Journal of Financial Market Infrastructures

Welcome to the Fall 2018 issue of The Journal of Financial Market Infrastructures.

We begin Volume 7 with “Benefits and risks of central clearing in the repurchase agreement market” by Viktoria Baklanova, Ocean Dalton and Stathis Tompaidis. In this paper, the authors analyze the US repurchase agreement (repo) market based on data from 2015, courtesy of the Office of Financial Research in collaboration with the Federal Reserve and the US Securities and Exchange Commission. They quantify the potential direct economic benefits to market participants of increasing central clearing. For dealers, centralized repo clearing may provide balance sheet netting benefits. However, risks increase for the central counterparty (CCP) when moving bilateral repo transactions between US dealers and their nondealer clients to CCPs for different asset classes. The authors conclude that the overall net effect depends on the cost of bilateral repo activity relative to the cost of raising additional funds in order to guarantee centrally cleared transactions.

“Empirical assessments of the Reserve Bank of India’s policy measures on payment and settlement systems in India” by Sasanka Sekhar Maiti and Nandyala Hemachandra, our second paper, takes The Journal of Financial Market Infrastructures to India for the first time. In their paper, the authors evaluate the effects of six policy measures used by the Reserve Bank of India (RBI) on interbank payment and settlement systems. The general aim of these measures was to promote electronic modes of payment over banknotes/coins and paper-based checks in order to increase overall efficiency. The most prominent measure was the demonetization of the INR 500 and INR 1000 denominations (together constituting 86.4% of the total value of banknotes in circulation), which ceased to be legal tender the day after this measure was introduced. It was an attempt to curb high-denomination fake currency, which is used for financing terrorism, as well as to control the unaccounted-for wealth stored in high-value currency notes. The authors find that the altered payment pattern during the demonetization period has continued into the post-demonetization period. However, they also observe an increased use of paper-based checks for low-value transactions, which will require further policy measures.

Our third paper, “The short-term Danish interbank market before, during and after the financial crisis” by Kim Abildgren, Nicolaj Albrechtsen, Mark Strøm Kristoffersen, Søren Truels Nielsen and Rasmus Tommerup, takes the Danish interbank uncollateralized money market as its object of study. Here, as in other papers published earlier in this journal, the authors use estimates from payment flows in Denmark’s real time gross settlement (RTGS) system, ie, Danmarks Nationalbank’s system, for the period 2003–15. Denmark was the first country to move its key monetary policy interest rate into negative territory in early July 2012. The authors analyze the reduction in activity in the Danish money market as well as this market’s subsequent concentration on relatively few systemically important financial institutions.

Dennis McLaughlin’s “Skin in the game”, our fourth and final paper, contributes to the ongoing debate in this journal regarding the amount of a CCP’s waterfall that should come from a CCP’s own capital: so-called skin in the game.1  The author argues that the need to use a CCP’s capital is primarily driven by the nondefault loss exposure profile (losses not related to the default of a clearing member) rather than by the amount of cleared positions. The author also takes a broad perspective by considering the trade-off between increasing the amount of skin in the game and the resulting increase in clearing costs for members, who would be required to compensate. McLaughlin calculates that a substantial increase in skin in the game over current levels would require a corresponding substantial increase in clearing fees across the financial sector.

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

Ron Berndsen
LCH and Tilburg University

1. Related contributions in this journal are those by Albuquerque, Perkins and Rafi (“Central counterparties need thicker skins”, Volume 4, Issue 3 (2016), pp. 55–63), Carter and Garner (“Skin in the game: central counterparty risk controls and incentives”, Volume 4, Issue 3 (2016), pp. 39–54) and Murphy (“I’ve got you under my skin: large central counterparty financial resources and the incentives they create”, Volume 5, Issue 3 (2017), pp. 1–18).