Resilience of payments system in this crisis

 

Philipp Hildebrand, Vice-Chairman of Swiss National Bank has given an insightful speech on the payments system and its resilience in this crisis. He says substantial efforts were made to make a resilient payments system:

 

Let me begin with my conclusion. Throughout the financial crisis, the global financial market infrastructure has stood up very well and has helped to prevent the enormous uncertainty in the financial system from becoming even more pronounced. This favourable assessment applies to the payment and settlement systems in Switzerland as well as to global financial market infrastructure. Ladies and gentlemen, this is not an achievement we should take for granted. It is mainly due to the fact that, in the years prior to the crisis, the financial sector has invested a great deal in enhancing financial market infrastructure.

 

 

In Switzerland, for example, a fully integrated infrastructure for trading, clearing and settling financial market transactions has been in place for many years. The core elements of this infrastructure, known as the Swiss Value Chain, are the Swiss stock exchange, the SECOM securities settlement system, the x-clear central counterparty and the SIC  payment system. Integration of these infrastructures makes it possible, first, to standardise and automate the processes, which leads to considerable gains in efficiency. Second, risks relating to the technical aspects of the settlement process can be largely eliminated.

 

 

At the level of the global financial market infrastructure, the most important innovation of recent years has most certainly been the development of Continuous Linked Settlement (CLS). This system has been in place for some years and enables foreign exchange transactions to be settled almost free of risk. In particular, CLS allows to eliminate principal risk, which is often referred to as Herstatt risk.

 

This is the risk that one of the parties to a foreign exchange transaction meets its obligations, yet does not receive the countercurrency. Herstatt risk is thus a traditional counterparty risk.

He then reviews how the payment system was under stress after Lehman crisis but managed to ride the crisis. There were hardly any crisis as far as payment systems are concerned. However, there were different kinds of concerns as Lehman had equity stakes in many payment system companies. This is one concern he says we should address. Second concern is working on payment systems in growing financial  markets like OTC derivatives.

He finally reflects on regulation vs self-regulation debate and says we need a right balance.

Interesting aspect of the crisis.

Actually he covers one of the most under-reported and unglamorous part of the financial system – Back-office. Typically a fin firm activity is divided in 3 areas- front office (dealing in securities, offering loans, taking deposits etc), mid-office (risk management, research etc) and back-office (looks at settlement and payment issues). Back-office jobs are usually the least wanted and least known. However, it is the backbone of any firm and is mostly a thankless job.

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