CMI in Focus: Corporate Governance for Financial Market Infrastructures

A far more careful examination of corporate governance practices has become relevant as a result of recent financial crises and the defaults associated with them. Corporate scandals that have impacted companies all over the world have led to the re-examination of the role of corporate governance in their day-to-day operations. Moreover, expectations of the business world are heightened; society is demanding more responsiveness and certainly more communication to stakeholders as to how enterprises will be successful members of society beyond the next three-month reporting period. Many challenges have to be met as directors oversee senior management. And this is all the more true for infrastructure businesses.

The purpose of good corporate governance practice is to facilitate effective, entrepreneurial and prudent management that can deliver long-term success for the company. Poor corporate governance, as a result of dysfunctional boards, has been highlighted as one of the main reasons for the collapse of many companies such as Enron, Arthur Andersen and Lehman Brothers, amongst others. In the case of financial market infrastructures (FMIs), robust and transparent corporate governance arrangements are critical given the systemic role that they play in the marketplace and the economy.

The Organisation of Economic Co-operation and Development (OECD, OECD Principles of Corporate Governance, 2004) defines corporate governance as follows: "Procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making".

In recognition of the importance of FMIs to the financial markets and the increasing relevance of good corporate governance arrangements to business, the 2012 CPSS IOSCO Principles for Financial Market Infrastructures (PFMIs) explicitly incorporate various principles in respect of governance as part of regulators' oversight responsibilities. Principle 2: Governance, which stipulates that "An FMI should 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." And Principle 3: Framework for the comprehensive management of risks state that "An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational and other risks".

Two more principles refer to transparency, which is directly related to good corporate governance practices. Principle 23: Disclosure of Rules, key procedures and market data, which states that, “an FMI should have comprehensive rules and procedures and should 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.” Additionally Principle 24: Disclosure of market data by trade repositories specifies that, “a Trade Repository (TR) should provide timely and accurate date to relevant authorities and the public in line with their respective needs.”

In line with the recommendations included in CPSS IOSCO’s PFMIs, as well as recent demand from investors and regulators to see more transparent financial organisations and enhanced governance arrangements, Thomas Murray Data Services has included ‘Governance and Transparency’ (G&T) risk in its assessments of central securities depositories (CSDs) and central counterparties (CCPs).Governance and Transparency (G&T) Risk is defined as, “the risk that a participant may incur a loss arising from the FMI not acting according to its rules and regulations or not providing full and accurate information on its activities. This includes a loss caused by poor management decisions as a result of inadequate governance arrangements, management performance and/or user group arrangements.”

TM Criteria to Assess Governance and Transparency Risk

This risk is assessed based on six criteria which encompass board arrangements, establishment of risk management, disclosure of corporate information, management arrangements, user group arrangements and disclosure of statistical information.

Board arrangements

Board arrangements are critical for good governance practices. In the case of CSDs and other FMIs, the structure and composition of the board plays a key role in ensuring that as a utility entity, they are protecting the interests of varied stakeholders such as shareholders, and participants, (which may have conflicting interests), regulators, end investors, etc. Also, board arrangements are fundamental to prevent FMIs abusing any monopoly position they may enjoy by, for instance, charging exorbitant fees or cutting down on internal controls that may expose themselves or their participants to additional risk. In addition to having a balanced composition in terms of stakeholders, boards should also include independent directors that have deep knowledge of the industry but have no interest in the FMI. Although there are recommendations in national corporate governance codes, there are no international standards on what proportion of the board should be comprised of independent directors, nor what an agreed standard of ‘independent’ is. In addition, having a couple of executive directors is also desirable given that they are involved in the day-to-day operations of the FMI. Having board members specialised in different subjects also enhances the discussions and the effectiveness of the decisions in the best interest of the company and the market as a whole.

In the case of USA’s DTCC, there was a project to improve their corporate governance policies a couple of years ago. As part of the project, they split the role of the CEO and chairman of the board. In addition, there are now three independent members out of 19. The majority of the Board members are representatives of financial institutions which are users of DTCC’s services (“participant directors”). The executive chairman of the board and the CEO are, ex officio, members of the Board (“management directors”); from time to time other members of management may be elected as management directors.

The chart below represents the average rating on board arrangements for CSDs globally by region:

The above chart shows that the standards in terms of Board arrangements in the EU, Asia Pacific and Americas regions are at a similar level, Eurasia (CIS countries) and Africa and Middle East lag behind. This is perhaps because their capital markets are generally newer and still in developing and therefore usually lack the documented policies in place for governance arrangements. Also the frequency of board meetings is less than desirable and the board is composed predominantly by representatives from shareholders rather than a more inclusive approach. The absence of risk committees is also the norm for the majority of CSDs in these regions. However, as the chart shows, all regions are, in average, below the A+ rating, which demonstrates that changes are necessary in order to meet best market practice and international standards in this area. The use of independent directors appears to be uncommon.

Establishment of Risk Management

The second criteria used to assess G&T Risk is related to the establishment of a sound and robust risk-management framework, and the processes to determine the risk appetite, endorse the strategic direction as a function of it and regularly review by the board the risk profile adopted. Also, it is important to know whether there is a risk management and/or audit committee at the board level to discuss these distinct risk issues and their management. The board is responsible for ensuring that the management is properly determining the nature and extent of the risks the company is willing to take and that sound risk management and internal control systems are maintained.

The risk management approach by FMIs varies considerably from entity to entity. Best market practice determines that the board has full access to all material risk management documentation and analysis, including access to the external auditor report of the efficacy of the risk management function. This exchange of views and information directly with the statutory auditor provides for greater transparency and more effective management of risk. It is incumbent upon the FMI to have an established, documented risk management framework encapsulating all areas of business, which is reviewed on a quarterly basis. Board risk management must be holistic, and cover business lines that might not post evident risk.

An example of sound practice and structures is Clearstream Banking Frankfurt, where there is an Audit, Compliance and Risk Management Committee (ACRC) that covers all areas where risk might occur. The ACRC reports directly to the Board of Directors. It is composed of Clearstream International board members and of external members appointed by the Board. The ACRC is heavily involved in the establishment and monitoring of the risk management framework as well as audit, financial management and accounting functions. All potential issues identified by the internal audit department are reported to the Executive Board and ACRC on a regular basis.

The chart below shows the average rating on risk management arrangements by region:

The CSDs (central securities despositories) in the EU clearly appear to have more sound and robust risk management practices. In addition, it is more frequent than it is in other regions that the auditor reports directly to the board and communicates on the effectiveness of the risk management approach. Their use of committees is also more common and the scope of the committees wider. Africa, the Middle East and especially the Eurasia, region appear to have less developed risk management frameworks. Many of these CSDs have not distinguished between internal audit functions and proper risk management. However, the CPSS IOSCO PFMIs does provide minimum standards for them to incorporate risk management frameworks within their procedures and controls, so significant changes are expected in this area as the principles become more widely understood and accepted within the local regulatory frameworks.

Management arrangements

Management arrangements are not related to the quality of the FMI’s staff, but rather to the roles and responsibilities of the FMI’s management and the mechanisms in place to assess management performance. This criterion analyses how often and on what basis management performance is reviewed, whether their roles and objectives are clearly specified and the measures in place to reward strong (or punish weak) performance.

In our opinion, Malaysia’s MyClear has an exemplary system for assessing management performance that includes descriptions of the necessary/minimum qualifications or work experience required for every position. Manager KPIs (key performance indicators) and performance standards are reviewed by MyClear’s Management Committee and by the Board on a semi-annual basis. In addition, the assessments of management’s performance against the agreed KPIs are conducted twice a year (mid-year and year-end). In addition to the KPIs, staff members are assessed based on core leadership and technical competencies demonstrated throughout the year.

The chart below provides an indication of the assessment of management performance by CSDs:

The Americas, and particularly the EU regions (both with an average rating above the A+ mark), appear to have more clearly defined job descriptions, management objectives and an overall stronger staff appraisal process. Asia Pacific and Eurasia also have documented procedures in terms of job responsibilities and objectives although the staff appraisal process seems to be less formal and less frequently applied. Eurasia and Asia Pacific, in turn, appear to have a relatively strong framework for management appraisal and documented job descriptions and objectives. In Africa and the Middle East, there is generally a formally documented system for performance assessment process although the rewards and/or punishment to calculate strong/weak performance does not appear to be based on the performance of the individual against set objectives, department and company.

User Group Arrangements

This criterion looks at the scope and authority that these user groups may have in the decision making process of the FMI. The role of FMIs as market utilities mean that they should work with market participants to ensure that any developments are made in accordance with market need and implemented efficiently. Although most FMIs receive suggestions and recommendations by informal communications by a number of means (letter, email, regular meeting with their account manager, etc.), having a centralised mechanism to review and manage developments is often more effective. Through such ‘user’ or ‘working’ groups, participants are able to jointly represent their views and requirements, helping the FMI to prioritise and optimise new developments for the benefit of the market. Furthermore, having separate groups to discuss by topic is desirable and should include representatives from their participants who are experts in the relevant topics (i.e fees and budget, technical changes, new services, risk management policies, etc).

Perhaps because of the legacy of having competing CSDs in the market, Russia’s National Settlement Depository (NSD) has a very robust user group structure. NSD has four user groups: CSD Service Users Committee, the Quality and Risks Committee, the Settlement Depository Activity and Tariffs Committee, and the Cooperation with Registrars and Depositories Committee. Employees and other experts are invited to meetings of the user groups. The committees are advisory bodies that make recommendations to NSD. In addition to these user groups, NSD has periodic meetings and seminars for its participants. These are organised by the Client Service Department.

The chart below shows the average rating of the CSDs user group arrangements globally by region:

Asia Pacific, EU and Eurasia appear to have in place user groups to discuss relevant changes and developments at the CSD, although its use appears to be less extensive than desirable. Not all CSDs have separate groups to discuss items such as IT, finance, etc separately which also include experts from the relevant topics in each. In the Americas and Middle East and Africa the use of formal participant groups appear to be less common perhaps because the size of the markets and the culture dictates that more one-to-one meetings take place rather than through user groups.


There are two criteria related to transparency for FMIs: disclosure of corporate information and disclosure of statistical information. Disclosure of corporate information is extremely relevant for financial market infrastructures. Amongst other things, foreign and domestic investors that have a position in the market must use the local infrastructure in order to trade, clear and settle securities and other instruments. Given that the records of the positions and the securities are held at the CSD or securities settlement systems (SSS), having sufficient information to assess the risks that they are exposed to is relevant. In the case of CCPs, having sufficient information to assess the clearing member’s exposure to the CCP is essential. Therefore, FMIs should disclose sufficient information to members/participants in terms of risk policies, financial data and adherence to international market practices and standards.

Transparency in this area is measured based upon the FMI’s disclosure policy, the quality of information, access to information, information range, and system disruption (i.e. on whether and how quickly the FMI notifies participants of system disruptions).

With respect to this criterion, Chile’s Deposito Central de Valores (DCV) provides comprehensive corporate information on its website, including audited financial statements, laws and regulations that impact the capital markets, contracts, operational guides and handbooks, fees, AGC questionnaires, etc. Disclosure of statistical information, although of a different importance, also helps members and investors benchmark their performance vs. their peers. It also permits assessments of whether the market performance is adequate (e.g. settlement rate). The assessment of this criterion is based on the scope and accessibility of FMI and market performance data and the FMI’s data mining capabilities (i.e. the system’s ability to extract historical data).

Turkey’s Merkezi Kayit Kurulusu A.S. (MKK) provides the following regular reports and data via the e-MKK Information portal member to users: Domestic/Foreign Investors Report, Actual Shares Outstanding Report, Actual Shares Outstanding Report with Time Intervals, Monthly Statistical Data, Annual Statistical Data, Funds Management Fees and Investor Risk Appetite Index (RISE).

The relevant charts for transparency are outlined below:

According to the information available, the CSDs in the EU region are far more transparent in terms of disclosure of corporate information closely followed by Asia Pacific and the Americas. Perhaps given the legacy of the Soviet Union and the relative novelty of their capital markets, the CSDs in the Eurasia region, on average, appear to disclose less information than other regions. There is very limited information available in English or their local languages through their websites in terms of fees, news related to changes, AGC questionnaire, annual reports, financial statements, etc. This limits the availability of investors to assess the strength of the local infrastructure entities to maintain or settle securities.

In terms of disclosure of statistics, the Americas region appears to provide more statistical information than their peers in other regions. Although limited information is available in terms of their systems’ data mining capabilities, their settlement platforms, in general, appear to provide decent statistics for investors and market participants to gauge the overall performance of the market. However, most regions appear to have similar levels of disclosure as Eurasia, the EU and Asia Pacific all maintain a rating around the A level. The Middles East and Africa region overall is just above the BBB mark. This suggests that more effort is required from the market infrastructure entities to provide an adequate level of information and more system development is required to meet international standards in this area.


Governance arrangements vary widely across markets globally. Some FMIs have implemented adequate or high standards, such as the induction of independent directors on the board, the use of user groups to make significant decisions, the implementation of sound and robust risk management procedures, high standards for management appraisal, as well as a significant disclosure framework. However, much remains to be done to standardise practices for FMIs, and to take infrastructures forward to meet the demands of best business practice.

The EU region overall appears to have higher levels of corporate governance and transparency standards. The risk management framework of the CSDs in that region appears to be significantly stronger than all the other regions. In other areas such as board arrangements, management performance, user group arrangements and disclosure of corporate information, they also appear to be slightly ahead than other regions. This is likely due to pressure from regulators and shareholders towards greater transparency and good corporate governance. The Eurasia and Middle East and Africa regions appear to lag behind their peers in most criteria. Although the reasons for this vary, the majority of CSDs and their capital markets are less developed than in other regions. Governance arrangements, their risk management framework and their levels of transparency therefore are expected to improve as the markets develop and interfaces and links with other markets and regions expand.

Although corporate governance arrangements have improved in past years as more emphasis has rightly been placed on this topic, either FMIs will of their own volition move forward or else additional regulation may be required to improve the quality of these arrangements. Transparency is also essential in the development of the capital markets, and should therefore be enhanced and encouraged throughout the industry. It makes for better business, and FMIs have an important role to play in restoring confidence in the financial system. CPSS-IOSCO provides a framework for FMIs to improve their governance and transparency arrangements, however, these are currently only recommendations and therefore not mandatory to be implemented.

When implementing the CPSS-IOSCO PFMIs in local legislation or regulation, the authorities should give adequate importance to the governance and transparency items included in them. This will assure best market practice in board arrangements and related governance and transparency matters, in order to protect the interests of investors and the integrity of the marketplace as a whole.

For further information contact:

Ana Giraldo
Associate Director, Americas & Eurasia
Thomas Murray Data Services
+44 (0) 20 8600 2300

Jim Micklethwaite
Director, Capital Markets
Thomas Murray Data Services
+44 (0) 20 8600 2309

Tags: FMICorporate GovernanceCPSS-IOSCOCSDCMI in Focus