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Anne-Caroline Hüser, Caterina Lepore, and Luitgard Veraart
We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis. During this crisis, the repo network becomes more connected, with most institutions relying on existing trade relationships to transact. There are however significant changes in the repo volumes and spreads during the stress relative to normal times. We find a significant increase in volumes traded in the cleared segment of the market. This reflects a preference for dealers and banks to transact in the cleared rather than the bilateral segment. Funding decreases towards non-banks, only increasing for hedge funds. Further, spreads are higher when dealers and banks lend to rather than borrow from non-banks. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by nonbanks.
International Monetary Fund. Monetary and Capital Markets Department
The Unites States financial system includes several systemically important financial market infrastructures (FMIs); they are regulated, supervised, and overseen by multiple authorities. The U.S. FMIs are crucial to U.S. dollar clearing, i.e. the payment systems Fedwire Funds Service and The Clearing House Interbank Payments System (CHIPS), and for the clearing and settlement of U.S. Treasuries, i.e., the Fedwire Securities Service and the Fixed Income Clearing Corporation (FICC). Central counterparties (CCPs) that clear exchange-traded or over-the-counter (OTC) corporate securities or derivatives are of key importance to the safe and efficient functioning of these (global) markets. Disruption of critical operations at one of the large U.S. FMIs may spread to its participants, other FMIs, markets, and throughout the U.S. and global financial systems. The Financial Stability Oversight Council (FSOC) designated eight financial market utilities (FMUs) to be systemically important.1 These designated FMUs are regulated, supervised and overseen by the Federal Reserve Board (FRB), the Securities and Exchange Commission (SEC), or the Commodity Futures Trading Commission (CFTC), depending on their activities. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) authorized the FRB to promote uniform standards for the management of risks by systemically important FMUs.
Mr. Ghiath Shabsigh, Mr. Tanai Khiaonarong, and Mr. Harry Leinonen
Major transformations in payment and settlements have occurred in generations. The first generation was paper-based. Delivery times for payment instruments took several days domestically and weeks internationally. The second generation involved computerization with batch processing. Links between payment systems were made through manual or file-based interfaces. The change-over period between technologies was long and still some paper-based instruments like checks and cash remain in use. The third generation, which has been emerging, involves electronic and mobile payment schemes that enable integrated, immediate, and end-to-end payment and settlement transfers. For example, real-time gross settlement systems have been available in almost all countries. DLT has been viewed as a potential platform for the next generation of payment systems, enhancing the integration and the reconciliation of settlement accounts and their ledgers. So far, experiments with DLT experimentations point to the potential for financial infrastructures to move towards real-time settlement, flatter structures, continuous operations, and global reach. Testing in large-value payments and securities settlement systems have partly demonstrated the technical feasibility of DLT for this new environment. The projects examined analyzed issues associated with operational capacity, resiliency, liquidity savings, settlement finality, and privacy. DLT-based solutions can also facilitate delivery versus payment of securities, payment versus payment of foreign exchange transactions, and efficient cross-border payments.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Assistance report on Chile constitute technical advice provided by the staff of the IMF to the Banco Central de Chile (BCCh) in response to their request for technical assistance. The BCCh is considering broadening access to its services beyond commercial banks and some Financial Market Infrastructures. The mission emphasized the overarching requirement for all central bank counterparts to be adequately regulated and supervised, to mitigate the central bank’s operational, financial, and reputational risks. Recent changes to the banking law facilitate consolidation of the banking supervisor into the nonbank supervisor. This move should facilitate equal treatment across participants and reduce the prospect of regulatory arbitrage. The new architecture should ease, though not eliminate, coordination efforts between BCCh and authorities when it comes to maintaining financial stability. By applying the assessment framework to Chile, the mission recommended some minor broadening of Nonbank Financial Institutions access to BCCh services, while noting that it should have the power to provide liquidity to any nonbank financial sector to contain spillovers that may otherwise threaten financial stability more generally.
Dermot Turing and Mr. Manmohan Singh
Changes to the regulatory system introduced after the financial crisis include not only mandatory clearing of OTC derivatives at central counterparties and margining of uncleared derivatives, but also prudential measures, including notably a “Liquidity Coverage Ratio” which obliges firms to set aside high-quality liquid assets (HQLA) as a stopgap against anticipated cash outflows. We examine factors which may affect the demand for HQLA in a severely stressed market following a hypothetical default of a major clearing member. Immediately following a major default, the amount of HQLA demanded by the whole market would spike. We estimate the size of the spike and draw conclusions as to whether the depth of the market is adequate to absorb it.
International Monetary Fund. Monetary and Capital Markets Department
Regulation, supervision, and oversight of central counterparties (CCPs) and central securities depositories (CSDs) in the euro area is evolving. Recent proposed amendments to the European Market Infrastructure Regulation (EMIR) are expected to further alter the landscape, as is the European Central Bank (ECB) proposal to amend article 22 of the Statute of the European System of Central Banks (ESCB) and the ECB. The main objective of this note is to analyze the regulatory and supervisory structure applicable to CCPs and International CSDs (ICSDs) in the European Union (EU) and assess their suitability using international standards and good practices.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note analyzes financial stability issues related to financial market infrastructures (FMIs) in China. Since the previous Financial Sector Assessment Program, the supervision and oversight of FMIs has strengthened through the adoption of the CPSS–IOSCO (Committee on Payment and Settlement Systems/International Organization of Securities Commissions) Principles for FMIs (PFMI). The public adoption of the PFMI by the authorities in 2013 and the establishment of an interagency platform to assess FMIs are commendable. Full implementation of the principles by FMIs is the next step and is expected to enhance the resilience and stability of the FMIs.