Journal of Financial Market Infrastructures

A little over five months ago, on April 16, 2012, new and improved regulatory standards were published: the twenty-four Principles for Financial Market Infrastructures of the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO). The new principles replace three existing sets of standards, with the oldest unchanged for more than a decade. This is therefore a truly important milestone.

It is therefore a pleasure for me to introduce the very first issue of The Journal of Financial Market Infrastructures. From this point on we have a new umbrella term - financial market infrastructures (abbreviated as FMIs) - for referring to terms that were previously often used in a loose way, such as "the payment system", "clearing and settlement" or "post-trade infrastructures".

This is a great service to thoseworking in the relevant fields: we nowhave a standard term that takes in all of these areas, which are, of course, deeply interconnected.Yet it also provides a challenge: while establishing the concept of an FMI is a great achievement, it is just the launch pad for further scientific and policy research.

The concept of a financial market infrastructure is defined as a set consisting of five elements. One element is on the payments side: the systemically important payment system. The other four are on the securities/derivatives side, and in post-trade order they are the trade repository, the central counterparty, the securities settlement system and the central securities depository. These five types of FMI collectively perform the crucial role of clearing and settlement of financial transactions economy-wide. They constitute the systemically important part of the financial infrastructure.

And that is precisely the main rationale for having the CPSS-IOSCO principles: they aim to contain systemic risk, or, more precisely, infrastructural systemic risk. This is the part of systemic risk where FMIs - if they do not meet the principles - could transmit shocks from one part of the financial sector to another or cause a shock through an internal failure. FMIs are of fundamental importance to the rest of the economy: pretty much every individual, company, public institution and financial institution uses FMIs on a daily basis. But, as with most infrastructures in daily life, such as electrical power or tap water, their users might not be fully aware of what happens "behind the scenes".

The new principles published in April are also a response to the Lehman Brothers crisis. Although FMIs weathered that turbulent period well, it was decided by overseers and securities regulators that increasing the resilience of FMIs, in case even more extreme scenarios were to materialize, was necessary. In the principles that cover financial risks such as credit risk and liquidity risk the bar has been raised. This is especially true for central counterparties (CCPs). A CCP that is clearing products with a more complex risk profile or one that is systemically important in multiple jurisdictions is now required to show that it could withstand the default of the two largest participants and their affiliates in extreme, but plausible, market conditions. This tougher requirement prepares CCPs for the mandatory central clearing of overthe- counter derivatives, as directed by the G20 meeting in Pittsburgh in 2009. In addition, FMIs should also conduct stress tests at regular intervals, with routine stress tests on a daily basis.

It is the aim of this new journal to promote and publish research in the field of financial market infrastructures. Through this endeavor we will strive to make a contribution to this new discipline. Although the body of literature is growing, it is still a largely under-researched area. I therefore encourage readers and their colleagues to submit full-length papers. The focus is of course on FMIs but papers on related fields such as retail payments and correspondent banking will also be considered. The journal is also intended to serve as a medium for discussion on topical issues in the sphere of FMIs. Subsequent issues of the journal will feature a "Forum" section, with space reserved for shorter papers on specific policy-relevant matters.

In this first issue of The Journal of Financial Market Infrastructures we have four papers that taken together already take in a great part of the scope of this journal. The first paper, "Auto-collateralization as a liquidity-saving mechanism" by Søren Korsgaard, analyzes the effects of introducing auto-collateralization in securities settlement systems. The author shows that the savings in terms of liquidity can be large, which means that banks can save on collateral usage without reintroducing liquidity risks.

The second paper in the issue, "Is collateral becoming scarce? Evidence for the euro area" by Anouk Levels and Jeannette Capel, takes the issue of collateral further by providing an answer to the question of whether good collateral will become scarce in coming years. The answer to this question is important because the provision of liquidity in a large number of FMIs is based on collateral-taking.

The issue's third paper, "(In)efficient investment in financial market infrastructure: the role of governance structures" by Thorsten V. Koeppl, takes a broad view by considering any type of FMI. He analyzes rigorously the driving factors behind the level of investment in financial infrastructure and its governance arrangements. In doing so he is able to show that his model can predict both efficient and inefficient investment in infrastructure depending on the ownership arrangements of the FMI and the allocation of costs.

The fourth paper in this issue, "Estimating the intraday liquidity risk of financial institutions: a Monte Carlo simulation approach" by Carlos León, studies intraday liquidity issues inside a large-value payment system. By using Monte Carlo simulations of payment transactions, the author contributes to the literature by modeling intraday liquidity risks with certain confidence levels. This allows for estimations of value-atrisk and expected shortfall for intraday liquidity. The results in this paper could be used to enhance the simulations needed for performing stress tests as mentioned in the new principles for FMIs.

On behalf of the editorial board I welcome you to this inaugural issue of The Journal of Financial Market Infrastructures. Hopefully, the journal will increase awareness of the benefits and risks of FMIs among a broader audience than before. I am looking forward to your contributions to further improve the efficiency and safety of financial market infrastructures worldwide.