Journal of Financial Market Infrastructures


Ron Berndsen

LCH and Tilburg University

Welcome to the fourth issue of Volume 8 of The Journal of Financial Market Infrastructures, which contains three papers. The first paper addresses the topical subject of central bank digital currencies. The second paper looks at the detection of operational outages in Canada’s Large-Value Transfer System (LVTS). The third paper fits nicely into the tradition of what we might call recording historical (near-) failures of central counterparties.

In “Should the central bank issue e-money?”, our first paper, Charles M. Kahn, FranciscoRivadeneyraandTsz-NgaWongexploretheargumentsforandagainstthe issuance of central bank digital currencies (CBDCs), although they carefully avoid that term, instead using the traditional descriptor “e-money”. In this fundamental contribution to the CBDC literature, the authors provide a clear distinction between account-based and token-based systems. The various CBDC setups are discussed, such as direct provision of central bank accounts to the general public and indirect provision via custodians or financial intermediaries. The authors’ conclusion is that the trade-off for central banks issuing token-based CBDCs may have changed due to new technology. Surprisingly, the paper’s main argument in favour of such issuance is that it would increase the level of competition in the market for payments services at the wholesale and retail levels, not that it would prepare us for a cashless society, which might be the most straightforward general goal of CBDCs.

Next, Neville Arjani and Ronald Heijmans develop an algorithm for detecting operational outages in a Canadian LVTS using five-minute intervals. In “Is there anybody out there? Detecting operational outages from Large Value Transfer System transaction data”, the authors build on the approach of Glowka et al (among others),which appeared in a special issue of The Journal of Financial Market Infrastructures in 2018 (Volume 6, Issue 2/3), and adapt it for the LVTS. The authors show that their algorithm works best for large participants, as they are more likely to send in transactions during most five-minute intervals. The importance for the system operator of knowing whether a large participant is out there lies in the potential knock-on effects, as other participants may rely on the fact that incoming funds from the stricken participant will set a downward spiral in motion. This practical method is usable in real-time monitoring if the frequency of the feed of transactions to the algorithm is in real time too. 

Finally, in “Brazil’s BM&F in 1999: a central counterparty near-failure case?”, Norberto Montani Martins discusses the bailout of two small Brazilian banks and the problems at the Brazilian central counterparty (CCP) of BM&F (Brazil’s Commodities and Futures Exchange) during the large devaluation of the real after entering a floating exchange rate in January 1999. The author points out that some references in the literature classify this as a near-failure of a CCP, but he argues that the CCP’s default fund was large enough to cover the losses of the two banks. The evidence is based on the minutes (in Portuguese) of the Brazilian Congress Investigative Commission. However, Martins also acknowledges that the timely and unusual bailouts of the two banks by the Central Bank of Brazil played an important role.

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

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