s office, the authorities responsible for AML strategy and the Supervision department at the central bank responsible for monitoring AML matters at supervised financial institutions. 12

13 The central bank department responsible for IT (in close relationship with the central bank department responsible for RTGS system operations) should plan to: Confirm detailed message specifications for the RTGS system and document these as functional requirements Agree on the scope and requirements for future test commitments, including static data. Security testing pre-requisites and requirements should also be confirmed, as well as any security specifications to inform the Security Risk Assessment conducted by CLS. The central bank department responsible for RTGS system operations should plan to: Outline normal and contingency RTGS system operational processes, including escalation and exceptional operating processes. The agreed procedures will be verified against legal and IT agreements and documented in the Operations Co-ordination Manual, a procedural document for the central bank and CLS Operations. The central bank as a whole should plan to: Strongly promote the participation of local banks in CLS, for example by supporting CLS and market efforts to raise awareness of the importance of FX settlement risk mitigation. During the Diligence Phase CLS will: Provide the central bank with an outline of the topics to be covered in CLS s diligence, advise which departments in CLS and the central bank will need to meet, and specify which documents CLS will need to review Request workshops and/or conference calls with the central bank to discuss onboarding and identify any gaps to be addressed Co-ordinate Steering Committee meetings, in conjunction with the central bank, to keep track of progress on the agreed steps to meet currency eligibility requirements and address any significant challenges Keep the central bank informed of the CLS governance process, including the formal decision to move the currency to the Implementation Phase. 13

14 07 Implementation Phase During the Implementation Phase, we will work with the central bank to address any outstanding legal and operational issues that have been identified. The review completed in this phase will also include the results of liquidity modeling for the addition of the prospective currency and confirmation of compliance with applicable international regulatory standards. 19/ The operational approval process for a new currency is an established framework of interrelated scripted trials executed within the production environment. The trials are designed to ensure the production readiness of all participants seeking to submit FX instructions to CLS in the prospective currency. 20/ Including the RTGS and any other system that could adversely affect the central bank s connectivity with CLS and that could affect the settlement process due to inability to connect for payments. 21/ Scripted trialing requires significant resources and commitment from the central bank, CLS and other key stakeholders. In parallel, we will conduct testing and trialing with the RTGS system, prospective and existing settlement members and nostros. Implementation plans for the currency and any prospective settlement members will be aligned to achieve maximum participation and efficiencies for the local market and existing membership. Key outcomes of the Implementation Phase Satisfactory legal opinion from CLS s local counsel Account agreement between CLS and central bank Final Operations Co-ordination Manual Testing Production trialing / operational approval process 19 CLS regulatory approval As with any new initiative, we will regularly update the Federal Reserve, the OC and existing settlement members on progress with the currency implementation. We will share, and co-ordinate where necessary, any external communications on the progress of the currency with the central bank. Upon satisfying all of CLS s eligibility criteria, the resolution of all outstanding issues, successful completion of testing and trialing, endorsement from the RMC, designation by CLS s Board of the currency as eligible for inclusion in CLS, approval by the Federal Reserve, and approval by the central bank s main governing body, the currency will go-live in CLS. 14

15 To successfully complete the Implementation Phase: The central bank department responsible for legal and compliance issues should plan to: Work with CLS to address outstanding legal and compliance issues (if any), including: Working with relevant government entities to amend legislation, if necessary Opening a central bank account for CLS and executing any relevant account or other agreements outlining the terms for the operation of the account and providing CLS with access to the local RTGS system (or a similar arrangement) Provide formal notice to the Federal Reserve that it does not object to the inclusion of its currency in CLS. The central bank department responsible for IT should plan to: Test connectivity and message flows with CLS, prospective and existing settlement members and nostros Participate in security testing to allow CLS to validate the security of the central bank s systems 20 and identify any issues for remediation. The central bank department responsible for internal audit should plan to: Provide a description of the security controls operative over the central bank s (and its payment system s) SWIFT equipment and communication links and the associated contingency measures. The central bank department responsible for monetary policy / financial markets should plan to: Continue its assessment of liquidity requirements with CLS. The central bank department responsible for RTGS system operations should plan to: Provide static data information for production and test environments Undertake testing (scripted and non-scripted) and trialing 21 - see Appendix II for details - in order to test: All operational processes agreed with CLS in both the test and production environments Operational readiness of CLS, the central bank, settlement members and nostros. Perform user acceptance testing, and Upon successful completion of all the above testing and trialing, finalize and sign off all processes in the Operations Co-ordination Manual. 15

16 During the Implementation Phase CLS will: Maintain regular contact with the central bank to monitor progress and the completion of any necessary remedial actions to manage the timely delivery of the currency onboarding project Identify test requirements and propose the test strategy, plan and scripts. In addition to the central bank, testing will involve other stakeholders, including CLS technology vendors, new and/or existing settlement members and nostros Finalize functional requirements discussed with the central bank Provide availability and support for the completion of central bank testing in the CLS test environment Manage the trialing process, including proposing the trialing schedule, investigating the circumstances of any unsuccessful trial, recommending remedial actions and scheduling re-trial dates Conduct a liquidity workshop with local banks and nostros Seek regulatory approval to include the currency in the CLS settlement system In conjunction with the central bank, issue any external communications regarding go-live. 16

17 08 After go-live Once the currency is live in the CLS system, the central bank will be expected to perform certain daily operational activities and meet certain standards and expectations on an ongoing basis, as agreed during the implementation process. The central bank is expected to (amongst other things): Perform RTGS system handshakes by 06:45 CET Straight-through process (STP) all CLS-related payments Have the ability to extend the RTGS system opening hours in the case of contingency situations Inform CLS of any expected RTGS system changes Maintain robust RTGS system contingency procedures, perform quarterly trialing of the contingency tool (Central Bank Contingency Automation) in the CLS production environment and conduct quarterly trialing with its RTGS system participants, with CLS participating for end-to-end testing results Supply end-of-day statements Supply intra-day statements upon request Review and update the Operations Co-ordination Manual with CLS at least annually, or as needed Notify CLS of any potential/actual issue domestically that might impact funding and/or settlement completion Participate in the RTGS system operators group Review reports from CLS on settlement of the currency to assess any impact on intra-day liquidity. 17

18 Appendix I: CLS operational timeline Operational timeline core settlement service (CET) 06:30 Bilateral rescind deadline 20:00 20:45 Credit derivatives (DTCC) cash flow submission window for next settlement day 20:00 CET 00:00 Unilateral rescind deadline 00:00 Initial pay-in schedule issued (triggers in/out swap process) 06:30 Revised pay-in schedule issued. Central bank pay-in report issued 07:00 Start of settlement 09:00 Settlement completion target time 10:00 Asia Pacific funding completion target time (pay-in) 12:00 European/ North American funding completion target time (pay-in) 22:00 00:00 02:00 04:00 06:00 08:00 10:00 12:00 Instruction input and matching Settlement Funding process 20:00 20:00 CET 22:00 00:00 02:00 01:15 In/out swap details available to members 04:00 06:00 06:00 07:00 RTGS system handshakes CLS testing and trialing process 08:00 10:00 10:25 Currency close Asia Pacific 12:00 13:00 Currency close European / North American Appendix II: CLS testing and trialing process Test Environments Production Environment System Test Objective: To prove that the CLS system application changes satisfy the functional requirements Connectivity Test Objective: To prove successful connectivity between the CLS test systems and the RTGS test system(s) through the SWIFT network Central bank involvement System Integration Test Nostro Testing SIT on JAS Member & Nostro Testing Objective: To prove integration of the CLS system components with the RTGS system Internal User Acceptance Test Objective: To prove new and updated internal CLS operational procedures CLS Decision on Activation of Production Code Payment Format Trial Objective: To ensure that timed payments to CLS in the new currency from nostros and RTGS systems are correctly formatted and STP in the CLS system Static Data Proving Trial Objective: To ensure all nostros and RTGS system have addressed the necessary static data changes needed for routing CLS payments Payment Trial Objective: To test payment flow between settlement members, nostros. central bank and CLS, ensuring that end-to-end flow is correctly configured and STP. Stakeholders will also be validating their ability to meet timed payments Full Settlement Trial Objective: To prove the operational readiness of the settlement members and nostros to exchange payments in the new currency within the CLS system under standard day and failure management scenarios No Central bank involvement 18

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