Scope: This article is a practitioner-focused, oversight-oriented guide to PFMI Principles 11,12,13,14. Each principle includes a short PFMI excerpt, an explanation, expanded jurisdictional practice (EU, UK, Singapore, Australia, Canada), and three added sections: How this principle fails in real life, What good looks like, and How FMIs usually misunderstand this principle.
Short excerpts are concise summaries; consult the official BIS/CPMI-IOSCO PFMI text for verbatim wording.
11) Principle 11 — Central Securities Depositories (CSDs)
What this means
Principle 11 sets minimum expectations for CSDs: reliable record-keeping, robust reconciliation, strong access controls, and processes that ensure the integrity of securities holdings and movements.
Regulatory practice — concrete & important
- EU (CSDR): The EU enforces dematerialization/immobilization, mandatory reconciliation cycles (often T+0/T+1 depending on market), segregation rules for participants, mandatory internal and external audit trails, and legal requirements for record ownership. CSDR also prescribes standards for operational resilience and settlement discipline.
- UK (BoE / FCA): The UK expects CSDs to implement automated reconciliation, strong authorisation controls (MFA, role-based access), and forensic logs; supervisors request evidence of reconciliation exceptions and remediation timelines.
- Singapore (MAS): MAS mandates daily reconciliation with issuer registers where feasible, periodic custody control audits, and explicit client segregation rules. MAS also tests forensic traceability during onsite reviews.
- Canada (Bank of Canada): The Bank focuses on operational capacity, demands proof of segregation and safekeeping, and requires evidence that CSDs can recover accurate positions after an incident (recovery drills and data restoration tests).
How this principle fails in real life
What good looks like
- Fully dematerialized records with automated, intraday reconciliation and exception workflows.
- Independent custody audits and immutable logs enabling rapid forensic reconstruction.
- Clear legal title framework and published operational SLAs for corporate actions and record updates.
How FMIs usually misunderstand this principle
Typical misunderstanding: Treating dematerialization as a technical switch only. In reality, asset integrity is legal, operational and procedural — not just a database feature.
12) Principle 12 — Exchange-of-Value Settlement (DvP / PvP)
What this means
Principle 12 requires mechanisms that ensure simultaneous exchange of value — securities for cash (DvP) or payment-versus-payment for FX (PvP) — eliminating principal risk to participants.
Regulatory practice — concrete & important
- EU (T2S / TARGET2-Securities): They enforce settlement in central bank money for many market segments, implement DvP models with strict timestamping and atomic settlement logic, and require contingency procedures for failed DvP batches.
- UK (BoE): For PvP or linked-settlement arrangements, the BoE requires governance over cut-offs, defined linkage protocols and robust liquidity management to ensure settlement simultaneity, especially in cross-currency flows.
- Singapore (MAS): MAS mandates DvP for securities-clearing arrangements, enforces tight matching rules, and requires documented fallback settlement procedures (alternative pathways or hold-and-match rules during outages).
- Australia (RBA): RBA oversight includes validating DvP atomicity tests, measuring settlement queuing, and ensuring liquidity coverage for linked payments to avoid deadlocks.
How this principle fails in real life
What good looks like
- Atomic settlement logic with centralized timestamping and clear irrevocability points.
- Validated fallback DvP/PvP methods tested under production volumes and cross-border time-zone effects.
- Operational playbooks to resolve partial failures within defined SLAs.
How FMIs usually misunderstand this principle
Typical misunderstanding: Assuming DvP is solved by matching alone. The true requirement includes legal finality, liquidity provisioning, and operational fallbacks — matching is necessary but not sufficient.
13) Principle 13 — Participant Default Rules & Procedures
What this means
Principle 13 requires a documented, tested default management framework: detection, resource tapping (margin, default fund), auction/porting, loss allocation, and communication with stakeholders and authorities.
Regulatory practice — concrete & important
- UK (Bank of England): The BoE requires detailed default playbooks, clear escalation matrices, and expects annual default simulation exercises with Board involvement and post-exercise remediation plans.
- EU (ESMA): ESMA demands transparent default waterfall disclosures, routine default scenario testing, and rule revisions where responsibilities or waterfall triggers are ambiguous.
- Australia (RBA): The RBA expects FMIs to test multi-default and market-wide stress scenarios, confirm availability of auction participants and pre-positioned resources, and evidence rapid operational readiness.
How this principle fails in real life
What good looks like
- Documented default playbooks with clear roles, time-bound steps and tested operational runbooks.
- Regular default simulations including multi-default and cross-market stress tests with Board oversight.
- Pre-identified liquidity plans and porting counterparts to enable rapid client protection.
How FMIs usually misunderstand this principle
Typical misunderstanding: Treating default rules as a legal appendix. In practice, they must be operational procedures embedded into systems, staffing plans, liquidity arrangements and participant communications.
14) Principle 14 — Segregation & Portability (CCP-specific)
What this means
Principle 14 ensures client assets and positions are protected from a participant’s insolvency and can be transferred to another clearing member without material disruption or value loss.
Regulatory practice — concrete & important
- EU (EMIR): EMIR requires legal segregation and portability arrangements, disclosure of account structures, and periodic portability feasibility testing. Regulators require legal opinions confirming portability enforceability in relevant jurisdictions.
- Singapore (MAS): MAS focuses on both legal and operational portability: legal segregation, tested operational porting processes (including IT scripts and reconciliation), and contingency funding for client position transfers.
- Canada (Bank of Canada): The Bank assesses whether porting can be achieved under extreme market conditions and requires proof of fallback arrangements where porting is infeasible.
How this principle fails in real life
What good looks like
- Legal segregation confirmed across jurisdictions, plus tested operational scripts that can port large numbers of positions within hours.
- Pre-arranged candidate receiving clearing members and liquidity arrangements to accept ported portfolios.
- Documented communication templates and client notification processes to reduce market uncertainty.
How FMIs usually misunderstand this principle
Typical misunderstanding: Conflating segregation with portability. Segregation is necessary but not sufficient — portability requires legal enforceability, operational readiness, and liquidity/credit capacity at receiving members.
practical scenarios & supervisor questions (11,12,13,14)
Supervisor-style stress scenarios (selected)
- CSD data corruption during corporate action window causing massive position mismatches.
- Cross-border DvP link failure producing partial settlements across currencies.
- Simultaneous default of two clearing members with high client portfolios and no immediate receiving member capability.
What supervisors will ask on-site
- “Show your last reconciliation exception log and remediation record.”
- “Walk me through an end-to-end porting test: timelines, scripts, reconciliation and communication outputs.”
- “Provide the legal opinions supporting portability and finality across major jurisdictions.”
- “Show evidence of the last default simulation and Board minutes discussing gaps and remediation.”
Key takeaways
- Principles 11–14 are the safeguards for asset integrity, simultaneous exchange-of-value, and continuity of client positions during stress.
- Regulators focus on demonstrable testing — reconciliation cycles, DvP atomicity tests, default simulations and portability drills.
- Common failures are operational or legal (not conceptual): missing scripts, stale legal opinions, or untested porting paths.