Financial market infrastructure can be viewed as the plumbing or road system of the financial markets. The Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) define the concept as follows:

The term financial market infrastructure (FMI) refers to a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, and/or other financial transactions. Such systems typically establish a set of common rules and procedures for all participants, a technical infrastructure, and a specialised risk management framework appropriate to the risks they incur. They provide participants with centralised clearing, settlement, and recording of financial transactions (…) to allow for greater efficiency and reduced costs and risks. (…) Financial market infrastructure can promote increased transparency in particular markets. Some FMI elements are critical to helping central banks conduct monetary policy and maintain financial stability.

At any given time, the term systemically important financial market infrastructure applies in particular to payment systems that could catalyse or spread system-wide disruption.

Financial market infrastructure can be either publicly or privately owned. To some extent, different criteria may apply to different types of financial market infrastructure. Securities depositories that own and operate securities settlement and registration systems are supervised entities.

Inadequate security and efficacy in the operation of systemically important financial market infrastructure could cause a chain reaction between participants and markets. Effective and reliable risk management of such financial market infrastructure is extremely important, as shocks that occur to infrastructure operations or related activities could have severe societal repercussions. In modern economies and financial markets, it is therefore considered appropriate to subject systemically important FMI to stringent requirements as regards professional work habits and operational set-up, and to entrust the authorities with an active supervisory role, with the particular aim of minimising potential systemic risk.

According to the PFMI, interbank systems and securities settlement systems should be categorised as systemically important financial market infrastructure. The systems satisfy the general requirements for systemic importance, both with reference to Icelandic law and in terms of turnover, transaction volume, substitutability, etc.

The two-component interbank system is the largest and most important payment system in Iceland. All financial institutions must be interbank system participants, either directly or indirectly, in order to function in the Icelandic financial market. Final settlement of securities transactions (i.e., financial transfers in securities settlement systems) takes place in the interbank system. The Central Bank uses the interbank system in monetary policy conduct, as a channel for interest rate decisions and, if applicable, loans of last resort.

The Financial Stability Committee has confirmed the Central Bank’s interbank system and the Nasdaq CSD SE securities depository as systemically important financial market infrastructure.

Systemically important financial market infrastructure is generally recognised and is notified as such to the EFTA Surveillance Authority (ESA) pursuant to the Act on the Security of Transfer Orders in Payment Systems and Securities Settlement Systems, no. 90/1999. On the website of the European Commission is a list of all financial market infrastructure in the European Economic Area that is recognised under the Settlement Finality Directive 98/26/EC, which was incorporated into Icelandic law with Act no. 90/1999.

The aim is for systemically important payment and settlement systems to comply with both international and domestic requirements. Chief among these are the BIS/IOSCO Core Principles for Financial Market Infrastructures (PFMI), European Union law and directives on payment intermediation, securities settlement, and the Icelandic regulatory framework. The systems in question must be transparent, efficient, and secure, and their structure shall take account of the fact that they are intended to promote financial stability. In accordance with foreign models, the Central Bank of Iceland has important roles to play in promoting this:

• Policy-making role – formulation of policy related to the systems development.;
• Regulatory role – preparation and adoption of rules for the systems.;
• Catalyst role – promotion of market solutions and assumption of initiative in matters related to payment and settlement systems.;
• Operational role – operation of the RTGS system and execution of settlement in the netting- and securities settlement systems.;
• Oversight role – oversight of the systems in accordance with international standards.

 

The criteria laid down in the BIS/IOSCO Core Principles for Financial Market Infrastructures (PFMI) shall form the basis of the Central Bank’s oversight and operation of systemically important financial market infrastructure in Iceland.

Based on the system administrator’s self-assessment, the Financial Market Infrastructure Oversight Unit of the Central Bank’s Financial Stability Department assesses the interbank systems’ compliance with the Core Principles, assigning one of the following categories to each:

• Observed.
• Broadly observed.
• Partly observed.
• Not observed.
• Not applicable.

 

The PFMI Core Principles

In the interest of cybersecurity, the PFMI Core Principles have been described in the Guidance on cyber resilience for financial market infrastructures.