Principle 11, derived from the Principles for Financial Market Infrastructures (PFMI) by CPSS-IOSCO, stipulates that a central counterparty (CCP) should possess effective and transparent risk management procedures for its investment activities. While primarily intended for traditional finance, its applicability extends to institutional crypto operations that manage significant collateral or reserves. This principle ensures that any investments made with participant funds do not jeopardize the CCP’s financial soundness or its ability to meet its obligations.
Mechanism
The mechanism for adhering to Principle 11 involves establishing clear, conservative investment policies, strict limits, and robust governance structures for any funds held by a clearing entity. This includes mandates for low-risk, highly liquid investments, often restricted to regulated markets, complemented by regular stress testing and independent oversight. Investment decisions must prioritize the safety and liquidity of participant collateral over yield generation, thereby minimizing exposure to credit and market risks.
Methodology
The methodology for implementing Principle 11 in crypto-related clearing or custody services focuses on conservative investment strategies and comprehensive transparency. This requires publishing clear disclosures about asset management practices, engaging in regular independent audits of investment portfolios, and adhering to strict internal controls to prevent conflicts of interest. The strategic approach is designed to maintain confidence in the financial integrity of critical market infrastructure by protecting participant assets from undue investment risk.
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