Journal of Financial Market Infrastructures

Responsibility D of the CPSS-IOSCO Principles for financial market infrastructures reads "Central banks, market regulators, and other authorities should adopt the CPSS-IOSCO principles for financial market infrastructures and apply them consistently". A little over a year on from the April 2012 publication of the principles for financial market infrastructures (PFMIs), the aforementioned authorities have taken stock of where they stand on the level of compliance with Responsibility D (See the CPSS-IOSCO report "Implementation monitoring PFMIs - Level 1 assessment report". URL: At this preliminary stage only the maturity of the adoption process is considered, ie, no review has yet been conducted into whether the PFMIs have been correctly translated into the respective national laws (The subset of six EU countries in the CPSS-IOSCO group has been counted as one in cases where EU law has been established or is planned. Where there is a double grading in the CPSS-IOSCO report we have counted "in progress/complete" as "in progress" and "complete/not applicable" as "complete"). This issue will be taken up in the next CPSS-IOSCO review.

There is a breakdown in five categories. The international community is clearly most advanced in the area of its own responsibilities ("RESP"), with 80% of jurisdictions fully complete. Progress is much less advanced when we look at the different types of market infrastructures, with around 25-30% of jurisdictions having the relevant law in place for central counterparties ("CCP"), payment systems ("PS") and central securities depositories ("CSD"). For trade repositories ("TR") half of the authorities have fully adopted the PFMIs (as of April 5, 2013) - (In some jurisdictions there is at present no TR and/or no CCP - and neither is planned either. These jurisdictions have been graded as "not applicable"). Only two jurisdictions have fully completed the adoption process in all five categories.We can also conclude that much implementation work is still needed for the two infrastructure types that were addressed in the G20 meeting in Pittsburgh in 2009: the central counterparty and the trade repository.

Central clearing, as requested by the G20, is the topic of the first paper in this issue: "Liquidity and central clearing: evidence from the credit default swap market" by Joshua Slive, Jonathan Witmer and Elizabeth Woodman. The authors explore the consequences of moving to central clearing and the impact on liquidity. They study the clearing of the credit default swap market by the central counterparties ICE Clear Credit and ICE Clear Europe (clearing, respectively, a selection of US and EU single-name CDS contracts). Firstly, as not all over-the counter contracts are (equally) suitable for central clearing, they find that the central counterparty chooses the most liquid contracts for central clearing, consistent with liquidity characteristics being important in determining the safety and efficiency of clearing. Secondly, they demonstrate that on balance the introduction of central clearing is associated with a slight increase in the liquidity of a contract.

The issue's second paper, "The social and private costs of retail payment instruments: a European perspective" by Heiko Schmiedel, Gergana L. Kostova and Wiebe Ruttenberg, is situated on the ground floor of our metaphorical warehouse (This warehouse was introduced in the second issue of The Journal of Financial Market Infrastructures (Winter 2012). It represents all of the financial (market) infrastructures within a given currency). The paper deals with the deceptively simple question, "How much does a retail payment cost?" - a question that is very hard to answer. Based on an intensive collaboration between the European Central Bank and the central banks of thirteen EU countries, the authors provide a comprehensive answer. On average, the social costs amount to almost 1% of GDP; half of these costs are incurred by banks and infrastructures and half by retailers. Furthermore, the authors provide, via a cluster analysis, insight into the potential cost savings of promoting relatively efficient payment instruments, eg, in some countries, debit cards. It seems that there is still scope for reducing costs within the European warehouse.

Our third paper, "Designing an expert-knowledge-based systemic importance index for financial institutions" by Carlos León and Clara Machado, focuses on identifying systemically important financial institutions, ie, the participants to large-value payment systems rather than the central infrastructure itself. They apply the method of fuzzy logic inference (which allows for continuous, uncertain set membership, as opposed to membership in classic logic, where an element is either a member of a set or is not) and an expert system approach (which captures expert knowledge in a systematic way). The authors combine payment data with balance sheet data to implement the three criteria that are often used to capture systemic risk: the size of an institution, its connectedness and its substitutability. They show that the process involved in arriving at their systemic importance index imitates the way that experts themselves make a decision regarding what a systemically important financial institution is within the financial system under analysis.

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

Ron Berndsen
De Nederlandsche Bank and Tilburg University

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