The role of Financial Market Infrastructures in Financial Stability

Abstract

Financial Market Infrastructures (FMIs) are essential for the well-functioning of the financial system, as they play a central role in facilitating clearance and settlement of financial transactions such as payments, securities, and derivatives contracts. Nowadays, it is widely acknowledged that the proper functioning of systemically important FMIs is also vital to maintain financial stability; their failure for solvency reasons or operational disruptions could almost certainly lead to systemic instability. As a consequence, the adequate supervision of FMIs is inherent to the function of preserving financial stability. The aim of this chapter is to provide a general overview of the different FMIs; discuss their role in financial stability and to give an overview of the efforts made by some financial authorities towards the supervision, risk assessment and reinforcement of FMIs.

Assessment of financial system and economic growth: An empirical evidence from Ghanas stock market

“…The effectiveness of the interaction between the asset pricing mechanisms would entice foreign firms to enlist their securities on a country's stock market (Martinez-Jaramillo et al, 2016). The higher the number of expatriate firms listed on the exchange, the higher the depth of the financial market of such country and consequentially higher economic growth with ceteris paribus.…”

Financial stability in networks of financial institutions and market infrastructures

“…material connections) exist among FIs when they settle transactions, links among FIs may be depicted as logical (Kurant and Thiran, 2006) or virtual (Kivelä et al, 2014). For instance, although the purchase of a security by Bank A from Bank B does not result in a physical exchange of security for cash, it is customary to represent such transaction as a logical or virtual link; that is, despite FIs' interactions apparently take place bilaterally, it is almost certain that such transactions will be performed, cleared and settled by one or more FMIs (Martínez-Jaramillo et al, 2016). Hence, following Kurant and Thiran (2006), networks of FIs are logical networks.…”

“…insolvency) risk only. As highlighted in Martínez-Jaramillo et al (2016), FMIs' failure for solvency reasons or operational disruptions could almost certainly lead to systemic instability. However, some FMIs are exposed to credit and liquidity risk as well.…”

“…Therefore, the safe and efficient functioning of FMIs is not only crucial for financial markets and for financial stability, but FMIs should also be considered as critical infrastructures. 4 In spite of the fact that the critical role of FMIs has been stressed before (Bernanke, 2011;CPSS and IOSCO, 2012;Dudley, 2012a,b;Diehl, 2016;Martínez-Jaramillo et al, 2016), most research on financial networks still focuses on single-layer FIs-only networks, in which linkages correspond to transactions or exposures pertaining to a single market (e.g. interbank, foreign exchange, derivatives, etc.).…”

“…Four novel findings result from our paper. First, to the best of our knowledge, our unique dataset allows coupling FIs and FMIs into an interdependent network for the first time, which is a significant step forward in the examination of financial networks; therefore, following Martínez-Jaramillo et al (2016), we incorporate into the notion of financial interconnectivity the fact that FMIs should be considered as the vehicle that allows interconnection to take place, and that highlights its crucial nature. Second, we verify that the multiplex network of FIs preserves the main connective and hierarchical features of single-layer networks, namely their inhomogeneous and modular architecture, and we suggest that this is a byproduct of positively correlated multiplexity in the sense of Lee et al (2014).…”