Oversight of payment systems and infrastructures

Payment systems and market infrastructures

Financial market infrastructures process financial flows between players in the financial system. Four types of infrastructure exist:

• payment systems that settle customer retail payments between banks and large-value payments between financial institutions, especially those relating to monetary policy
• settlement systems that ensure the effective settlement of transactions involving financial instruments via the pan-European settlement platform
• clearing houses that enable counterparty risk to be managed centrally and more effectively
• trade repositories that register derivatives transactions in centralised databases to ensure the transparency of financial markets

Each infrastructure brings together participants or members, most of which are credit institutions. Each infrastructure therefore interacts with a large number of players/platform users.

Financial market infrastructures operate at the heart of the financial system and help it to run smoothly. Their central position in the financial ecosystem implies that they concentrate a number of risks, including:

• Settlement risk (or financial risk). There are two types:
  • credit risk is the risk of loss stemming from a counterparty's failure to meet its contractual obligations at the specified date or in the future
  • liquidity risk is the risk that a participant in an infrastructure has insufficient funds or securities to meet, partially or wholly, an obligation at the specified date, even if the participant is not insolvent.
• Operational risk is the risk that a failure attributable to internal processes, people, systems or external events adversely affects the capacity of the market infrastructure to deliver its services, leading to reputational, legal or financial consequences.
• Legal risk is the risk of a loss resulting from an unpredictable or ambiguous application of a law or regulation, or from a situation where it is impossible to execute a contract.
• Systemic risk is the risk that a particular event affecting the infrastructure, resulting notably from a financial or operational risk, leads by a chain reaction to significant disruptions across the financial system that are liable to adversely affect the financial system and the real economy.

The financial crisis of 2008 was an important test for the resilience of financial market infrastructures, which proved their robustness. They make an important contribution to the transparency of financial markets as they require the use of common operating guidelines. In the wake of the 2008 financial crisis, the G20 therefore wished to promote their use.

The growing importance of the role of infrastructures has led to the strengthening of the regulatory standards applicable to them.

The players involved

Market infrastructures involve several players:

• Participants : access criteria are specific to each infrastructure but mainly concern credit institutions, central banks, investment firms and certain public sector entities.
• Operators : these are the entities tasked with managing the infrastructures.
• Oversight and supervisory bodies : all market infrastructures are subject to central bank oversight. The security of payment and securities systems is essential to maintaining public confidence in the euro, for which central banks are the guarantors.

At international level (Bank for International Settlements), the Banque de France participates in the Committee on Payments and Market Infrastructures (CPMI), a discussion forum for the central banks of 28 countries on payment, clearing and securities settlement systems.

The French financial infrastructure landscape

The French financial market infrastructure landscape comprises a large-value payment system (T2-BF), two retail payment systems (CORE(FR) and SEPA(EU)), a clearing system (LCH SA) and a securities settlement system (ESES France).

The sector has experienced considerable changes over recent years as a result of European financial integration:

All flows processed by French infrastructures flow into T2-BF, ensuring settlement in central bank money in accounts held by the Banque de France. With the exception of CORE(FR), which has its own private network, French infrastructures communicate via the services provided by SWIFT (Society for Worldwide Interbank Financial Telecommunication).

French oversight and supervisory bodies

• The Autorité de Contrôle Prudentiel et de Résolution (ACPR – Prudential Supervision and Resolution Authority) is tasked with oversight of credit institutions and financial institutions.
• The Autorité des Marchés Financiers (AMF – Financial Markets Authority) is tasked with oversight of clearing and securities settlement systems.
• The Banque de France, as part of its responsibilities within the ESCB, is tasked with oversight of payment systems and instruments, and clearing and securities settlement systems.