Journal of Financial Market Infrastructures

In this summer 2013 issue of The Journal of Financial Market Infrastructures we again have contributions that span all three floors of the metaphorical warehouse introduced half a year ago: retail payments on the ground floor, large-value payments one floor up, and securities and derivatives on the top floor.

Before discussing the papers in this issue, I would like to focus on a specific theme of the warehouse: complexity. Let us consider a simple measure of complexity here: the number of financial market infrastructures per warehouse including the number of links among them. On inspecting the large-value payments floor, we would typically find only two or three infrastructures for a G20 country. Firstly, a real-time gross settlement system operated by the central bank. Secondly, the Continuous Linked Settlement (CLS) system settling the domestic currency leg of foreign exchange transactions. In some large economies, a privately operated large-value payment system is also present. All in all a relatively simple configuration. By contrast, the top floor is far more complex. To a large extent this is understandable as securities/derivatives clearing and settlement are inherently much more complex than the settlement of one-sided payments. But the main point is that complexity seems to increase, worldwide.

In the last couple of years many new multilateral trading platforms have been established. In addition, the number of central counterparties (CCPs) for derivatives clearing, either already operating or at the planning stage, is on the rise. And there will definitely eventually be more than one trade repositoryworldwide, although from a transparency standpoint it would make sense to have just one. The question is, of course, whether or not, on balance, the increase in complexity results in a decrease in potential systemic risk. The logic of a CCP (and the trade repository) works best if it is indeed central, ie, there is only one CCP per asset class and there is a sufficiently large number of participants. In such circumstances the benefits of reducing counterparty risk by multilateral netting for a whole financial market segment can be reaped. We do not need a crystal ball to predict that in the securities post-trade industry we will see a lot of changes in complexity. This holds everywhere, but it is especially true for the euro area. Harder to predict is whether we will indeed experience a reduction in complexity or whether we will see complexity continuing to increase.

The first paper in this issue, "To link or not to link? Netting and exposures between central counterparties" by Stacey Anderson, Jean Philippe Dion and Hector Perez-Saiz, investigates the aforementioned complexity problem insofar as links between CCPs are concerned. The authors provide a framework in which to compare linked and unlinked CCP configurations in terms of total netting achieved by market participants and the total system default exposures that exist between participants and CCPs. The specific problem they address is whether or not a domestic CCP should link up with a global CCP.

In our second paper, "Central banks and foreign collateral", Jeannette Capel investigates the implications for a central bank of accepting foreign collateral in order to facilitate the provision of international liquidity. This is relevant in crises like the 2007-9 financial crisis. The author discusses the possible risks and opportunities of foreign collateral for the various primary tasks of a central bank, including the case of jurisdictions where the central bank and the prudential supervisor are in the same organization.

For the third and fourth papers in this issue we descend the warehouse to the retail payments floor. Both papers discuss the infamous multilateral interchange fee - the amount an acquiring bank pays to the issuing bank for using a certain card brand - and its implications for the choice to pay by cash or card.

In the paper "Tourist Test interchange fees for card payments: down or out?" by Nicole Jonker and Mirjam Plooij, the level of the multilateral interchange fee for debit card payments in the Netherlands is assessed based on the Tourist Test methodology. The authors show that this methodology, which may be used as a regulatory benchmark, may produce unexpected results if the costs of using cash are rising over time while those for debit card payments are declining.

In the paper "Card versus cash: the first empirical evidence of the impact of payment card interchange fees on end users' choice of payment methods", Guerino Ardizzi focuses on the relationship between the level of the interchange fee and the decision to withdraw cash from an automated teller machine. Using data from Italy it is shown that there is a positive correlation between cash usage and the level of the interchange fee. The author concludes that interchange fee regulation may be an effective tool for reducing cash payments at the point of sale.

In the Forum section of this issue, our fifth paper, "The effects of settlement methods on liquidity needs in Japan: an empirical study based on funds-transfer data from BOJNET" by Saiki Tsuchiya, provides a historical overview of the developments in Japan of the large-value payments floor of the yen warehouse. It describes the policy of the Bank of Japan over the last two decades in going from deferred net settlement to real time gross settlement and the introduction of liquidity-saving features. The paper then focuses on the impact of their introduction on the liquidity needed for settlements in the Japanese real time gross settlement system. Using data from BOJ-NET the study reveals that liquidity needs are indeed lower compared with the situation before the liquidity-saving features were implemented.

This issue completes the first volume of The Journal of Financial Market Infrastructures. We are still very keen to receive theoretical papers and more policy-oriented papers on any global financial market infrastructure (in a broad sense) for the second volume. If you have a question about whether a given topic would be within this journal's scope, please drop me a line at and I will be pleased to help.

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