The role of Financial Market Infrastructures in Financial Stability: An Overview

The role of Financial Market Infrastructures in Financial Stability: An Overview

Serafin Martinez-Jaramillo, Jose Luis Molina-Borboa, Bernardo Bravo-Benitez
Copyright: © 2016 |Pages: 21
DOI: 10.4018/978-1-4666-8745-5.ch002
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Abstract

Financial Market Infrastructures (FMIs) are essential for the well-functioning of the financial system, as they play a central role in facilitating clearance and settlement of financial transactions such as payments, securities, and derivatives contracts. Nowadays, it is widely acknowledged that the proper functioning of systemically important FMIs is also vital to maintain financial stability; their failure for solvency reasons or operational disruptions could almost certainly lead to systemic instability. As a consequence, the adequate supervision of FMIs is inherent to the function of preserving financial stability. The aim of this chapter is to provide a general overview of the different FMIs; discuss their role in financial stability and to give an overview of the efforts made by some financial authorities towards the supervision, risk assessment and reinforcement of FMIs.
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Introduction

Financial market infrastructures (FMIs) are essential in modern economies as they represent the platforms and interfaces through which financial operations are performed. In order to avoid threats to the stability of the system as a whole, their adequate supervision is of the utmost importance. The aim of this chapter is to provide a general overview of the different FMIs; discuss their role in financial stability by presenting specific cases, and to describe efforts made by some jurisdictions in the supervision, risk assessment and reinforcement of FMIs under the framework provided by the Principles for Financial Market Infrastructures (PFMIs).

It is important to state that although in this chapter we review the relationship between FMIs and financial stability and we focus more specifically on the risks that FMIs may pose to financial stability, FMIs were designed in the first place to provide and improve upon the stability of the financial system. In the absence of such key infrastructures, financial stability would be much more difficult.1

The reader will find many definitions of Financial Market Infrastructures (FMIs) in the current growing literature. Nevertheless, for the purpose of this chapter, it is enough to say that FMIs are composed of the organisations and entities in charge of the registration, clearing and settlement of financial transactions. Among them can be found: payment systems (PSs), central securities depositories (CSDs), securities settlement systems (SSSs), central counterparties (CCPs), and trade repositories (TRs).

This chapter turns on two important axes: the first is the rationale for the strong relationship between financial stability and the proper functioning of FMIs, including significant cases on the role played by FMIs in financial stability; the second axis provides the reader with a general view of the Principles for Financial Market Infrastructures (PFMIs), jointly issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO).

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