Journal of Financial Market Infrastructures

Ron Berndsen
LCH and Tilburg University

Welcome to the fourth issue of Volume 10 of The Journal of Financial Market Infrastructures, which contains three research papers: one on large-value payment systems (LVPSs), one on central counterparties (CCPs) and one on central bank digital currency (CBDC).

In the first paper in the issue, “Transmission of cyber risk through the Canadian wholesale payment system”, Anneke Kosse and Zhentong Lu study the impact of a cyber attack scenario on one or more banks connected to the Canadian LVPS. They take as an example scenario an availability attack on a participant, which is essentially a freeze of its liquidity (ie, the attack is not on the whole LVPS itself). They include in their analysis the knock-on effects on other participants of the lower available liquidity in the system. Given the systemic risk effects of such scenarios, especially when large participants are involved, Kosse and Lu recommend implementing contingency measures that should enable an affected participant to employ a manual workaround to mitigate the impact on the system.

In the issue’s second paper, “Construction of hypothetical scenarios for central counterparty stress tests using vine copulas”, Aniket Bhanu and Vineet Virmani employ a statistical technique (the vine copula) to construct extreme-but-plausible hypothetical stress scenarios that a CCP can use to size its default fund. Vine copulas are used more widely in the financial sector and elsewhere for modeling such tail risks. The authors use data from the National Stock Exchange of India covering the high-volatility period during the Covid-19 pandemic (May 2019–April 2020). By definition, hypothetical stress scenarios need to go beyond what has happened in history. However, this raises the unavoidable issue for risk management of a CCP of when a hypothetical scenario can still be considered extreme but plausible or when it should be judged implausible. The benefit of constructing hypothetical scenarios using vine copulas is that it may provide a more objective (statistical) basis for the underlying simulations, as the authors show.

In our third and final paper, “Illustrative industry architecture to mitigate potential fragmentation across a central bank digital currency and commercial bank money”, Lee Braine and Shreepad Shukla consider a new form of money issued by a central bank: CBDC. Their motivation for writing the article comes from the risk of a potential fragmentation of the retail payments market when CBDC is introduced. Such fragmentation could occur if payments made out of retail deposits in commercial bank money were not interoperable with retail CBDC. To mitigate that risk, Braine and Shukla adopt one of the potential models for implementing CBDC proposed by the Bank of England, together with some fundamental high-level requirements. This so-called illustrative industry architecture extends the Bank of England’s platform model for CBDC. It achieves interoperability by introducing a common layer that connects both the central bank ledger and commercial bank ledgers to payment services providers (banks and payment institutions) via application programming interfaces. The authors also point out that the common layer could be operated by a financial market infrastructure (FMI). They illustrate the architecture for the sterling market and present their analysis on how the requirements could be met.

This issue marks the end of the first decade of The Journal of Financial Market Infrastructures (JFMI) and presents a good opportunity to look back. Figure 1 shows how the 152 articles we have published to date are distributed over the various types of FMIs and other topics. CCPs and LVPSs are the main categories, together comprising more than 60% of all papers. Of all academic journals globally, JFMI is the one that publishes the most papers on CCPs.1 A new category is crypto/blockchain, which represents the major innovations in the field through the lens of JFMI since 2017.

This issue not only brings to a close a decade of JFMI, but it is also my final issue as the journal’s editor-in-chief. In line with good corporate governance principles, I thought that after 10 years at the helm of the journal it was time for me to step down and make room for a new team. A lot of progress has been made since September 2012. Back then, the Principles for Financial Market Infrastructures had been newly published, but there was no peer-reviewed academic journal specializing in the field. Now, a decade later, it is very pleasing to see such a well-established journal.

The world of FMIs is small, so I hope my path will cross with the readers and authors of JFMI again in the future. In the meantime, please keep improving the resilience, efficiency and intelligence of FMIs worldwide through further analysis and discussion in this journal. I wish my successors – Manmohan, Jorge and Anneke – all the best with their new roles at JFMI.