Settlement Bank Research Articles

No more tears without tiers? The impact of indirect settlement on liquidity use in TARGET2

We study the impact of tiered payments originating from client banks on the liquidity consumption (relative intraday liquidity use) of settlement banks. Estimates of a panel data model, employing wholesale payments in euro, show that a higher share of tiered payments reduces liquidity consumption by settlement banks. Metrics on timing, delay, and payment priorities suggest that settlement banks use more leeway in settling tiered payments from client banks compared to in-house payments. Payment timing as a proxy for external delay suggests that tiered payments help smooth liquidity positions. Payment delay within the system does not follow a clear dynamic over time, whereas banks consistently de-prioritize tiered payments. Thereby, settlement banks employ tiered arrangements to manage intraday liquidity more efficiently. To a certain extent, this hints at “free riding” or higher recycling of liquidity from client banks’ payments. However, the results are also consistent with settlement banks’ monitoring role or tiered payments potentially exhibiting different characteristics which may be attributable to contractual arrangements.

Multi-level responses of oysters Crassostrea virginica for assessing organochlorine pesticides in a Ramsar coastal lagoon in southern Mexico

Organochlorine pesticides (OCPs) have been intensively used without proper regulation and control in Latin America due to the prevalence of diseases and pests, thus posing potential risks to nontarget organisms. Initiatives for ecosystem preservation, such as to designate protected areas, may not be enough to avoid contamination by OCPs, considering that protected areas tend to be permeable to diffuse sources. Here, we investigate multi-level responses of the oyster Crassostrea virginica to OCPs in Laguna de Términos, a RAMSAR coastal lagoon in the southern Gulf of Mexico. For this aim, OCPs occurrence and concentrations in the water, sediment, and in oysters from 3 settlement banks were assessed. Enzymatic and non-enzymatic biochemical biomarkers were quantified in the oysters’ mantle and digestive gland, and the human health risk due to oyster consumption was also evaluated. OCPs in water were below detection limits. Fourteen OCPs were detected in sediments (∑OCPs mean of 49 ngg−1) and 7 in oyster tissues (∑OCPs mean of 121 ngg−1). The occurrence of OCPs was related to the land uses along the watersheds of the rivers that drain into the lagoon. Biochemical responses were correlated with OCPs (∑HCH, ∑DDT, heptachlor and endosulfan) in sediment, and oyster tissues. OCPs in oyster tissues showed a strong association with pro-oxidant forces and oxidative stress responses (Superoxide dismutase, Catalase, Glutathione Peroxidase, and lipid peroxidation), and neurotoxicity (Acetylcholinesterase), suggesting that the current OCPs contamination exerts significant stress. Our study also shows that the consumption of oysters from the lagoon increases the potential human health risk. Considering that Laguna de Términos is a protected Ramsar site, we suggest that environmental protection measures should be increased and that a monitoring program for OCPs exposure is necessary to assess the effects on this ecosystem.

Prospects and limitations in the modernization of securities settlement operations in Ukraine

The article points to the critically insufficient compliance of Ukraine's stock market infrastructure with the relevant international recommendations, first of all in the segment of securities settlements. The author states that despite the creation of market infrastructure in Ukraine and the possibility to avoid problems related to the evolutionary errors, the market participants face numerous difficulties, such as risks in legal empowerment and in the activities of key infrastructure actors, limited competition, excessive transaction costs, ongoing defragmentation of the system of depository accounting, as well as inconvenience and limitations of the existing risk management systems. The study on the evolution of securities settlement models in Ukraine revealed that the radical reform of infrastructure in 2013 led to contradictory consequences, in particular, the abuse by the settlement bank and the central counterparty of its monopolistic positions, active participation of this monopolist in high-profile market abuse, stagnation in clearing and settlement technologies, and a slowdown in the development of the derivatives market. It was found that, despite lengthy discussions, the updated legislation in the field of organized capital markets, which is designed to implement a number of EU laws and should enter into force in 2021, does not really rectify the problems in the existing infrastructure, in particular due to a rather dubious proposed procedure of securities settlement and conservation for a few more years of the monopoly in the field of settlement and clearing services. It is substantiated that Ukraine has constructive practical experience and skills that can allow to implement the best international standards for building a system of cash settlements in "central bank money", organically integrated into Ukrainian payment system and able to adapt to European payment systems.

Offshoring the Uncovered Liability Problem: Currency Hierarchies, State-Owned Settlement Banks and the Offshore Market for Renminbi

ABSTRACT The existence of an uncovered liability has historically benefited foreign banks and lead currencies. Using the case of China’s efforts to fund its foreign exchange needs by exploiting loopholes in the international financial architecture, the paper examines whether using state-owned settlement banks as a means of intermediating a specialised ‘non-deliverable’ financial asset in offshore markets can substitute the institutional and technical prerequisites that developing economies typically lack. The findings show that while offshore money markets can reduce US dollar dependency in areas such as trade invoicing that do not depend on currency delivery, increasing the offshore holdings of RMB is more challenging. The reasons for this are to be found in the way the governance, geographic and credit generating limitations of state settlement banks reinforce the constraints imposed by the uncovered liability problem. The findings distinguish the historical evolution of the RMB’s offshore use from other offshore markets and reinforce the impossibility of separating issues related to trade infrastructures from those related to the structure of the international financial system.

Перспективи та обмеження модернізації розрахунків в операціях із цінними паперами в Україні

The article points to the critically insufficient compliance of Ukraine’s stock market infrastructure with the relevant international recommendations, first of all in the segment of securities settlements. The author states that despite the creation of market infrastructure in Ukraine and the possibility to avoid problems related to the evolutionary errors, the market participants face numerous difficulties, such as risks in legal empowerment and in the activities of key infrastructure actors, limited competition, excessive transaction costs, ongoing defragmentation of the system of depository accounting, as well as inconvenience and limitations of the existing risk management systems. The study on the evolution of securities settlement models in Ukraine revealed that the radical reform of infrastructure in 2013 led to contradictory consequences, in particular, the abuse by the settlement bank and the central counterparty of its monopolistic positions, active participation of this monopolist in high-profile market abuse, stagnation in clearing and settlement technologies, and a slowdown in the development of the derivatives market. It was found that, despite lengthy discussions, the updated legislation in the field of organized capital markets, which is designed to implement a number of EU laws and should enter into force in 2021, does not really rectify the problems in the existing infrastructure, in particular due to a rather dubious proposed procedure of securities setrtlement and conservation for a few more years of the monopoly in the field of settlement and clearing services. It is substantiated that Ukraine has constructive practical experience and skills that can allow to implement the best international standards for building a system of cash settlements in "central bank funds", organically integrated into Ukrainian payment system and able to adapt to European payment systems.

Clustering electricity market participants via FRM models

Collateral mechanism in the Electricity Market ensures the payments are executed on a timely manner; thus maintains the continuous cash flow. In order to value collaterals, Takasbank, the authorized central settlement bank, creates segments of the market participants by considering their short-term and long-term debt/credit information arising from all market activities. In this study, the data regarding participants’ daily and monthly debt payment and penalty behaviors is analyzed with the aim of discovering high-risk participants that fail to clear their debts on-time frequently. Different clustering techniques along with different distance metrics are considered to obtain the best clustering. Moreover, data preprocessing techniques along with Recency, Frequency, Monetary Value (RFM) scoring have been used to determine the best representation of the data. The results show that Agglomerative Clustering with cosine distance achieves the best separated clustering when the non-normalized dataset is used; this is also acknowledged by a domain expert.

Foreign Exchange Manipulation and the Equity Returns of Global Banks

We investigate the valuation effects of foreign exchange manipulation for seven systemically important banks that settled with regulators and legal authorities. The seven settlement banks suffer a total market value loss of $48 billion that far exceeds the $10 billion in regulatory and criminal fines. We attribute the difference of $38 billion to a market-imposed reputational penalty, which we define as the expected decline in the present value of future cash flows due to higher regulatory and financing costs and lower revenues. However, only five of the seven settlement banks experience reputational penalties that are higher than the assessed fines. Our evidence suggests that the market responds differentially based on the distinctive circumstances related to each institution’s involvement. We also find evidence of negative valuation effects for other competing global banks that are more pronounced for those banks that have greater systemic importance and control a greater share of the foreign exchange market.

Urban Principle of Water Sensitive Design in Kampung Kamboja at Pontianak City

This study will define the design principles of settlement area banks of the Kapuas Pontianak to approach the concept of water sensitive urban design (WSUD) in densely populated residential areas. Using a case study of a region densely located on the banks of the river with engineering literature to formulate the aspects taken into consideration and the components are arranged in the design, analysis descriptive paradigm rationalistic to identify the characteristics of residential areas riverbank with consideration of elements WSUD and formulate design principles residential area that is sensitive to water. This research is important to do because of problems related to the water management system in the settlement bank of the river in the city of Pontianak do not maximize. So that the primacy of this study contains several objectives to be achieved is to identify the characteristics of the settlement area riverbanks under consideration aspects areas design that is sensitive to water and principle areas design that will formulate the structure of the existing problems related to the needs of the community infrastructure facilities infrastructure neighborhoods and formulate and create guidelines for appropriate technology for integrated water management systems in the residential area of the riverbank and engineering design for the settlements are sensitive to water (WSUD). The final aim of the study is expected to achieve water management systems in residential areas by utilizing the abundant rainwater availability by using LID (Low Impact Development) through the concept of urban design that sensitive water

Estimating defaults in organized security lending markets

Purpose This paper aims to analyze the dynamics of the security lending process and lending markets to identify the market-wide variables reflecting the characteristics of the stock borrowed and to measure the credit risk arising from lending contracts. Design/methodology/approach Using the data provided by Istanbul Settlement and Custody Bank on the equity lending contracts of Securities Lending and Borrowing Market between 2010 and 2012 and the data provided by Borsa Istanbul on Equity Market transactions for the same timeframe, this paper analyzes whether stock price volatility, stock returns, return per unit amount of risk and relative liquidity of lending market and equity market affect the defaults of lending contracts by using both linear regression and ordinary least squares regression for robustness and proxying the concepts of relative liquidity, volatility and return constructs by more than variable to correlate findings. Findings The results illustrate a statistically significant relationship between volatility and the default state of the lending contracts but fail to establish a connection between default states and stock returns or relative liquidity of markets. Research limitations/implications With the increasing pressure for clearing security lending contracts in central counterparties, it is imperative for both central counterparties and regulators to be able to precisely measure the risk exposure due to security lending transactions. The results gained from a limited set of lending transactions merit further studies to identify non-borrower and non-systemic credit risk determinants. Originality/value This is the first study to analyze the non-borrower and non-systemic credit risk determinants in security lending markets.

The Role of Counterparty Risk in CHAPS Following the Collapse of Lehman Brothers

We study the impact of the global financial crisis on CHAPS, the United Kingdom’s large value payments system, over the period 2006-2009. Core infrastructures functioned smoothly throughout the crisis and settlement banks continued to meet their payment obligations. However, payments data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. We show that this slowdown is related to concerns about counterparty default risk, thereby identifying a new channel through which counterparty risk manifests itself in financial markets.

Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis*

We study the liquidity demand of large settlement banks in the UK and its effect on the money markets before and during the subprime crisis of 2007-08. We find that the liquidity demand of large settlement banks experienced a 30% increase in the period immediately following August 9 2007, the day when money markets froze, igniting the crisis. Following this shift, liquidity demand had a precautionary nature in that it rose on days of high payment activity and for banks with greater credit risk. This caused over- night interbank rates to rise, an effect virtually absent in the precrisis period.

Bank Behaviour and Risks in Chaps Following the Collapse of Lehman Brothers

We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counter-party default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures.

System-Wide Liquidity Risk in the United Kingdom’s Large-Value Payment System: An Empirical Analysis

When settling their own liabilities and those of their clients, settlement banks rely on incoming payments to fund a part of their outgoing payments. We investigate their behaviour in CHAPS, the United Kingdom’s large-value payment system. Our estimates suggest that in normal times, banks increase their payment outflows when their liquidity is above target and immediately following the receipt of payments. We use these estimates to determine the robustness of this payment system to two hypothetical behavioural changes. In the first, a single bank stops sending payments, perhaps because of an operational problem. In the second, it pays out exactly what it previously received, relying exclusively on the liquidity provided by other system members. Using the observed uncertainty around our estimated behavioural equations, we derive probabilistic statements about the time at which the bank’s counterparties would run out of liquidity if they followed their estimated normal-time behaviour.

Does FOMC news increase global FX trading?

Does global currency volume increase on Federal Open Market Committee (FOMC) days? To test hypotheses of abnormal currency volume on FOMC days, a new data set from the Continuous Linked Settlement (CLS) Bank is used. The CLS measure captures more than half of the global trading volume in foreign exchange (FX) markets. The evidence shows that FX trading volume increases about 5% in the spot and the spot-next market following FOMC deliberations. The novelty of this result is that the aggregated CLS data controls for responses in various derivatives markets: a feature that existing studies based on intradaily data for specific trading platforms do not consider.

Banks’ intraday liquidity management during operational outages: Theory and evidence from the UK payment system

We investigate how settlement banks in the United Kingdom’s large-value payment system deal with intraday liquidity and operational risk. In particular, we are interested in payments behaviour towards a bank that is, for operational reasons, unable to make but able to receive payments. If other banks did not sufficiently monitor their outgoing payments, these operational shocks could impact the entire payment system because the affected bank could absorb liquidity from the system. Our game-theoretic model predicts that only early in the day, when they are uncertain about the payment instructions they might have to execute, banks stop sending payments to a counterparty which is unable to make payments. Using a non-parametric method, we find that this prediction is supported by the data, implying that banks effectively contain the disruption caused by the operational outage: payment flows between healthy banks remain unaffected.

Banks' Intraday Liquidity Management During Operational Outages: Theory and Evidence from the UK Payment System

We investigate how settlement banks in CHAPS, the United Kingdom’s large-value payment system, deal with operational risk. In particular, we are interested in payments behaviour towards a bank that is, for operational reasons, unable to make but able to receive payments. If other banks did not sufficiently monitor their outgoing payments, operational shocks could impact the entire payment system because the affected bank may absorb liquidity from the system. We first build a game-theoretic model in which a bank’s decision to make payments depends both on whether another bank experiences operational problems, and on the time of day at which the outage occurs. We then investigate these reactions empirically using a non-parametric method. Our theory predicts that banks stop paying to a bank which has been unable to make payments early in the day, when they are uncertain about the payment instructions they might have to execute. When this uncertainty has been resolved (later in the day), healthy banks make payments even to a bank experiencing the operational problem. Both predictions are supported by the data. We show that this behaviour effectively contains the disruption caused by the operational outage: payment flows between healthy banks are largely unaffected.

Precautionary Hoarding of Liquidity and Inter-Bank Markets: Evidence from the Sub-Prime Crisis

Using data on the behavior of large settlement banks in the UK and theSterling Money Markets before and during the sub-prime crisis of2007-08, we provide evidence of precautionary hoarding of liquidity andits e ect on inter-bank borrowing rates. Our evidence consists of threepieces. First, we document that liquidity holdings of the largesettlement banks in the UK experienced on average a 30% increase in theperiod immediately following 9th August, 2007, the widely accepted dateof money-market freeze during the sub-prime crisis. Second,we show that following this structural break, bank liquidity had aprecautionary nature in that it rose on calendar days predicted to havea large amount of uctuations in payment and settlements activity andmore so for banks that made larger losses during the crisis. Third,using the payment and settlements activity as an instrument, weestablish a causal e ect of bank liquidity on overnight inter-bankrates, in both secured and unsecured markets, an e ect that is virtuallyabsent in the period before the crisis. Importantly, precautionaryhoardings by some settlement banks raised lending rates for allsettlement banks, suggestive of a contagion-style systemic riskoperating through inter-bank rates. Finally, variability in overnightinter-bank rates appears to have a ected rates and volumes in householdas well as corporate lending.

Global Trends in Large-Value Payments

Globalization and technological innovation are two major forces affecting the financial system and its infrastructure. Perhaps nowhere are these trends more apparent than in the internationalization and automation of payments. While the effects of globalization and technological innovation are most obvious on retail payments, the influence is equally impressive on wholesale, or interbank, payments. Given the importance of payments and settlement systems to the smooth operation and resiliency of the financial system, it is important to understand the potential consequences of these developments. This article presents ten major long-range trends in the settlement of large-value payments worldwide. The trends are driven by technological innovation, structural changes in banking, and the evolution of central bank policies. The authors observe that banks, to balance risks and costs more effectively, are increasingly making large-value payments in real-time systems with advanced liquidity-management and liquidity-saving mechanisms. Moreover, banks are settling a larger number of foreign currencies directly in their home country by using offshore systems and settling a greater number of foreign exchange transactions in Continuous Linked Settlement Bank or through payment-versus-payment mechanisms in other systems. The study also shows that the service level of systems is improving, through enhancements such as longer operating hours and standardized risk management practices that adhere to common standards, while transaction fees are decreasing. Payments settled in large-value payments systems are more numerous, but on average of smaller value. Furthermore, the overall nominal total value of large-value payments is increasing, although the real value is declining.

Risks and Efficiency Gains of a Tiered Structure in Large-Value Payments: A Simulation Approach

The large-value payment system in the United Kingdom (CHAPS) is highly tiered: a few settlement banks make payments on behalf of many customer banks. This paper makes use of a simulation approach to quantify by how much tiering affects, on the one hand, concentration and credit risk and, on the other, the liquidity needs of CHAPS. We do so by creating scenarios where current settlement banks become customer banks and thus we increase the degree of tiering. The results show that concentration risk would rise substantially in what is already a highly concentrated system. As for credit risk, the size of intraday exposures compared with settlement banks' capital is very small and therefore the likelihood of contagion remote. More importantly, the increase in credit risk brought to the system by settlement banks leaving CHAPS bears little relationship to the values settled by each individual bank. We find that increasing the degree of tiering in CHAPS leads to substantial liquidity savings - although the liquidity saved is only a fraction of the spare liquidity currently posted in the system. Most of the savings are due to liquidity pooling rather than to internalisation of payments. There is a strong relationship between changes in values settled and liquidity needs. This relationship can be used to forecast the impact on liquidity needs if more banks were to join CHAPS. The quantification of the trade-off between risk and efficiency in different scenarios provides policymakers with a useful analytical framework for analysing the effects of tiering.

Does FOMC News Increase Global FX Trading?

Does global currency volume increase on days when the Federal Open Market Committee (FOMC) meets? To test the hypothesis of excess currency volume on or around FOMC days, we use a novel data set from the Continuous Linked Settlement (CLS) Bank. The CLS measure captures roughly half of the global trading volume in foreign exchange (FX) markets. We find strong evidence that trading volume increases across currency areas on FOMC days during 2003 to 2007. This result holds irrespective of the size of price changes in currency markets and FOMC policy shocks. We interpret the evidence of excess FX trading on FOMC days to be inconsistent with standard models of homogenous agents.