The Bank of Canada’s Risk-Management Standards for Designated FMIs

Find material related to the Bank’s standards for designated FMIs and the applicability of each standard to securities settlement systems, central counterparties and payments systems.


The Principles for Financial Market Infrastructures (PFMIs) are international standards related to the risk-management, efficiency and transparency of systemically important FMIs. They were introduced and published in April 2012 by:

The Bank of Canada adopted the PFMIs into its risk-management standards for designated systemically important FMIs (systemic FMIs) the same year. The designated systemic FMI have been expected to observe all the principles since December 31, 2016.

The Bank also developed risk-management standards for prominent payment systems that are based on the PFMIs, but are designed to be proportional to a level of risk that is relatively less than in systemic FMIs.

The Bank’s standards for systemic FMIs

In order to satisfy itself that a systemic FMI is adequately controlling its risk, the Bank will consider the FMI’s risk­management practices relative to the Bank’s risk­-management standards, which fully incorporate the Principles and Key Considerations articulated in the PFMIs. The PFMIs also contain explanatory notes that describe how an FMI may implement particular aspects of the standards.

The Bank’s risk­-management standards are summarized below. The associated key considerations and explanatory notes are found in the PFMIs.

The Bank has developed supplementary guidance in coordination with the Canadian Securities Administrators to provide additional context and clarity on certain aspects of these new standards in the Canadian context. This supplementary guidance is intended to support implementation of the PFMI. It does not modify or replace any element of the Principles.

Supplementary Policy Guidance for the Canadian Context

The Bank is developing supplementary guidance in coordination with the Canadian Securities Administrators to provide additional context and clarity on certain aspects of these new standards in the Canadian context. These authorities have also adopted the PFMIs.

Standard 1: Legal Basis

The Bank expects an FMI to have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.


Standard 2: Governance

An FMI is expected to have governance arrangements that are clear and transparent; promote the safety and efficiency of the FMI; and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.

Additional guidance:


Standard 3: Framework for the Comprehensive Management of Risks

An FMI is expected to have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.


Standard 4: Credit Risk

An FMI is expected to effectively measure, monitor and manage its credit exposures to participants and those arising from its payment clearing and settlement processes. To meet this expectation, an FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a central counterparty (CCP) that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions, is expected to 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 are expected to 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.


Standard 5: Collateral

An FMI that requires collateral to manage its or its participants’ credit exposure is expected to accept collateral with low credit, liquidity, and market risks. The Bank also expects an FMI to set and enforce appropriately conservative haircuts and concentration limits.

Additional guidance:


Standard 6: Margin

A CCP is expected to cover its credit exposures to its participants for all products through an effective margin system that is risk-based and reviewed regularly.


Standard 7: Liquidity Risk

An FMI is expected to effectively measure, monitor and manage its liquidity risk. This entails maintaining 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 FMI in extreme but plausible market conditions.

Additional guidance:


Standard 8: Settlement Finality

An FMI is expected to provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.


Standard 9: Money Settlements

An FMI is expected to conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimize and strictly control the credit and liquidity risks arising from the use of commercial bank money.


Standard 10: Physical Deliveries

An FMI is expected to clearly state its obligations with respect to the delivery of physical instruments or commodities and identify, monitor, and manage the risks associated with such physical deliveries.


Standard 11: Central Securities Depositories

A central securities depository (CSD) is expected to have appropriate rules and procedures to help ensure the integrity of securities issues and minimize and manage the risks associated with the safekeeping and transfer of securities. Securities should be held in an immobilized or dematerialized form for their transfer by book entry.


Standard 12: Exchange-of-Value Settlement Systems

If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it is expected to eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.


Standard 13: Participant-Default Rules and Procedures

An FMI is expected to have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.


Standard 14: Segregation and Portability

A CCP is expected to have rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to the CCP with respect to those positions.


Standard 15: General Business Risk

An FMI is expected to 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 materialize. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.

Additional guidance:


Standard 16: Custody and Investment Risk

An FMI is expected to safeguard its own and its participants’ assets and minimize the risk of loss on, and delay in access to, these assets. An FMI’s investments should be in instruments with minimal credit, market and liquidity risks.

Additional guidance:


Standard 17: Operational Risk

An FMI is expected to 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. This entails designing systems to ensure a high degree of security and operational reliability, while delivering adequate, scalable capacity. Business-continuity management should aim for timely recovery of operations and fulfillment of the FMI’s obligations, including in the event of a wide-scale or major disruption.


Standard 18: Access and Participation Requirements

An FMI is expected to have objective, risk-based and publicly disclosed criteria for participation, which permit fair and open access.


Standard 19: Tiered Participation Arrangements

An FMI is expected to identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.


Standard 20: FMI Links

An FMI that establishes a link with one or more FMIs is expected to identify, monitor, and manage link-related risks.


Standard 21: Efficiency and Effectiveness

An FMI is expected to be efficient and effective in meeting the requirements of its participants and the markets it serves.


Standard 22: Communication Procedures and Standards

An FMI is expected to use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment clearing and settlement.


Standard 23: Disclosure of Rules, Key Procedures and Market Data

An FMI is expected to have clear and comprehensive rules and procedures and to provide sufficient information to enable participants to have an accurate understanding of the risks, fees and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed.

Additional guidance:


Application of the Bank’s standards to different types of systemic FMIs

Certain standards are applicable only to FMIs that operate particular types of systems, as outlined in the following table.

Securities settlement systems Central counterparties Payment systems
Std. 1

Std. 2

Std. 3

Std. 4

Std. 5

Std. 6

Std. 7

Std. 8

Std. 9

Std. 10

Std. 11

✓*

Std. 12

Std. 13

Std. 14

Std. 15

Std. 16

Std. 17

Std. 18

Std. 19

Std. 20

Std. 21

Std. 22

Std. 23

* Standard 11 related to central securities depositories is only applicable to securities settlement systems that also operate as a central securities depository.

The Bank’s standards for prominent payment systems

The Bank also developed criteria for identifying prominent payment systems for designation and risk-management standards for these systems. The risk-management standards are based on the PFMIs, but are designed to be proportional to a level of risk that is relatively less than in systemic FMIs.