De Nederlandsche Bank Eurosysteem GLOBAL DEVELOPMENTS Carlo Winder Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems

De Nederlandsche Bank Eurosysteem

GLOBAL DEVELOPMENTS

Carlo Winder

Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems

Ohrid 24 June 2008

De Nederlandsche Bank


Agenda

LIQUIDITY CRISIS

PAYMENTS SYSTEMS Global developments Effects of liquidity crisis TARGET 2


LIQUIDITY CRISIS

key words: EXCESSIVE OPTIMISM

EXCESSIVE RISK APPETITE

ASPECTS

● Relative Stability (the great moderation, Bernanke) cy

● Search for Yield

● Easing Criteria for Credit (subprime, alt-a etc)

● Innovations (originate-to-distribute model, monoliners etc)


LIQUIDITY CRISIS

Chuck Prince, CEO Citibank

FT, July 2007

“ When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you´ve got to get up and dance. We´re still dancing”


LIQUIDITY CRISIS

SOURCES

● US Housing Market

GLOBAL CONTAGION OF

markets and financial institutions

Unprecedented: scale and scope of contagion


LIQUIDITY CRISIS

TRANSITION PROCESS TOWARDS NEW

YIELD/RISK ´EQUILIBRIUM´

Losses for Banking Industry: $ 380 billion

Banks: Restructuring their Balance Sheets


LIQUIDITY CRISIS: risk management

USED TO BE SMART


Crisis: Payments Systems Angle

STYLIZED FACT:

Scale and Scope of Contagion

We live in global village


NSCC

Clearnet

LondonClearingHouse

CDiCG

CCAS

JSCC

Austraclear

Euroclear

SIS

CREST

Clearstream

SCLV

Monte Titoli

OM-VPC

VPS

VP

HKSCCJasDec

Chess

CDP

CDS

CHAPS

FedWire

SIC

ELLIPSTBF/ TOP

BI REL

SLBE

LVTS

RTGSPLUS

LIPS-Gross

MEPS

BoJ-NetRITS RTGS

CLS Bank

DEBES

E/ K RIX

BoF-RTGS

APK

SWIFT-RTGS

ARTIS

OeKB

HERMES

BOGS/ CSD

SPGT

SITEMEInterbolsa

EuroCCP

DTC

CCPs

CSDs

RTGS

CLS

TARGET

CSD Links

2nd wave CLS currency


Payments and Securities Infrastructure

WEB OF GLOBAL INTERDEPENDENCIES

(LVPSs, CCPs, CSDs, Banks)

WITH TIGHT DEADLINES

(RTGS, DVP, PVP)

Key words

● technological developments

● globalization

● consolidation in financial sector


CPSS REPORT ON INTERDEPENDENCIES

Figure 6: Profile of Institutions’ Activities and Access Choices, 2006(by country, with number of financial institutions* in parentheses)

Very Significant

InternationalSettlement

Activity

CH (1)FR (1)JP (1)US (1)

DE (1)NL (1) UK (1)US (1)

Significant InternationalSettlement

Activity

CH (1)NL (1)

IT (1) FR (2)JP (1)

UK (1)

Moderate InternationalSettlement

Activity

BE (2)IT (2)JP (1)NL (1)SG (1)US (3)

CA (5)DE (2)FR (1)SE (3) UK (1)

DE (1)JP (1)UK (1)

Mixed Approach: Significant self-clearing in multiple currency zones,

but moderate levels of direct participation

Primary reliance oncorrespondentsand custodiansbeyond home

currency; direct participation in CLS

and one or more ICSDs

Domestic, plus one or two of: EUR, USD, or

YEN

Domestic, plus more than threeCPSS currencies

Significant self-clearing in most

CPSS currencies, and

beyond

* At the highest holding company level


Very Significant


Activity

CH (1)FR (1)JP (1)US (1)

DE (1)NL (1) UK (1)US (1)


Activity

CH (1)NL (1)

IT (1) FR (2)JP (1)

UK (1)


Activity

BE (2)IT (2)JP (1)NL (1)SG (1)US (3)

CA (5)DE (2)FR (1)SE (3) UK (1)

DE (1)JP (1)UK (1)







YEN




beyond



Very Significant


Activity

CH (1)FR (1)JP (1)US (1)

DE (1)NL (1) UK (1)US (1)


Activity

CH (1)NL (1)

IT (1) FR (2)JP (1)

UK (1)


Activity

BE (2)IT (2)JP (1)NL (1)SG (1)US (3)

CA (5)DE (2)FR (1)SE (3) UK (1)

DE (1)JP (1)UK (1)







YEN




beyond



LIQUIDITY CRISIS

No CrisisOf

P&SS Infrastructure


LIQUIDITY CRISIS

No Crisis of P&SS Infrastructure

BUT it may have an infrastructural impact, e.g.

Need for further standardization (operating rules,legal devices etc)?

US: intraday credit policy UK: highly tiered structure of CHAPS


LIQUIDITY CRISIS

COOPERATION WITH SUPERVISORS

(domestic and cross-border)

Update Sound Practices on Liquidity Management: intraday liquidity

FX Settlement Risk: use of CLS Correspondent banking: risk management


LIQUIDITY CRISIS

FURTHER ISSUES

Assess BCP arrangements: scope and scale of contagion, cross-border

Cross-border Collateral: ELA facilitiesGrowth of Collateral


LIQUIDITY CRISIS

FURTHER POLICY ISSUES

Role of third party service providers

Multiple platforms for Securities Settlement

Emerging Markets


Intraday liquidity

Settlement risk ↓

importance of sound liquidity management ↑

Relevant for Intraday Liquidity: differs from other liquidity concepts, and hence the supervision tools for managing

intraday liquidity risks are different


Intraday liquidity

Specific features of intraday liquidity Liquidity saving features in payment systems Multilateral participation (´multilateral netting´)

Consequently, in times of shocks: Gross claims become relevant Source of the problem is difficult to trace


Liquidity saving features in LVPSs Examples

BIS, New developments in large-value payment systems, 2005)

Increased customisation and centralisation of payment control functions

New queuing arrangements and release methods, offsetting processes

Introduction of multiple settlement streams (with different risk/costs profiles)

Alternative forms to achieve continous finality


Liquidity saving features in TARGET 2

Reservation, prioritisation, sender limits, active queue management, consolidated account information

More specifically for liquidity issues Intraday pooling on a cross-border basis Offsetting payment flows


Liquidity pooling - Virtual account

Credit institution e.g.Bank A2

Credit institution Bank A3

Credit institution e.g.Bank A1

Group account

virtual balance : balance on (single) accounts + credit lines possibility to „use“ this position by each group account

holder booking on the single accounts (not on the virtual account) only intra-day: „levelling“ off at the end of day mandatory


COLLATERAL - Eurosystem

ESCB conditions for collateral framework uniform eligibility criteria

● Protecting the ESCB from incurring losses in its monetary policy operations

● Ensuring equal treatment of counterparties

● Enhancing operational efficiency and transparency


MARKETABLE ASSETS

Type of assets ECB debt certificates; other marketable debt instruments

Credit standards Asset of high credit standard; using ECAF rules

Place of issue EEA

Settlement/handling procedures

Settled in euro area; centrally deposited in book-entry form with central banks or SSS fulfilling ECB’s minimum standards

Type of issuer/debtor/guarantor

Central banks; public sector; private sector; international and supranational institutions

Place of establishment of

Issuer/debtor/guarantor

Issuer: EEA or non-EEA G10 countries; Guarantor EEA

Acceptable markets Regulated markets; non-regulated market accepted by ECB

Currency Euro

Cross-border use Yes

(No minimum size; no governing law)


NON-MARKETABLE ASSETS: CREDIT CLAIMS

Type of assets Credit claims

Credit standards High credit standard for debtor/guarantor; using ECAF rules

Settlement/handling procedures

Eurosystem procedures

Type of issuer/debtor/guarantor

Public sector; non-financial corporations; international and supranational institutions

Place of establishment of

Issuer/debtor/guarantor

Euro area

Currency Euro

Minimum size Until Dec 2011: NCB choice for domestic use; 500,000 for cross-border use. After 1 Jan 2012: 500,000

Governing law Law of a euro area Member State;

Cross-border use Yes

(Additional legal requirement: verification of existence, notification of debtor or registration, no restrictions from banking secrecy, no restrictions on

mobilisation or realisation). (Not applicable: place of issue; acceptable markets)


Marketable assets Credit claims

Valuation haircut

Liquidity category Coupon type Residual maturity

Residual maturity Type of interest rate paymentValuation methodology (NCBs)

Variation margin

Trigger point (0.5%) Assets or cash (depends on NCBs)

Trigger point (0.5%)

Risk control measures


THNX

Documents

De Nederlandsche Bank Eurosysteem GLOBAL DEVELOPMENTS Carlo Winder Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems