How to Deal with the Resolution of Financial Market Infrastructures: 2nd Interim Report of the CEPS Task Force on Implementing Financial Sector Resolution

35 Pages Posted: 7 Jul 2016 Last revised: 19 Sep 2016

See all articles by Thomas Huertas

Thomas Huertas

Goethe University Frankfurt - Institute of Law and Finance; Center for Financial Studies

Date Written: September 16, 2016

Abstract

Financial market infrastructures (FMIs) are the backbone of the financial system: they enable market participants to transact with one another in an efficient manner. FMIs are inherently systemic, as their very names imply: payments systems, securities settlement systems (SSSs) and central counterparties (CCPs). If an FMI were to cease operation, it could put a stop to payments and/or securities and derivatives transactions. That in turn could destabilise financial markets and possibly the economy at large.

In effect, FMIs are “single points of failure”: they reduce risk as long as they remain robust, but they concentrate risk and serve as a conduit for contagion, if they do fail. Moreover, the risks posed by FMIs are highly correlated. Each G-SIB is generally a member of several FMIs, so that if a G-SIB enters resolution many or all FMIs may come under pressure at the same time.

Two responses are in order: first, to make FMIs less likely to require resolution; and, second to improve the resolution regime applicable to FMIs. Considerable progress has been made with respect to the first item. So the failure of a FMI should be an extremely remote event, a “tail of the tail” risk. But it is an event that could conceivably occur, and if it did occur, it could have catastrophic consequences. Therefore, it is of the utmost importance to ensure that FMIs are resolvable. To this end, FMIs should prepare recovery plans and authorities should prepare resolution plans. This chapter of the CEPS Resolution Task Force Report highlights the issues that such plans should consider and outlines some options on how the plans might address them.

Keywords: resolution, financial market infrastructures, payment systems, securities settlement systems, central counterparties

JEL Classification: G20, G28

Suggested Citation

Huertas, Thomas, How to Deal with the Resolution of Financial Market Infrastructures: 2nd Interim Report of the CEPS Task Force on Implementing Financial Sector Resolution (September 16, 2016). Available at SSRN: https://ssrn.com/abstract=2805487 or http://dx.doi.org/10.2139/ssrn.2805487

Thomas Huertas (Contact Author)

Goethe University Frankfurt - Institute of Law and Finance ( email )

Campus Westend - Grüneburgplatz 1
Frankfurt, 60323
Germany

Center for Financial Studies ( email )

Grüneburgplatz 1
Goethe University
Frankfurt am Main, 60323
Germany

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