Journal of Financial Market Infrastructures

Ron Berndsen
LCH and Tilburg University

Welcome to the Issue 3 of Volume 9 of The Journal of Financial Market Infrastructures. This issue contains two papers on real-time gross settlement (RTGS) systems related to liquidity use and liquidity risk, and two Forum papers on clearing: one related to the impact of the Covid-19 pandemic and one on the impact of Brexit.

In the first paper in the issue, “How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada’s large-value payment system”, Shaun Byck and Ronald Heijmans study so-called liquidity-saving mechanisms (LSMs) in the context of the current renewal of Canada’s Large Value Transfer System (LVTS). The new system is called Lynx and it went live in August 2021. According to the well-known tradeoff (see the authors’ Figure 2), liquidity use in an RTGS is very high but settlement risk (measured as a delay) is very low. To improve on that trade-off, an LSM should reduce the amount of liquidity that a participant needs to hold. The authors employ various LSMs that are available on the Financial Network Analysis platform, such as bypassing the strict first-come, first-served character of an RTGS, bilateral offsetting and multilateral offsetting. They find that combining the various LSMs is the most effective use of liquidity.

In the issue’s second paper, “Monitoring intraday liquidity risks in a real-time gross settlement system”, Neville Arjani, Fuchun Li and Leonard Sabetti construct an indicator for intraday liquidity risk within an RTGS. According to the abovementioned trade-off, liquidity use in an RTGS is very high, so monitoring intraday liquidity is crucial (see also earlier contributions in Volume 1, Issue 1 and Volume 2, Issue 3 of this journal). The intraday liquidity risk of an RTGS participant is taken in the paper to be the ratio of the remaining intraday liquidity needs to the remaining intraday liquidity sources of that participant. Based on historical payment data from the Canadian LVTS system, they test their indicator against various other methods. Their intraday liquidity risk indicator can also be used in “early warning mode”, helping the operator of the payment system detect potential liquidity shortages later on that day.

In our third paper, “Credit default swap market retrospective: observations from the 2008–9 financial crisis and the onset of the Covid-19 pandemic”, Stanislav Ivanov, Richard Jordan and Ian Springle investigate the impact of the initial Covid-19 shock on the credit default swap (CDS) market. They highlight the unprecedented moves in the prices of CDS contracts (conventionally measured as the credit spread in basis points) in March 2020 and compare them with those seen during the 2008–9 financial crisis. They also analyze the clearing volumes of the central clearing parties that clear European and North American CDSs. The comparison between the two crisis periods is interesting because the CDS clearing landscape changed fundamentally between them: from no central clearing during the 2008–9 financial crisis to mandatory central clearing now.

Our fourth and final paper, “Clearing away after Brexit?”, sees Dermot Turing considering the new post-Brexit legal landscape in which the clearing of securities and derivatives takes place, both inside and outside the EU. The EU’s legal framework for CCPs, called EMIR, has been renewed, and it came into force on January 1, 2020. Turing discusses the roles of the various EU institutions – the EU Commission, the European Central Bank and the European Securities and Markets Authority – and the importance of having direct access to cash liquidity in euros for non-EU CCPs, especially in times of crisis. Turing concludes with some possible scenarios for UK CCPs after Brexit has been fully implemented.

I hope you enjoy reading this issue of The Journal of Financial Market Infrastructures.