20 February 2018
visit www.nextgenbanking.co.uk/

Fed warns of liquidity threat to settlement utilities

12 October 2009  |  4725 views  |  0 foreign exchange rates on screen

The increasing use of 'just-in-time liquidity' provisioning by financial market utilities (FMU) to mitigate against settlement risk poses a growing threat to future financial stability according to a study conducted by the Chicago Federal Reserve.

The authors of the paper - published in the Chicago Fed Letter - suggest that the tight time-frames used by utilities for the settlement of open commitments by user institutions exposes new areas of systemic risk during a domino default scenario.

Market infrastructure platforms referenced in the report include real-time gross settlement systems in payments, CLS bank for FX, and central counterparties in derivatives.

In light of recent liquidity crises, the paper asks: "Can we take it for granted that just-in-time liquidity will be available to FMUs at a time when multiple market participants are in danger of defaulting?"

The document suggests that during periods of extreme market disruption, the presumption that private sources of liquidity will be released into the system does not hold.

"Recent global financial crises have shown that stable and liquid funding may not always be available and that liquidity risk must be taken seriously," the paper contends. "With the increasing dependence of FMUs on just-in-time liquidity, the impact of such liquidity risk on financial markets should be a particular focus of vigilance by market participants and regulators; and it is an important issue to keep in mind as we consider potential changes to the regulatory process."

Read the full paper:» Download the document now 58.2 kb (PDF File)

Comments: (0)

Comment on this story (membership required)

Finextra news in your inbox

For Finextra's free daily newsletter, breaking news flashes and weekly jobs board: sign up now

Related stories

Investment managers call for urgent UK reform following Lehman 'chaos'

Investment managers call for urgent UK reform following Lehman 'chaos'

08 December 2008  |  7381 views  |  0 comments

Related company news


Related blogs

Create a blog about this story (membership required)
visit www.swift.com/your-needs/instant-paymentsVisit http://info.nice.comvisit www.ebaday.com

Top topics

Most viewed Most shared
Saudi central bank provides sandbox for banks to try out Ripple techSaudi central bank provides sandbox for ba...
11699 views comments | 16 tweets | 12 linkedin
ABN Amro moves escrow accounts to the blockchainABN Amro moves escrow accounts to the bloc...
9316 views comments | 15 tweets | 13 linkedin
ECB launches staunch defence of cashECB launches staunch defence of cash
9150 views 10 comments | 22 tweets | 26 linkedin
Coinbase and Visa at loggerheads over erroneous charges on customer crypto accountsCoinbase and Visa at loggerheads over erro...
7856 views comments | 13 tweets | 11 linkedin
FCA explores creation of global sandboxFCA explores creation of global sandbox
7231 views comments | 19 tweets | 18 linkedin

Featured job

Competitive base + commission + benefits
London, UK

Find your next job