Evolution in Financial Market Infrastructure Governance

Abstract

Financial Market Infrastructures (by which we mean central counterparties and central security depositories) are often described as the ‘plumbing’ of the financial markets. This helps convey a sense of their criticality to the smooth functioning of global finance. FMIs’ IT systems handle a mindboggling volume of clearing and settlement traffic daily, and any failures or interruptions could transmit major shocks throughout the financial markets. In an era of intensifying cyber and ransomware threats against critical infrastructure, it is more vital than ever that these technology heavy systemically important institutions are well run. More than this, FMIs are in the vanguard of pivotal developments in Fintech. Focusing on distributed ledger technologies alone reveals innovations that may prove transformative to the sector. New winners and losers among current incumbents and new entrants are likely to emerge, together with new operational risks. Regulatory attention is inevitable.

In this paper we look at how corporate governance in FMIs, as mandated by financial regulation has evolved and is evolving. Taking into consideration the inherent differences between banks and FMIs, we consider how and to what extent governance strategies, which may have originated to tackle excessive risk-taking in banks, meet the requirements of FMI governance. We recognise the importance of balancing profitable pursuit of existing business lines and new technological opportunities, with the need for resilience to withstand attacks and a robust approach to risk and systemic safety. From all this we suggest there is an increasingly compelling case for paying closer attention to FMI governance.

Keywords: financial market infrastructure, corporate governance, financial regulation, Fintech, systemic risk

JEL Classification: K20, K22, K23