02 July 2015

BIS / Caruana: The role of the CPMI as part of the Basel Process

Keynote speech by Mr Jaime Caruana, General Manager of the BIS, at the CPMI 25th Anniversary Conference, Basel, 30 June 2015

The crisis that erupted in 2008 revealed the financial sector's many shortcomings. But the infrastructure that supports payment, clearing and settlement was not among them. On the contrary, the various financial market infrastructures - or FMIs - withstood the battering they received while the markets around them were in turmoil, and continued to function smoothly, with little or no damage.

If in 2008, the market infrastructure had been in the same state as it was back in 1990, then the outcome could have been rather different. It has been said many times before, but it bears repeating: FMIs are fundamental to the ability of markets to work. A weak infrastructure can turn a small crisis into a huge one. The fact that the infrastructure was strong enough in 2008 is in large part thanks to the many efforts of this committee since its inception. The introduction of improvements such as real-time gross settlement (RTGS) for payments, delivery-versus-payment (DVP) for securities, and payment-versus-payment (PVP) for foreign exchange has made a real and substantial difference.

Three snapshots from history:

• 1st is about the evolution of standard setting. For many years, some of the most influential norms in the payment and settlement area came in the report that was, in effect, the father of the CPSS - that is, the Lamfalussy report of 1990, published just as the CPSS was created. This report was a key response both to that disruptive innovation of electronic deferred settlement and to the problem of Herstatt. The first reports issued by the CPSS itself were statistical in nature, very different from standard setting. But soon thereafter, the Committee started producing a wide range of normative statements. The terms used to describe these statements varied, but curiously, the term "standards" was rare. It appeared in the 1990 Lamfalussy report, and then again this year when "disclosure standards" for CCPs were published. But in between, the Committee used a bewildering variety of terms: principles, core principles, general principles, recommended actions, recommendations, responsibilities, propositions, and guidelines. In the last couple years, under the initiative of Paul Tucker and concluded under Benoît Cœuré, the CPSS's international standard -setting role was explicitly confirmed by its governance bodies: the Economic Consultative Committee (ECC) and the Global Economy Meeting. The CPSS became the CPMI.
• 2nd is about the resilience, recovery and resolution of FMIs. One of the CPMI's most significant contributions is the promotion of PVP as a safer way to settle foreign exchange. Many of you in this audience would know that the history behind this goes back to 1974 and the so-called Herstatt crisis. The direct consequence of that for us here in Basel was in fact the creation of the Basel Committee on Banking Supervision (BCBS), not the Committee on Payment and Settlement Systems (CPSS). It was only some years later that people recognised the need for a more specialised group to work on settlement issues. Nevertheless, despite its later start, the CPSS embraced FX settlement as one of its initial, defining projects together to produce the BCBS's 2013 Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions. In the coming years, this cooperation will bear fruit as risks are better recognised and addressed.
• 3rd of this conference is about disruptive innovations. In a way, the Committee can be considered to be not 25 but 35 years old, given that its predecessor, the Group of Experts on Payment Systems, was set up in 1980. What led to the formation of that group was a major innovation that, as it happened, was highly disruptive, namely the conversion of paper-based large-value payment systems to electronic ones. This was a change driven by technology. And it occurred at a time when financial markets were starting to grow rapidly in size. The combination - new technology and bigger markets - led central banks to wonder, quite rightly, what the risk implications might be. And it turned out that what was relatively harmless when payments were slow and small became potentially disastrous when they were fast and large. Back in those days, banks received information about incoming payments in real time during the day and credited their customers' accounts immediately based on that information. But settlement between banks took place only at the end of the day. The result: large amounts of intraday interbank credit, that was hardly visible, understood or controlled by the banks. This development led to what was, thankfully, only a brief era of electronic large-value deferred settlement arrangements, before real-time settlement came to dominate.

Then, he speaks about how the Committee has been working in the context of what we at the BIS call the Basel Process.

Finally, he shares a few thoughts on one of the outcomes of the financial crisis, namely the growing role of centralised counterparties or CCPs.

Full speech

Conference – speeches and information

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