Journal of Financial Market Infrastructures

Ron Berndsen
LCH and Tilburg University

Welcome to the third issue of Volume 10 of The Journal of Financial Market Infrastructures. This issue contains three research papers: two on large-value payment systems and one on central counterparties (CCPs).

In the first paper in the issue, “Quantifying the economic benefits of payments modernization: the case of Canada’s large-value payment system”, Neville Arjani, Fuchun Li and Zhentong Lu investigate the economic benefits of renewal of a realtime gross settlement (RTGS) system. Several central banks (eg, the Bank of England, the US Federal Reserve, the European Central Bank, the Bank of Canada) have renewed their RTGS systems recently or are conducting an RTGS renewal program. Arjani et al study the Canadian case, where the country’s legacy large-value transfer system (LVTS) has been replaced by a new system, Lynx. The data on which the model estimations are based are taken from another Canadian payments system to perform a counterfactual analysis, as the new system was not yet live at the time of their study. Central in the identification of the benefits is the well-known trade-off between credit risk and liquidity need. It is concluded that Lynx provides full cover for the participants’ credit risk exposures but at a higher liquidity cost.

The issue’s second paper is by Francisco Rivadeneyra and Nellie (Yinan) Zhang. It provides a nice sequel to the first and is titled “Payment coordination and liquidity efficiency in wholesale payments systems”. Rivadeneyra and Zhang consider how the abovementioned credit risk and liquidity trade-off can be improved in the case of Lynx by introducing a liquidity-saving mechanism (LSM) or an urgent payment mechanism (UPM). These mechanisms can in principle be used simultaneously during the settlement day. The authors devise several scenarios with quantitative results. Unsurprisingly, the Bank of Canada, being the central bank, plays a decisive role. The outcome of their analysis is that the LSM should be favored over UPM, resulting in less need for liquidity at the system level.

In our third research paper, “Mitigating margin procyclicality: the effectiveness of anti-procyclicality measures during the Covid-19 stress event”, Argyris Kahros and Marco Weissler analyze how a CCP that is subject to the European Market Infrastructure Regulation (EMIR) legislative framework deals with anti-procyclicality (APC). APC is studied extensively because of its macroprudential nature, and recent papers have been published in the fourth issue of Volume 9 and in the first issue of Volume 10 of The Journal of Financial Market Infrastructures. The data used in Kahros and Weissler’s study covers actual portfolios of individual clearing members. The EMIR allows for several different measures that a central counterparty can take for implementing APC, and this paper provides a good insight into that. It also highlights the role of a margin model with a floor to prevent margins from going down too much in tranquil periods. During the Covid-19 stress period these floor models generally performed well in terms of APC.

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