GLOBAL DEVELOPMENTS

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• GLOBAL DEVELOPMENTS
• Carlo Winder
• Conference Financial Sector of Macedonia on
  Payments and Securities Settlement Systems
• Ohrid 24 June 2008

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Agenda

• LIQUIDITY CRISIS
• PAYMENTS SYSTEMS
• Global developments
• Effects of liquidity crisis
• TARGET 2

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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)

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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, youve got to get up and dance.
  Were still dancing

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LIQUIDITY CRISIS

• SOURCES
• ? US Housing Market ?
• GLOBAL CONTAGION OF
• markets and financial institutions
• Unprecedented scale and scope of contagion

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LIQUIDITY CRISIS

• TRANSITION PROCESS TOWARDS NEW
• YIELD/RISK EQUILIBRIUM
• Losses for Banking Industry 380 billion
• Banks Restructuring their Balance Sheets

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LIQUIDITY CRISIS risk management
USED TO BE SMART
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Crisis Payments Systems Angle

• STYLIZED FACT
• Scale and Scope of Contagion
• We live in global village

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(No Transcript)
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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

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CPSS REPORT ON INTERDEPENDENCIES
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LIQUIDITY CRISIS
No Crisis Of PSS Infrastructure
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LIQUIDITY CRISIS

• No Crisis of PSS 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

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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

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LIQUIDITY CRISIS

• FURTHER ISSUES
• Assess BCP arrangements scope and scale of
  contagion, cross-border
• Cross-border Collateral ELA facilities
• Growth of Collateral

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LIQUIDITY CRISIS

• FURTHER POLICY ISSUES
• Role of third party service providers
• Multiple platforms for Securities Settlement
• Emerging Markets

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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

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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

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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

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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

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Liquidity pooling - Virtual 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

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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

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MARKETABLE ASSETS 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 ECBs 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) (No minimum size no governing law)
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NON-MARKETABLE ASSETS CREDIT CLAIMS 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) (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)
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Risk control measures
Marketable assets Credit claims
Valuation haircut Liquidity category Coupon type Residual maturity Residual maturity Type of interest rate payment Valuation methodology (NCBs)
Variation margin Trigger point (0.5) Assets or cash (depends on NCBs) Trigger point (0.5)
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THNX