The Investment Company Institute, a US mutual fund trade body, has called for the establishment of minimum standards for the business continuity capabilities of the clearing banks and improved communication between industry participants to counter vulnerabilities in the government securities market.
In a recent comment letter to the SEC and the Federal Reserve Board, the Institute supports making improvements to the existing settlement system, but believes that the creation of a central utility to clear, settle, and finance US government securities is unnecessary.
The comments are made in response to an interagency white paper on structural change in the settlement of government securites, which posited the creation of a central utility to conduct settlement. The Fed paper identified possible structural approaches for a utility and possible evaluation criteria for assessing the approaches.
The Institute opposes the creation of such a body on the grounds that it could "adversely impact the operational risk in the system by creating a single point of failure; eliminate or substantially reduce the innovation and efficiency present in the current system; entail a costly, time-consuming, and untested process; and adversely impact liquidity".
Instead, the ICI recommends the establishment of minimum standards for the business continuity capabilities of the clearing banks and improved co-ordination between banks. These capabilities should be subject to periodic regulatory stress-testing, suggests the ICI, including mandatory periodic testing with all market participants.
The comment letter also suggests improving communication channels and broadening the network of market participants that are communicated with during times of crisis.