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78.1

Oversight of Financial Market Infrastructures

Introduction

Financial market infrastructures (FMIs) that facilitate the clearing, settling or recording of payments, securities, derivatives or other financial transactions constitute an essential foundation for the smooth functioning of an advanced economy, and play a critical role in fostering financial stability. It is therefore important for central banks and monetary authorities to oversee key FMIs to promote their safety and efficiency. 

According to Principles for Financial Market Infrastructures issued jointly by the Committee on Payments and Market Infrastructures of the Bank for International Settlements and the International Organization of Securities Commissions in April 2012, FMIs include systemically important payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories.

On 28 March 2013, the HKMA issued a policy statement - Oversight of Financial Market Infrastructures by the Hong Kong Monetary Authority. The document describes the approach adopted by the HKMA in its oversight of FMIs in Hong Kong under its purview, namely the designated clearing and settlement systems and the OTC Derivatives Trade Repository of the HKMA (HKTR). Amendments will be made to the document from time to time to reflect enhancements made by the HKMA in fine-tuning its oversight framework. The latest version of the document can be found here. 
Oversight of Financial Market Infrastructures by the Hong Kong Monetary Authority (PDF File, 110KB)

Mandate of the HKMA to Oversee Financial Market Infrastructures

Policy Objectives
The effective functioning of the FMIs is essential to the monetary and financial stability of Hong Kong and to the functioning of Hong Kong as an international financial centre.  The policy objectives of the HKMA in overseeing the FMIs in Hong Kong are to promote the general safety and efficiency of the FMIs, to limit systemic risk and to foster transparency.  The aim of the HKMA’s oversight work is to make the FMIs more resilient to financial crises and to protect the monetary and financial systems in Hong Kong from possible destabilising effects arising from disruption to the functioning of the FMIs.   

Systems Designated under the Payment Systems and Stored Value Facilities Ordinance
The Clearing and Settlement Systems Ordinance (CSSO), which came into effect on 4 November 2004, establishes a statutory regime for the Monetary Authority (MA) to designate and oversee clearing and settlement systems (CSSs) that are material to the monetary or financial stability of Hong Kong or to the functioning of Hong Kong as an international financial centre.  The HKMA is therefore empowered to designate and oversee CSSs on an ongoing basis to ensure their compliance with the CSSO. 

On 13 November 2015, the CSSO was amended and retitled as the Payment Systems and Stored Value Facilities Ordinance (Ordinance) to introduce a regulatory regime for stored value facilities and retail payment systems in addition to the existing oversight framework for CSSs under the pre-amended CSSO. As far as the designated CSSs are concerned, all designations, certificates of finality and exemptions granted under the pre-amended CSSO continue to have effect under the Ordinance.

Systems Owned and Operated by the HKMA
One of the policy objectives of the HKMA is to help maintain Hong Kong’s status as an international financial centre, including the maintenance and development of Hong Kong’s financial infrastructures.  The HKMA plays a key role in developing a safe and efficient financial infrastructure in Hong Kong, which is essential to the stability and integrity of the monetary and financial systems.  Among the financial infrastructures, the Hong Kong Dollar Clearing House Automated Transfer System (Hong Kong dollar CHATS - Hong Kong dollar RTGS system in Hong Kong), the Central Moneymarkets Unit (CMU - the debt securities settlement system in Hong Kong) and the HKTR are owned and operated by the HKMA.  The HKMA therefore has a duty to ensure these systems are operated in a safe and efficient manner and apply appropriate oversight standards.

Oversight Framework

Payment Systems and Stored Value Facilities Ordinance

The Ordinance establishes a statutory regime for the MA to designate and oversee CSSs. The objective is to promote the general safety and efficiency of designated CSSs. As the overseer, the MA monitors the compliance of designated CSSs with the safety and efficiency requirements stipulated in the Ordinance and, where appropriate, instigates changes to designated CSSs to bring them into compliance with the requirements. The Ordinance also provides statutory backing to the finality of settlement for transactions made through the CSSs designated under the Ordinance by protecting the settlement finality from insolvency laws or any other laws. The MA is empowered to issue a certificate of finality to a designated CSS if it meets certain criteria specified in the Ordinance.

Exemptions Granted by the Monetary Authority
The MA has exempted the system operator (SO) or settlement institution (SI) of some designated CSSs from certain obligations imposed under the Ordinance or from the application of certain provisions of the Ordinance. Such exemptions are granted in accordance with the requirements set out in the Ordinance. 

List of Exemptions Granted by the Monetary Authority under the Ordinance (PDF File, 15KB)

Explanatory Notes and Guidelines
The MA is empowered to issue explanatory notes and guidelines to explain its role, policies and requirements in relation to the designation and oversight of CSSs under the Ordinance. To enhance the transparency of the designation and oversight functions of the MA, the HKMA has issued the Explanatory Note on Designation and Issuance of Certificate of Finality (the Note) (PDF File, 165KB) which explains the policies and procedures that the MA intends to follow with respect to the designation of CSSs and the issuance of certificates of finality under the Ordinance. The Note also outlines the major obligations of a designated CSS, the power of the MA in respect thereof, and the appeal mechanism in respect of designation, revocation of designation and issuance, suspension, or revocation of certificates of finality. 

The HKMA has also issued the Guideline on the Oversight Framework for Designated Clearing and Settlement Systems  (PDF File, 102KB) under section 54(1)(a) of the Ordinance which explains the MA's interpretation of the oversight requirements, including the safety and efficiency requirements under sections 7 and 8 of the Ordinance and the process that the MA intends to follow in his oversight of the CSSs designated under the Ordinance.

To date, the following systems were designated under the Ordinance, to which certificates of finality have been issued by the MA:

  1. Hong Kong dollar CHATS;
  2. US Dollar Clearing House Automated Transfer System (US dollar CHATS);
  3. Euro Clearing House Automated Transfer System (Euro CHATS);
  4. Renminbi Clearing House Automated Transfer System (Renminbi CHATS);
  5. CMU; and
  6. Continuous Linked Settlement System (CLS).

International Standards
The HKMA has committed to comply with the international regulatory standards on FMIs. Specifically, the HKMA adopts the Principles for Financial Market Infrastructures (PFMI) issued jointly by the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements and the International Organization of Securities Commissions (IOSCO) in April 2012. The PFMI replace, harmonise and strengthen various earlier standards on FMIs, and aim at making the FMIs more resilient to financial crisis and fostering their safety and efficiency. The PFMI contain twenty-four principles for FMIs and five responsibilities of regulatory authorities to provide for the effective regulation, supervision and oversight of FMIs.

On 28 March 2013, the HKMA publicly announced its policy intention to adopt the PFMI, and the PFMI (including the twenty-four principles and the five responsibilities) came into effect on same day (http://www.hkma.gov.hk/eng/key-information/press-releases/2013/20130328-6.shtml). 

For FMIs under HKMA’s purview, the new requirements under the PFMI have been incorporated into the oversight guidelines issued by the HKMA, after consulting relevant parties.  The HKMA published a separate guideline on Application of Principles for Financial Market Infrastructures to Designated Clearing and Settlement Systems under section 54(1)(a) of the Ordinance and revised the guideline on oversight of the trade repository (Guideline on the Oversight Framework for the Hong Kong Trade Repository, PDF File, 410KB). The two guidelines  adopt the relevant requirements as specified in the PFMI and the additional note Application of Principles for Financial Market Infrastructures to central bank FMIs issued by CPMI-IOSCO. All FMIs under HKMA’s purview are required to observe the relevant PFMI applicable to them. The HKMA has also adopted the five responsibilities under the PFMI into its oversight framework.

The FMIs under HKMA’s purview are expected to have made necessary changes to conform with the relevant requirements in the PFMI, and be generally observant of the PFMI by 31 December 2015. The HKMA is conducting assessments of the FMIs under its purview against the PFMI.  The FMIs under the HKMA’s purview will generally be subject to PFMI assessment every two years, and the outcome will be published on the HKMA’s website

In accordance with the PFMI, each FMI is required to publish a disclosure framework in line with the CPMI-IOSCO Disclosure Framework for Financial Market Infrastructures. The disclosure frameworks for the FMIs under the HKMA's purview are published on the websites of the respective FMIs.

Oversight Approach

Oversight follows a risk-based approach to continuously monitor and assess the compliance of FMIs under HKMA’s purview focusing on areas of high risk using a variety of techniques aimed at detecting problems at an early stage.

The HKMA conducts annual assessments of the compliance of each FMI under its purview.  The oversight is conducted through one or more of the following methods:

  1. off-site reviews and continuous monitoring;
  2. on-site examinations;
  3. auditor’s reports;
  4. meeting with the management of the SOs and SIs; and
  5. follow-up action.

Off-site Reviews and Continuous Monitoring
These form the core of the HKMA’s oversight approach.  The reviews enable the HKMA to evaluate the degree of compliance of FMIs under its purview with the relevant requirements and to conduct cross-institutional or peer group analysis.  Monthly information is collected on transaction volumes and values, system performance statistics, incidents of default and non-compliance with operating rules, and significant events in the coming months, which may have risk implications for each designated system. In addition, the HKMA also requires the SO and the SI, as appropriate, of each FMI under its purview to provide supplementary information for off-site reviews. The information includes submissions of periodic internal or external auditor’s reports on various risk areas, business continuity plans, and data on the financial strength and commitment of the SO and/or SI, which should also report any delays or abnormal events of the FMI under its purview as soon as possible.  This should be followed by a written report to the HKMA within a reasonable time specified by the HKMA, explaining the cause and impact of the event, and the remedial action taken.

On-site Examinations
On-site examinations complement the HKMA’s off-site reviews and provide it with the opportunity to assess at first-hand how the FMIs under the HKMA’s purview are being operated, managed and controlled.  On-site examinations are conducted when necessary and their frequencies vary from FMI to FMI.  In general, the scope of an on-site examination will focus on priority areas identified through the off-site review.  These include high-risk areas or where control process validations are needed. An on-site examination report, identifying any area of weakness or concern and making recommendations for remedial action, will be issued to the SOs and SIs. 

Auditor’s Reports
To supplement off-site reviews and on-site examinations, the HKMA may request the SO and/or SI, as appropriate, to submit an auditor’s report on high-risk areas or other areas of concern to assist the HKMA in deciding whether the FMI in compliance with the relevant requirements.  

Meeting with the Management of System Operators and/or Settlement Institutions
The HKMA holds annual meetings with senior management of the SO and/or SI, as appropriate, of each FMI to discuss the findings of the off-site reviews (and on-site examinations if conducted), particularly any significant deficiencies in safety and efficiency identified, or any other matters of concern or mutual interest. The meetings also enable the HKMA to better understand how the SO and/or SI view and control risks and how they assess their business situation and future development.  

Follow-up Action
Following evaluation of the compliance of a FMI under its purview, the HKMA may make recommendations to the SO and/or SI, as appropriate, asking them to take steps to meet the oversight requirements. It will then closely monitor implementation of the recommendations. 

Co-operative Oversight Arrangements

The HKMA has established co-operative oversight arrangements with relevant authorities both at domestic and international level in accordance with Responsibility E under the PFMI.  The co-operative oversight arrangements serve to foster efficient and effective communication and consultation in order to support each other in fulfilling their respective mandates with respect to FMIs.

Co-operation with Domestic Regulators
There are some FMIs in Hong Kong under the supervision of the Securities and Futures Commission (SFC). To avoid regulatory overlap between the HKMA and the SFC, the Ordinance stipulates that the MA's power to designate does not cover CSSs operated by a recognised clearing house under the Securities and Futures Ordinance (SFO). But there are cases in which a recognised clearing house under the SFO may also be a participant of a designated CSS under the Ordinance.  To avoid the possibility of introducing any incompatible regulatory requirements, the HKMA and the SFC have entered into a memorandum of understanding (PDF File, 1.3MB) to set out the co-operative oversight arrangements between the two regulators, including the arrangements for mutual consultation.

Co-operation with Regulators outside Hong Kong

Continuous Linked Settlement System (CLS)
The MA designated and granted a certificate of finality to CLS under the Ordinance.  CLS Bank is regulated and supervised by the US Federal Reserve as an Edge corporation.  The HKMA participates in the co-operative oversight arrangements of the CLS and is a member of the CLS Oversight Committee (OC).  The co-operative oversight arrangement is specified in the Protocol for the Cooperative Oversight Arrangement of CLS signed by the central banks/monetary authorities overseeing the CLS, including the HKMA.  The HKMA will use the information obtained from the OC, among other things, to consider whether the CLS continues to meet the requirements under the Ordinance.

Cross-border Links Established with Financial Market Infrastructures outside Hong Kong
The HKMA cooperates with overseas authorities in the oversight of cross-border links established between FMIs in Hong Kong and those in overseas jurisdictions.  Appropriate co-operative oversight frameworks are established to assist authorities in both jurisdictions to discharge their oversight functions.

Accountability

Roles of the Financial Market Infrastructure Oversight Team
The oversight of the designated CSSs and the HKTR within the HKMA is performed by the Financial Market Infrastructure Oversight (FMIO) team (formerly known as Payment Systems Oversight team), which is segregated from the Financial Infrastructure Department (FID) of the HKMA to maintain checks and balances.  The FID is a department within the HKMA which is responsible for the operation and development of the financial infrastructures in Hong Kong.  There are effective “Chinese wall” arrangements to avoid any potential conflicts of interest.  All information obtained by the FMIO team during the oversight process is kept strictly confidential and solely used for oversight purposes.

Process Review Committee
The Process Review Committee (PRC) is composed of independent members (see membership list, PDF File, 104KB).  Its mandate is to review the processes and procedures adopted by the MA in making decisions relating to or affecting the designated systems in which the MA has a legal or beneficial interest.  This arrangement helps ensure that the same set of oversight standards is applied to all designated systems, whether or not the MA has an interest in them.  The PRC is required to submit annual reports and, if appropriate, special reports to the Financial Secretary of the Hong Kong Special Administrative Region (FS).  With the approval of the FS, its annual report is published in full on the HKMA website to promote transparency.

Process Review Committee Annual Report 2015-2016 (PDF File, 56KB)

Process Review Committee Annual Reports of Previous Years

Disclosure and Transparency
The FMIO team aims at transparency in its oversight of the FMIs as far as this is compatible with the security of the various FMIs under its purview and the legitimate confidentiality of data handled by or relevant to these FMIs.  Information regarding the oversight objectives, policies, the framework and the approach taken is available on the website and in various publications of the HKMA.  The information will be updated from time to time if required.  As mentioned above, the annual reports of the PRC, with the approval of the FS, are published in full on the HKMA website. 

Payment Systems and Stored Value Facilities Appeals Tribunal
Under section 34(1) of the Ordinance, the Payment Systems and Stored Value Facilities Appeals Tribunal (PSSVFAT) is established to hear appeals from persons who are aggrieved by a decision of the MA. The list of reviewable decisions is set out in Schedule 1 to the Ordinance.

The PSSVFAT is chaired by a judge and consists of a panel of independent members appointed by the Chief Executive of the Hong Kong Special Administrative Region. The Tribunal will only meet on a need basis. The Chairman and no fewer than two members chosen from the panel will form a Tribunal to hear appeals.

Assessment of FMIs against International Standards

The HKMA has committed to conduct assessments of the FMIs under its oversight against the PFMI. When assessing those FMIs which accept for clearing and settlement transfer orders denominated in foreign currencies (i.e. currencies other than the Hong Kong dollar), the HKMA will, in accordance with Responsibility E of the PFMI ("cooperation with other authorities"), consider the views of the central bank of issue of the relevant currency. However, the assessment report reflects solely the views of the HKMA, as the overseer of these systems.  

To date, the HKMA has conducted PFMI assessments of the following FMIs:

Payment systems:

Assessment of HKD CHATS:
Assessment report of HKD CHATS 2015 (PDF File, 173KB)

Assessment of RMB CHATS:
Assessment report of RMB CHATS 2014 (PDF File, 135KB)

Assessment of USD CHATS
Assessment report of USD CHATS 2016 (PDF File, 224KB)

Assessment of Euro CHATS:
Assessment report of Euro CHATS 2016 (PDF File, 462KB)

Central securities depository / Securities settlement system:

Assessment of CMU:
Assessment report of CMU 2016 (PDF File, 404KB)

Trade Repository:

Assessment of HKTR:
Assessment report of HKTR 2016 (PDF File, 429KB)

Disclosure framework for FMIs under HKMA's purview

Disclosure framework for HKD CHATS
The information is available on both the HKMA and Hong Kong Interbank Clearing Limited (HKICL) websites. The HKMA is the settlement institution and HKICL is the system operator of HKD CHATS.  

Disclosure framework for USD CHATS
The information is available on both The Hongkong and Shanghai Banking Corporation Limited (HSBC) and HKICL websites. HSBC is the settlement institution and HKICL is the system operator of USD CHATS. 

Disclosure framework for Euro CHATS
The information is available on both Standard Chartered Bank (Hong Kong) Limited (SCBHK) and HKICL websites. SCBHK is the settlement institution and HKICL is the system operator of Euro CHATS. 

Disclosure framework for RMB CHATS
The information is available on both Bank of China (Hong Kong) Limited (BOCHK) and HKICL websites. BOCHK is the settlement institution and HKICL is the system operator of RMB CHATS.

Disclosure framework for Central Moneymarkets Unit (CMU)
The information is available on the HKMA website. The HKMA is the system operator of CMU.

Disclosure framework for HKTR
The information is available on the HKTR website. The HKMA is the system operator of HKTR.

Last revision date: 9 March 2017
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