Effective Oversight of Financial Market Infrastructures

Effective Oversight of Financial Market Infrastructures

Effective Oversight of Financial Market Infrastructures

Course Chair: Richard Heckinger, former Vice President and Senior Policy Adviser, Federal Reserve Bank of Chicago

Tuesday 11th September

The Oversight Framework: Key changes and challenges

Major changes in the oversight landscape

Led by the chair, Richard Heckinger

The FMI oversight landscape in 2018 faces numerous challenges: from the rate and volume of innovations to demands from consumers, to a growing sophistication of cyberattacks. Three questions stand out: how are new technologies disrupting the traditional oversight landscape? Should central banks be worried about the rate and level of innovation? How can central banks best prepare themselves for the future of oversight? In this introductory session, the chair will outline the oversight landscape as it stands, including challenges in the need for cross-border co-operation and information sharing. Delegates will be invited to discuss the main obstacles their central banks face, and to set objectives to find solutions to these obstacles as the week goes on.

Blockchain: a key source of financial market innovation

Nahiomy Alvarez, Financial Markets Group, Federal Reserve Bank of Chicago

The disruptive nature of blockchain technology has been felt by all kinds of institutions, central banks included. A system that relies on users to approve transactions, that keeps a record of every transaction ever made and allows this record to be accessed by anyone has changed from fantastical to revolutionary. But, how is this technology infiltrating the traditional oversight remit of a central bank? In this session, the speaker will draw on her recent paper to outline the key benefits of a distributed ledger as opposed to a centralised ledger, and will define the differences between permissioned and permissionless ledgers. She will discuss the potential applications of blockchain technology, including digital assets, smart contracts, digital currencies and record keeping, and the questions that arise of overseers around these applications.

Wednesday 12th September

The key to an effective framework

Mobile payments: non-bank oversight

Rob Reeve, Senior Management Consultant, Modusbox

Dependence on mobile phones has grown rapidly, meaning that the way payments are made and the ways in which consumers manage their money has changed. For central banks the challenge has been how best to adapt to the new telcos landscape, which does not fall within the traditional oversight remit. In this session, the speaker will outline work done to overcome this when developing new regulation for telcos and mobile payments more broadly. He will lead a discussion on the elements required in regulatory frameworks, touching on topics such as safeguarding and ring-fencing of funds, risk management, non-exclusive dealings with agents and interoperability.

PFMI application to central bank FMI

Bjørn Bakke, Assistant Director, Financial Infrastructure Unit, Norges Bank and Lyndsie Smith, Advisor, Norges Bank

Implementation and oversight of the PFMI brings with it many practical issues. Questions arise around which FMIs should be assessed, how often and which principles are relevant for the specific FMI. Drawing on recent work at Norges Bank, the speaker will set out the framework developed in his central bank in three parts: aligning the PFMI with the central bank’s FMI itself; describing the data and quantitative tools developed to assess the systems; and structuring the off-site and onsite assessments of the infrastructures’ compliance. Points for discussion will include reporting lines, resourcing needs and how best to communicate findings.

Making real-time retail payments a reality

Carlo Palmers, Head of Payments Market Infrastructures, Marketing, SWIFT

The distinction between wholesale and retail payments has begun to blur with the introduction in retail payments of instant or immediate funds transfers between end-consumer accounts. Before this, it would take a number of days for retail payments to be made, while wholesale payments were typically settled in real time, at least between banks. Real-time payments are now the new benchmark – with the UK, Sweden, Denmark, Poland, Singapore and Australia in place and Europe and the USA following. This session will focus on how real-time payments have become a reality, and the opportunities and challenges, including those for central banks, in this new payments environment.

PFMI: next steps in implementation and monitoring

Bjørn Bakke and Lyndsie Smith

Full, timely and consistent implementation of the PFMI is key to the safety and soundness of FMIs, ultimately helping to support the resilience of the global financial system. Although implementation monitoring assessments have been successful, there is room for improvement, especially in the speed in which consistency of outcomes can be achieved. In this session, the speaker will discuss the methodology employed, experience with assessments and the themes already emerging in authorities’ implementation of the principles. She will discuss the differences of approach and attitude to transparency, and delegates will be encouraged to share experiences of any “roadblocks” they have encountered in implementation.

The FinTech chapter: what does it mean for central banks and the future of oversight?

Led by the Chair, Richard Heckinger

The growth of FinTech in the private sector is now significantly disrupting the traditional oversight landscape, and has shown central banks that they need to do more as overseers in order to keep consumers safe. However, central banks now understand the importance of finding the right approach to regulation so that it does not hinder innovation, while also ensuring that consumers are protected. In this session, the chair will discuss the ways in which the Bank have prepared for this disruption. Specifically, he will address what this technology means for oversight, and the preparations that central banks have to take should this technology become more involved in the payments sphere.

Thursday 13th September

Stress Testing The System

Oversight challenges of CCPs

Led by the Chair, Richard Heckinger

Central Counterparties (CCPs) create a number of policy issues for overseers related to margining, collateral, interoperability and recovery and resolution. However, they also bring transparency, simplicity and risk reduction to over the counter (OTC) derivatives markets. This session will outline the role of CCPs and their importance as “commitment mechanisms”. This will then be applied to the wider context of FMIs and the speaker will consider questions of governance, ownership and competition

Network theory and agent-based modelling: a new dashboard for FMI and financial system risk

Kimmo Soramaki, Founder and CEO, Financial Network Analytics and founding Editor-in-Chief, Journal of Network Theory in Finance

Central banks are increasingly recognising the important of understanding interconnectedness of financial institutions and markets to tackle financial risks and returns. But, traditional economic models are not equipped to understand these interconnections fully. In this session, the speaker will outline how mapping these connections can be used as a tool for identifying points of systemic risk and analysing risk exposure, including, crucially, contagion from both domestic and international sources. The speaker will discuss the use of techniques and algorithms such as the examination of outliers to predict changes and anomalies in payments; assessing how default patterns highlight networks acting as a propagation channel for risks. Discussion will focus on the practical application of these techniques

FMI oversight for financial stability – stress testing in focus

Joaquin Bernal Ramirez, Head, Payment Systems and Banking Operations, Central Bank of Colombia

In this case study session, the speaker will share with the group how his central bank distinguish oversight and supervision, and how it has defined its oversight function. He will then go onto describe systemic stress testing it has developed to analyse FMI, including: estimation of financial institutions’ intraday liquidity; technical analysis of the structure and functioning of interconnections and connectivity; and simulation of stress scenarios. Group discussion will consider the interface between FMI and financial regulation and supervision with a view to avoiding overlap, as well as the clear data-sharing arrangements put in place.

FMI resolution: the state of the art

Klaus Löber, Senior Adviser, Market Infrastructure and Payments, European Central Bank with Joaquin Bernal Ramirez as a discussant

FMIs are the backbone of the financial system and are pivotal to delivering critical services and ensuring financial stability. If an FMI fails payments, securities and derivative could all grind to a halt. The Financial Stability Board (FSB) has recognised the special nature of FMIs and developed a list of attributes drawing on the regime for banks. But FMIs are not banks, and so problems remain around implementation. This panel discussion will invite delegates to discuss with speakers how supervisors develop an effective resolution regime for FMIs.

Friday 14th September

Preparing for the Future of Oversight

The future of oversight

Klaus Löber, Senior Adviser, Market Infrastructure and Payments, European Central Bank

Where is oversight heading? How are standard settings changing? Can, in an increasingly interconnected financial system, bodies like the CPMI continue the approach of issuing standards that are in the form of high-level principles? Or will the committee have to become much more specific about what FMIs have to do? In this interactive session, delegates will be invited to discuss the issues raised by these questions in small groups, in addition to how FMIs and authorities plan to handle extreme situations. Delegates will be encouraged to ask about their own central bank’s particular concern about oversight in theory or practice and invited to consider the likely development of oversight in their central bank.

Central bank digital currencies: new players in payments?

Klaus Löber

The idea of a central bank issued digital currency is one that has been widely dismissed in the past. However, the concept might be more viable than originally thought. Digital currencies have gained popularity at an alarming rate, despite not being backed by any governmental authorities. And so, the idea of a similar concept backed by a central authority as trusted as a central bank could quickly become the market leader. But, what implications would a central bank digital currency have on the oversight function? How would a currency of this kind be implemented in the market? In this session, the speaker will discuss his work in this field and what this means for the wider oversight function.

Wrap up and conclusions

Led by the chair, Richard Heckinger

The day and the course will conclude with a session led by the chairperson drawing in the main points of the course including the findings of the workshop. Delegates will be encouraged to pool their thoughts, revisit the questions and challenges identified on the first day and prepare action points to take back to their home institutions.