Journal of Financial Market Infrastructures

Welcome to the third issue of Volume 7 of The Journal of Financial Market Infrastructures, which contains three papers.

In our first paper, “What kind of payments settle in a real-time gross settlement system? The case of Norges Bank’s settlement system (NBO)”, Mats Bay Fevolden and Lyndsie Smith explore a real-time gross settlement system in the context of Norway’s financial market infrastructures landscape. The authors, who are employed by Norges Bank, aim to discover the underlying purpose of payments that settle in the Norges Banks Oppgjørssystem (NBO) on a daily basis. In doing so, they shed light on the interdependencies (eg, the netting effect) between NBO and its connected systems, such as the Norwegian retail payment system, the central securities depository, CLS and three central counterparties (CCPs). The authors are able to classify 92% of the payments value settled in NBO by incorporating institutional knowledge, market conventions and matching algorithms, such as the well-known Furfine algorithm and external sources.

“Who pays? Who gains? Central counterparty resource provision in the post- Pittsburgh world”, the issue’s second paper, focuses on the fundamental question of what service CCPs actually provide in the post-Pittsburgh world, where central clearing is mandatory. Fernando Cerezetti, Jorge Cruz Lopez, Mark Manning and David Murphy argue that CCPs provide a combination of a “club good” (to the clearing members) and a “public good” (financial stability). They analyze three plausible but extreme CCP operating models and conclude that all models come with specific disadvantages. They try to overcome these drawbacks by providing a new perspective on central clearing, analyzing the various subfunctions of a CCP, and suggesting a tailor-made governance for subfunctions depending on the orientation toward either club good or public good.

Oluwasegun Bewaji’s “Procyclicality and risk-based access: valuing the embedded credit default swap of employing bilateral credit limits in financial market infrastructures”, our third and final paper, investigates the procyclicality aspects of one of the two intraday credit provision modes of Canada’s large-value transfer system (LVTS): Tranche 2. In Tranche 2, payments are guided by bilateral credit limits set by participating banks, which are partly collateralized. In addition, there is a loss-sharing arrangement. Procyclicality is brought into the analysis by comparing Tranche 2 to an implicit credit default swap (CDS) between LVTS participants. The author provides numerical estimates of a daily valuation of that CDS and discusses its implications.

Ron Berndsen
LCH and Tilburg University