Journal of Financial Market Infrastructures

In this issue of The Journal of Financial Market Infrastructures we have two papers on large-value payment systems and two papers on central counterparties.

In their paper "Identification of over and under provision of liquidity in real-time payment systems", Edward Denbee, Rodney J. Garratt and Peter Zimmerman study the issue of liquidity provision in the context of payment systems where participating banks have flexibility on the timing of their outgoing payments during the settlement day. Using the observed difference between a bank's share of liquidity provision and its share of liquidity usage, it is found that smaller banks provide more liquidity to the system than larger banks. The interesting underlying question is whether banks steer their behavior during the settlement day. Based on data from the Bank of England's CHAPS system, the authors perform a simulation by randomly reordering the payments that have occurred in reality on that settlement day. They find evidence that there are structural or behavioral reasons for participating banks to consistently under provide or, as the case may be, over provide liquidity.

The second paper, "Reaction functions of the participants in Colombia's largevalue payment system" by Constanza Martínez and Freddy Cepeda, investigates how participants react to major incidents in a payment system, contributing to the literature on payment reaction functions. They study four cases in the period 2007-12 of the Colombian central bank's system Cuentas de Depósito (CUD) relating to a relatively long power outage (4.5 hours), a multiday technical failure of the largest participant and two brokerage firms' defaults. The results show, for example, that the response of the participants depends significantly on the type of incident (eg, technical versus a financial root cause) and the type of financial institution involved.

Moving to central counterparties (CCPs), the third paper explores the concept of interoperability between CCPs. The authors, Jürg Mägerle and Thomas Nellen, investigate interoperability from the perspective of the multilateral netting property of central clearing. They compare the setup of three interoperable cash equity CCPs to the benchmark case of a single CCP. This three-way arrangement is an existing configuration in Europe and can be compared to the situation of full consolidation, ie, when all interoperable CCPs would merge into a single CCP. This paper looks at alternative setups to reduce the amount of overcollateralization while respecting requirements for containing systemic risk.

The last paper in this issue takes us back to October 19, 1987: Black Monday, a regime change comparable to the Lehman Brothers crisis. I still vividly remember Black Monday because on the next day I had to defend my MA thesis at Tilburg University, dealing with...regime changes. In this Forum contribution, entitled "Central counterparties in crisis: the Hong Kong Futures Exchange in the crash of 1987", Robert Cox shows the reader the lessons that can be learned from one of the few occasions in history when a CCP got into severe difficulty. One striking difference from the modern-day CCP is that, back then, the clearing house was responsible for trade feed processing and initial margin setting but it did not act as the principal for the guarantee of settlement. The guarantee function was attributed to a separate legal entity, which complicated procedures and obscured responsibilities.

This last paper provides an appropriate link to the next issue of The Journal of Financial Market Infrastructures, preparing the reader for our special issue on CCPs, to appear in March 2016.

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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