Short term Thinking in Investment Decisions of Businesses and Financial Markets

Short term Thinking in Investment Decisions of Businesses and Financial Markets

 

When companies buyback shares and pay dividends rather than investing in new capacity, it leads to low economic growth and low aggregate demand.

Central Banks respond by cutting interest rates.  Yet Businesses do not invest in new capacity.

Many studies attribute this to short term thinking dominant in corporate investment decisions.  Pressures from shareholders push corporate managers to be short term oriented.

Many economists and thinkers have criticized this recently as advanced economies are suffering from anemic growth.

Larry Summers has invoked Secular Stagnation.  He says one of the reason for Secular Stagnation is short term thinking.

Andy Haldane of Bank of England has criticized short term thinking as it prevents investments and causes low economic growth.

Key Terms:

  • Quarterly Capitalism
  • Secular Stagnation
  • Short Term Thinking
  • Low Economic Growth
  • Business Investments
  • Real Interest Rates
  • Monetary Policy
  • Income and Wealth Inequality
  • Aggregate Demand
  • Productive Capacity
  • Productivity growth
  • Long Term Investments
  • Share Buybacks
  • Dividends
  • Corporate Cash Pools

 

Capitalism for the Long Term

The near meltdown of the financial system and the ensuing Great Recession have been, and will remain, the defining issue for the current generation of executives. Now that the worst seems to be behind us, it’s tempting to feel deep relief—and a strong desire to return to the comfort of business as usual. But that is simply not an option. In the past three years we’ve already seen a dramatic acceleration in the shifting balance of power between the developed West and the emerging East, a rise in populist politics and social stresses in a number of countries, and significant strains on global governance systems. As the fallout from the crisis continues, we’re likely to see increased geopolitical rivalries, new international security challenges, and rising tensions from trade, migration, and resource competition. For business leaders, however, the most consequential outcome of the crisis is the challenge to capitalism itself.

That challenge did not just arise in the wake of the Great Recession. Recall that trust in business hit historically low levels more than a decade ago. But the crisis and the surge in public antagonism it unleashed have exacerbated the friction between business and society. On top of anxiety about persistent problems such as rising income inequality, we now confront understandable anger over high unemployment, spiraling budget deficits, and a host of other issues. Governments feel pressure to reach ever deeper inside businesses to exert control and prevent another system-shattering event.

My goal here is not to offer yet another assessment of the actions policymakers have taken or will take as they try to help restart global growth. The audience I want to engage is my fellow business leaders. After all, much of what went awry before and after the crisis stemmed from failures of governance, decision making, and leadership within companies. These are failures we can and should address ourselves.

In an ongoing effort that started 18 months ago, I’ve met with more than 400 business and government leaders across the globe. Those conversations have reinforced my strong sense that, despite a certain amount of frustration on each side, the two groups share the belief that capitalism has been and can continue to be the greatest engine of prosperity ever devised—and that we will need it to be at the top of its job-creating, wealth-generating game in the years to come. At the same time, there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results.

Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of “long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at least five to seven years.) This shift is not just about persistently thinking and acting with a next-generation view—although that’s a key part of it. It’s about rewiring the fundamental ways we govern, manage, and lead corporations. It’s also about changing how we view business’s value and its role in society.

There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.

When making major decisions, Asians typically think in terms of at least 10 to 15 years. In the U.S. and Europe, nearsightedness is the norm.

None of these ideas, or the specific proposals that follow, are new. What is new is the urgency of the challenge. Business leaders today face a choice: We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public. The good news is that the reforms will not only increase trust in the system; they will also strengthen the system itself. They will unleash the innovation needed to tackle the world’s grand challenges, pave the way for a new era of shared prosperity, and restore public faith in business.

1. Fight the Tyranny of Short-Termism

As a Canadian who for 25 years has counseled business, public sector, and nonprofit leaders across the globe (I’ve lived in Toronto, Sydney, Seoul, Shanghai, and now London), I’ve had a privileged glimpse into different societies’ values and how leaders in various cultures think. In my view, the most striking difference between East and West is the time frame leaders consider when making major decisions. Asians typically think in terms of at least 10 to 15 years. For example, in my discussions with the South Korean president Lee Myung-bak shortly after his election in 2008, he asked us to help come up with a 60-year view of his country’s future (though we settled for producing a study called National Vision 2020.) In the U.S. and Europe, nearsightedness is the norm. I believe that having a long-term perspective is the competitive advantage of many Asian economies and businesses today.

Myopia plagues Western institutions in every sector. In business, the mania over quarterly earnings consumes extraordinary amounts of senior time and attention. Average CEO tenure has dropped from 10 to six years since 1995, even as the complexity and scale of firms have grown. In politics, democracies lurch from election to election, with candidates proffering dubious short-term panaceas while letting long-term woes in areas such as economic competitiveness, health, and education fester. Even philanthropy often exhibits a fetish for the short term and the new, with grantees expected to become self-sustaining in just a few years.

Lost in the frenzy is the notion that long-term thinking is essential for long-term success. Consider Toyota, whose journey to world-class manufacturing excellence was years in the making. Throughout the 1950s and 1960s it endured low to nonexistent sales in the U.S.—and it even stopped exporting altogether for one bleak four-year period—before finally emerging in the following decades as a global leader. Think of Hyundai, which experienced quality problems in the late 1990s but made a comeback by reengineering its cars for long-term value—a strategy exemplified by its unprecedented introduction, in 1999, of a 10-year car warranty. That radical move, viewed by some observers as a formula for disaster, helped Hyundai quadruple U.S. sales in three years and paved the way for its surprising entry into the luxury market.

To be sure, long-term perspectives can be found in the West as well. For example, in 1985, in the face of fierce Japanese competition, Intel famously decided to abandon its core business, memory chips, and focus on the then-emerging business of microprocessors. This “wrenching” decision was “nearly inconceivable” at the time, says Andy Grove, who was then the company’s president. Yet by making it, Intel emerged in a few years on top of a new multi-billion-dollar industry. Apple represents another case in point. The iPod, released in 2001, sold just 400,000 units in its first year, during which Apple’s share price fell by roughly 25%. But the board took the long view. By late 2009 the company had sold 220 million iPods—and revolutionized the music business.

It’s fair to say, however, that such stories are countercultural. In the 1970s the average holding period for U.S. equities was about seven years; now it’s more like seven months. According to a recent paper by Andrew Haldane, of the Bank of England, such churning has made markets far more volatile and produced yawning gaps between corporations’ market price and their actual value. Then there are the “hyperspeed” traders (some of whom hold stocks for only a few seconds), who now account for 70% of all U.S. equities trading, by one estimate. In response to these trends, executives must do a better job of filtering input, and should give more weight to the views of investors with a longer-term, buy-and-hold orientation.

If they don’t, short-term capital will beget short-term management through a natural chain of incentives and influence. If CEOs miss their quarterly earnings targets, some big investors agitate for their removal. As a result, CEOs and their top teams work overtime to meet those targets. The unintended upshot is that they manage for only a small portion of their firm’s value. When McKinsey’s finance experts deconstruct the value expectations embedded in share prices, we typically find that 70% to 90% of a company’s value is related to cash flows expected three or more years out. If the vast majority of most firms’ value depends on results more than three years from now, but management is preoccupied with what’s reportable three months from now, then capitalism has a problem.

Roughly 70% of all U.S. equities trading is now done by “hyperspeed” traders—some of whom hold stocks for only a few seconds.

Some rightly resist playing this game. Unilever, Coca-Cola, and Ford, to name just a few, have stopped issuing earnings guidance altogether. Google never did. IBM has created five-year road maps to encourage investors to focus more on whether it will reach its long-term earnings targets than on whether it exceeds or misses this quarter’s target by a few pennies. “I can easily make my numbers by cutting SG&A or R&D, but then we wouldn’t get the innovations we need,” IBM’s CEO, Sam Palmisano, told us recently. Mark Wiseman, executive vice president at the Canada Pension Plan Investment Board, advocates investing “for the next quarter century,” not the next quarter. And Warren Buffett has quipped that his ideal holding period is “forever.” Still, these remain admirable exceptions.

To break free of the tyranny of short-termism, we must start with those who provide capital. Taken together, pension funds, insurance companies, mutual funds, and sovereign wealth funds hold $65 trillion, or roughly 35% of the world’s financial assets. If these players focus too much attention on the short term, capitalism as a whole will, too.

In theory they shouldn’t, because the beneficiaries of these funds have an obvious interest in long-term value creation. But although today’s standard practices arose from the desire to have a defensible, measurable approach to portfolio management, they have ended up encouraging shortsightedness. Fund trustees, often advised by investment consultants, assess their money managers’ performance relative to benchmark indices and offer only short-term contracts. Those managers’ compensation is linked to the amount of assets they manage, which typically rises when short-term performance is strong. Not surprisingly, then, money managers focus on such performance—and pass this emphasis along to the companies in which they invest. And so it goes, on down the line.

Only 45% of those surveyed in the U.S. and the UK expressed trust in business. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil.

As the stewardship advocate Simon Wong points out, under the current system pension funds deem an asset manager who returns 10% to have underperformed if the relevant benchmark index rises by 12%. Would it be unthinkable for institutional investors instead to live with absolute gains on the (perfectly healthy) order of 10%—especially if they like the approach that delivered those gains—and review performance every three or five years, instead of dropping the 10-percenter? Might these big funds set targets for the number of holdings and rates of turnover, at least within the “fundamental investing” portion of their portfolios, and more aggressively monitor those targets? More radically, might they end the practice of holding thousands of stocks and achieve the benefits of diversification with fewer than a hundred—thereby increasing their capacity to effectively engage with the businesses they own and improve long-term performance? Finally, could institutional investors beef up their internal skills and staff to better execute such an agenda? These are the kinds of questions we need to address if we want to align capital’s interests more closely with capitalism’s.

2. Serve Stakeholders, Enrich Shareholders

The second imperative for renewing capitalism is disseminating the idea that serving stakeholders is essential to maximizing corporate value. Too often these aims are presented as being in tension: You’re either a champion of shareholder value or you’re a fan of the stakeholders. This is a false choice.

The inspiration for shareholder-value maximization, an idea that took hold in the 1970s and 1980s, was reasonable: Without some overarching financial goal with which to guide and gauge a firm’s performance, critics feared, managers could divert corporate resources to serve their own interests rather than the owners’. In fact, in the absence of concrete targets, management might become an exercise in politics and stakeholder engagement an excuse for inefficiency. Although this thinking was quickly caricatured in popular culture as the doctrine of “greed is good,” and was further tarnished by some companies’ destructive practices in its name, in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of value maximization have always insisted that it is long-term value that has to be maximized.

Capitalism’s founding philosopher voiced an even bolder aspiration. “All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries,” Adam Smith wrote in his 1759 work, The Theory of Moral Sentiments. “The wise and virtuous man,” he added, “is at all times willing that his own private interest should be sacrificed to the public interest,” should circumstances so demand.

Smith’s insight into the profound interdependence between business and society, and how that interdependence relates to long-term value creation, still reverberates. In 2008 and again in 2010, McKinsey surveyed nearly 2,000 executives and investors; more than 75% said that environmental, social, and governance (ESG) initiatives create corporate value in the long term. Companies that bring a real stakeholder perspective into corporate strategy can generate tangible value even sooner. (See the sidebar “Who’s Getting It Right?”)

Creating direct business value, however, is not the only or even the strongest argument for taking a societal perspective. Capitalism depends on public trust for its legitimacy and its very survival. According to the Edelman public relations agency’s just-released 2011 Trust Barometer, trust in business in the U.S. and the UK (although up from mid-crisis record lows) is only in the vicinity of 45%. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil. The picture is equally bleak for individual corporations in the Anglo-American world, “which saw their trust rankings drop again last year to near-crisis lows,” says Richard Edelman.

How can business leaders restore the public’s trust? Many Western executives find that nothing in their careers has prepared them for this new challenge. Lee Scott, Walmart’s former CEO, has been refreshingly candid about arriving in the top job with a serious blind spot. He was plenty busy minding the store, he says, and had little feel for the need to engage as a statesman with groups that expected something more from the world’s largest company. Fortunately, Scott was a fast learner, and Walmart has become a leader in environmental and health care issues.

Tomorrow’s CEOs will have to be, in Joseph Nye’s apt phrase, “tri-sector athletes”: able and experienced in business, government, and the social sector. But the pervading mind-set gets in the way of building those leadership and management muscles. “Analysts and investors are focused on the short term,” one executive told me recently. “They believe social initiatives don’t create value in the near term.” In other words, although a large majority of executives believe that social initiatives create value in the long term, they don’t act on this belief, out of fear that financial markets might frown. Getting capital more aligned with capitalism should help businesses enrich shareholders by better serving stakeholders.

3. Act Like You Own the Place

As the financial sector’s troubles vividly exposed, when ownership is broadly fragmented, no one acts like he’s in charge. Boards, as they currently operate, don’t begin to serve as a sufficient proxy. All the Devils Are Here, by Bethany McLean and Joe Nocera, describes how little awareness Merrill Lynch’s board had of the firm’s soaring exposure to subprime mortgage instruments until it was too late. “I actually don’t think risk management failed,” Larry Fink, the CEO of the investment firm BlackRock, said during a 2009 debate about the future of capitalism, sponsored by the Financial Times. “I think corporate governance failed, because…the boards didn’t ask the right questions.”

What McKinsey has learned from studying successful family-owned companies suggests a way forward: The most effective ownership structure tends to combine some exposure in the public markets (for the discipline and capital access that exposure helps provide) with a significant, committed, long-term owner. Most large public companies, however, have extremely dispersed ownership, and boards rarely perform the single-owner-proxy role. As a result, CEOs too often listen to the investors (and members of the media) who make the most noise. Unfortunately, those parties tend to be the most nearsighted ones. And so the tyranny of the short term is reinforced.

The answer is to renew corporate governance by rooting it in committed owners and by giving those owners effective mechanisms with which to influence management. We call this ownership-based governance, and it requires three things:

Just 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles.

More-effective boards.

In the absence of a dominant shareholder (and many times when there is one), the board must represent a firm’s owners and serve as the agent of long-term value creation. Even among family firms, the executives of the top-performing companies wield their influence through the board. But only 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles. A government-commissioned review of the governance of British banks last year recommended an enormous increase in the time required of nonexecutive directors of banks—from the current average, between 12 and 20 days annually, to between 30 and 36 days annually. What’s especially needed is an increase in the informal time board members spend with investors and executives. The nonexecutive board directors of companies owned by private equity firms spend 54 days a year, on average, attending to the company’s business, and 70% of that time consists of informal meetings and conversations. Four to five days a month obviously give a board member much greater understanding and impact than the three days a quarter (of which two may be spent in transit) devoted by the typical board member of a public company.

Boards also need much more relevant experience. Industry knowledge—which four of five nonexecutive directors of big companies lack—helps boards identify immediate opportunities and reduce risk. Contextual knowledge about the development path of an industry—for example, whether the industry is facing consolidation, disruption from new technologies, or increased regulation—is highly valuable, too. Such insight is often obtained from experience with other industries that have undergone a similar evolution.

In addition, boards need more-effective committee structures—obtainable through, for example, the establishment of a strategy committee or of dedicated committees for large business units. Directors also need the resources to allow them to form independent views on strategy, risk, and performance (perhaps by having a small analytical staff that reports only to them). This agenda implies a certain professionalization of nonexecutive directorships and a more meaningful strategic partnership between boards and top management. It may not please some executive teams accustomed to boards they can easily “manage.” But given the failures of governance to date, it is a necessary change.

More-sensible CEO pay.

An important task of governance is setting executive compensation. Although 70% of board directors say that pay should be tied more closely to performance, CEO pay is too often structured to reward a leader simply for having made it to the top, not for what he or she does once there. Meanwhile, polls show that the disconnect between pay and performance is contributing to the decline in public esteem for business.

Companies should create real risk for executives.Some experts privately suggest mandating that new executives invest a year’s salary in the company.

CEOs and other executives should be paid to act like owners. Once upon a time we thought that stock options would achieve this result, but stock-option- based compensation schemes have largely incentivized the wrong behavior. When short-dated, options lead to a focus on meeting quarterly earnings estimates; even when long-dated (those that vest after three years or more), they can reward managers for simply surfing industry- or economy-wide trends (although reviewing performance against an appropriate peer index can help minimize free rides). Moreover, few compensation schemes carry consequences for failure—something that became clear during the financial crisis, when many of the leaders of failed institutions retired as wealthy people.

There will never be a one-size-fits-all solution to this complex issue, but companies should push for change in three key areas:

• They should link compensation to the fundamental drivers of long-term value, such as innovation and efficiency, not just to share price.

• They should extend the time frame for executive evaluations—for example, using rolling three-year performance evaluations, or requiring five-year plans and tracking performance relative to plan. This would, of course, require an effective board that is engaged in strategy formation.

• They should create real downside risk for executives, perhaps by requiring them to put some skin in the game. Some experts we’ve surveyed have privately suggested mandating that new executives invest a year’s salary in the company.

Redefined shareholder “democracy.”

The huge increase in equity churn in recent decades has spawned an anomaly of governance: At any annual meeting, a large number of those voting may soon no longer be shareholders. The advent of high-frequency trading will only worsen this trend. High churn rates, short holding periods, and vote-buying practices may mean the demise of the “one share, one vote” principle of governance, at least in some circumstances. Indeed, many large, top-performing companies, such as Google, have never adhered to it. Maybe it’s time for new rules that would give greater weight to long-term owners, like the rule in some French companies that gives two votes to shares held longer than a year. Or maybe it would make sense to assign voting rights based on the average turnover of an investor’s portfolio. If we want capitalism to focus on the long term, updating our notions of shareholder democracy in such ways will soon seem less like heresy and more like common sense.

While I remain convinced that capitalism is the economic system best suited to advancing the human condition, I’m equally persuaded that it must be renewed, both to deal with the stresses and volatility ahead and to restore business’s standing as a force for good, worthy of the public’s trust. The deficiencies of the quarterly capitalism of the past few decades were not deficiencies in capitalism itself—just in that particular variant. By rebuilding capitalism for the long term, we can make it stronger, more resilient, more equitable, and better able to deliver the sustainable growth the world needs. The three imperatives outlined above can be a start along this path and, I hope, a way to launch the conversation; others will have their own ideas to add.

The kind of deep-seated, systemic changes I’m calling for can be achieved only if boards, business executives, and investors around the world take responsibility for bettering the system they lead. Such changes will not be easy; they are bound to encounter resistance, and business leaders today have more than enough to do just to keep their companies running well. We must make the effort regardless. If capitalism emerges from the crisis vibrant and renewed, future generations will thank us. But if we merely paper over the cracks and return to our precrisis views, we will not want to read what the historians of the future will write. The time to reflect—and to act—is now.

 

Please see my other related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

 

Key sources of Research:

Secular stagnation and low investment: Breaking the vicious cycle—a discussion paper

McKinsey

http://www.mckinsey.com/global-themes/europe/secular-stagnation-and-low-investment-breaking-the-vicious-cycle

Case Still Out on Whether Corporate Short-Termism Is a Problem

Larry Summers

http://larrysummers.com/2017/02/09/case-still-out-on-whether-corporate-short-termism-is-a-problem/

Where companies with a long-term view outperform their peers

McKinsey

http://www.mckinsey.com/global-themes/long-term-capitalism/where-companies-with-a-long-term-view-outperform-their-peers

How short-term thinking hampers long-term economic growth

FT

https://www.ft.com/content/8c868a98-b821-11e4-b6a5-00144feab7de

Anthony Hilton: Short-term thinking hits nations as a whole, not just big business

http://www.standard.co.uk/comment/comment/anthony-hilton-short-term-thinking-hits-nations-as-a-whole-not-just-big-business-10427294.html

Short-termism in business: causes, mechanisms and consequences

EY Poland Report

http://www.ey.com/Publication/vwLUAssets/EY_Poland_Report/$FILE/Short-termism_raport_EY.pdf

Overcoming the Barriers to Long-term Thinking in Financial Markets

Ruth Curran and Alice Chapple
Forum for the Future

https://www.forumforthefuture.org/sites/default/files/project/downloads/long-term-thinking-fpf-report-july-11.pdf

Understanding Short-Termism: Questions and Consequences

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Understanding-Short-Termism.pdf

Ending Short-Termism : An Investment Agenda for Growth

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Ending-Short-Termism.pdf

The Short Long

Speech by
Andrew G Haldane, Executive Director, Financial Stability, and Richard Davies

Brussels May 2011

http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/speech495.pdf

Capitalism for the Long Term

Dominic Barton

From the March 2011 Issue

https://hbr.org/2011/03/capitalism-for-the-long-term

Quarterly capitalism: The pervasive effects of short-termism and austerity

https://currentlyunderdevelopment.wordpress.com/2016/05/10/quarterly-capitalism-the-pervasive-effects-of-short-termism-and-austerity/

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?

http://www.wlrk.com/docs/IsShortTermBehaviorJeopardizingTheFutureProsperityOfBusiness_CEOStrategicimplications.pdf

Andrew G Haldane: The short long

Speech by Mr Andrew Haldane, Executive Director, Financial Stability, and Mr Richard
Davies, Economist, Financial Institutions Division, Bank of England,
at the 29th Société
Universitaire Européene de Recherches Financières Colloquium,
Brussels, 11 May 2011

http://www.bis.org/review/r110511e.pdf

THE UNEASY CASE FOR FAVORING LONG-TERM SHAREHOLDERS

Jesse M. Fried

https://dash.harvard.edu/bitstream/handle/1/17985223/Fried_795.pdf?sequence=1

The fringe economic theory that might get traction in the 2016 campaign

https://www.washingtonpost.com/news/wonk/wp/2015/03/02/the-fringe-economic-theory-that-might-get-traction-in-the-2016-campaign/?utm_term=.932bc0b97758

FCLT Global:  Focusing Capital on the Long Term

Publications

http://www.fcltglobal.org/insights/publications

Finally, Evidence That Managing for the Long Term Pays Off

Dominic Barton

James Manyika

Sarah Keohane Williamson

February 07, 2017 UPDATED February 09, 2017

https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off

Focusing Capital on the Long Term

Dominic Barton

Mark Wiseman

From the January–February 2014 Issue

Is Corporate Short-Termism Really a Problem? The Jury’s Still Out

Lawrence H. Summers

February 16, 2017

Yes, Short-Termism Really Is a Problem

Roger L. Martin

October 09, 2015

Long-Termism or Lemons

The Role of Public Policy in Promoting Long-Term Investments

By Marc Jarsulic, Brendan V. Duke, and Michael Madowitz October 2015

Center for American Progress

https://cdn.americanprogress.org/wp-content/uploads/2015/10/21060054/LongTermism-reportB.pdf

 

Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management

https://corpgov.law.harvard.edu/2009/09/11/overcoming-short-termism-a-call-for-a-more-responsible-approach-to-investment-and-business-management/

 

 

Focusing capital on the Long Term

Jean-Hugues Monier – Senior Parter – McKinsey & Company

Princeton University – November 2016

http://jrc.princeton.edu/sites/jrc/files/jean-hugues_j._monier_slides_final.pdf

Understanding Global OTC Foreign Exchange (FX) Market

Understanding Global OTC Foreign Exchange (FX) Market

 

OTC FX Market is biggest market in the world.  About 5.1 trillion USD are traded in this market every day.

Originally all FX transactions were for cross border trades in goods and services, but later on developments led to speculative investments activities in foreign currencies.

OTC FX Market is decentralized.  It means there is no exchange on which currencies are traded. Interbank market in FX is among dealer banks.  Dealer Banks are the biggest global banks.  Top 10 banks who trade in FX have total trade volume of 67%.

USD is the dominant currency in global FX market.  UK is the biggest location for FX trading followed by USA and Singapore.  Hong Kong SAR and Japan are other important FX trading centers.

Markets operate 24/7 unlike other financial markets which open and close at certain times.

Bank of International Settlement publishes its triennial survey of global FX markets.  2016 survey showed 5.1 trillion USD/day FX turnover down from 5.3 T/Day back in 2013 survey.  Markets peaked in September of 2014 at 6.5 Trillion USD/day.  Since then the trend is declining.  De-risking by global banks, decline in global trade are cited as main reasons for decline.  Will attempt to understand this issue at a later date.

 

Following Issues emerge from this post but are not discussed here in detail.

  • Retail FX Market
  • Algorithmic Trading
  • Non Bank High Frequency Liquidity Providers
  • FX  Prime Brokerage
  • Financial Stability in OTC Market – Case for CCP
  • China RMB Internationalization
  • Clearing and Settlement in FX Markets – CLS Bank and CLSNet
  • Liquidity for FX trades – Funding and Market Liquidity

 

Highlights from the 2016 Triennial Survey of turnover in OTC foreign exchange markets:

  •   Trading in foreign exchange markets averaged $5.1 trillion per day in April 2016. This is down from $5.4 trillion in April 2013, a month which had seen heightened activity in Japanese yen against the background of monetary policy developments at that time.
  •   For first time since 2001, spot turnover declined. Spot transactions fell to $1.7 trillion per day in April 2016 from $2.0 trillion in 2013. In contrast, the turnover of FX swaps rose further, reaching $2.4 trillion per day in April 2016. This rise was driven in large part by increased trading of FX swaps involving yen.
  •   The US dollar remained the dominant vehicle currency, being on one side of 88% of all trades in April 2016. The euro, yen and Australian dollar all lost market share. In contrast, many emerging market currencies increased their share. The renminbi doubled its share, to 4%, to become the world’s eighth most actively traded currency and the most actively traded emerging market currency, overtaking the Mexican peso. The rise in the share of renminbi was primarily due to the increase in trading against the US dollar. In April 2016, as much as 95% of renminbi trading volume was against the US dollar.
  •   The share of trading between reporting dealers grew over the three-year period, accounting for 42% of turnover in April 2016, compared with 39% in April 2013. Banks other than reporting dealers accounted for a further 22% of turnover. Institutional investors were the third largest group of counterparties in FX markets, at 16%.
  •   In April 2016, sales desks in five countries – the United Kingdom, the United States, Singapore, Hong Kong SAR and Japan – intermediated 77% of foreign exchange trading, up from 75% in April 2013 and 71% in April 2010.

 

Interbank (OTC) Market Infrastructure and Institutions

  • Banks
  • Non Banks
  • Exchanges

 

Top 10 Banks in FX

 

fx16

 

From All change in the 2016 Euromoney FX rankings

Citi holds on to the top ranking in this year’s Euromoney foreign exchange rankings, but elsewhere there have been unprecedented shifts.

Structural changes to the markets, management upheaval among many big banks, new non-bank entrants and lack of volumes and volatility have seemingly levelled the playing field among the industry’s biggest firms.

The biggest change in the rankings this year is the decline of the combined market share of the top five global banks. Their market share in the survey peaked in 2009 at 61.5% and was still above 60% as recently as 2014.

This year the top five banks account for just 44.7% of total volume. The hopes of many global FX heads and their investment bank bosses – that the share of the big banks would rise inexorably as the market became more automated and that they would be able to benefit from oligopolistic pricing power as a result – now seem like distant and deluded dreams.

One FX veteran tells Euromoney that the decline of the top five banks’ combined market share “is exactly what the regulators would want in a market they continue to keep a very close eye on.”

While the market share of the top 10 FX houses overall also declines, from over 75% last year to just 66% this year, the fall is entirely due to the performance of the top five banks. The banks ranked from sixth to 10th place overall produced a combined market share of 22%, roughly in line with the last five years of the survey and considerably higher than the 14% they managed in 2008.

Citi actually extends its lead over the second-placed bank in the survey, which market participants regard as the most accurate reflection of client-based activity in the global foreign exchange markets, to more than four percentage points – even though the bank’s own market share declined by more than three percentage points, from 16.11% in the 2015 survey to 12.91% of trading in 2016.

That winning market share is the lowest for any top-ranked bank in the survey since UBS won the survey in 2004.

Citi maintained its leadership overall in important product areas such as spot/forwards and swaps, as well as in the key real money and bank client categories. It rises one place this year to win in corporates and overall electronic market share, although it falls to third overall for options.

One big story in this year’s rankings is the decline of Deutsche Bank. It was once the undisputed leader in global foreign exchange, losing the top position in the Euromoney rankings three years ago after nearly a decade of dominance.

While new group CEO John Cryan has gone out of his way both publicly and privately to describe the FX business as one of the beleaguered bank’s crown jewels, the days when Deutsche Bank was able to secure an overall market share of more than 20% (as recently as 2009) are long gone.

In the latest set of rankings, Deutsche falls from second to fourth place overall: its market share of 7.86% is almost half what it was a year ago. Deutsche’s decline is widespread, and competitors say has been driven in part by the bank cutting back on the number of clients it covers. It falls from second to fifth in spot/forward; from second to eighth among real money clients and loses top spot among bank clients. It remains the leading overall options house.

Perhaps the most surprising fall of all is in its overall electronic market share. Deutsche’s Autobahn system revolutionized global FX trading and in banner years accounted for more than a quarter of all electronic trading. This year, Deutsche can only manage fourth place in e-market share, from holding the top ranking last year, and its share has fallen from 17.5% to 8.73%.

Two banks overtake Deutsche to move into the top three overall, but the similarities end there: the two banks in question have very different recent histories in global foreign exchange.

JPMorgan jumps to second place in the survey, with a market share of 8.77%, up from fourth place with 7.65% last year. For many years, competitors have said that JPMorgan has failed to punch its weight in FX; it has typically ranked outside the top five overall banks in the Euromoney survey for the last decade. Those accusations have less weight now, even though they have been replaced by rumours about the bank’s competitive pricing strategy.

The US bank rises across a range of categories. Its most notable successes are winning the leveraged fund category with a lead over second-placed UBS of almost eight percentage points and a market share of more than 18%; and jumping from fifth to second place in overall electronic trading. JPMorgan’s one poor ranking is now in options, where it comes a lowly eighth.

UBS returns to the top three global FX banks overall this year. A winner back in 2004, it has been outside the top three since 2009, and last challenged for the top spot overall a year earlier, when its market share of almost 16% was only beaten by Deutsche. Last year it fell to fifth place, its worst performance in a decade, with a market share of 7.3%.

Given the bank’s leadership has spent the last few years de-emphasizing the role of its investment bank, some competitors believed UBS was on a long, slow decline in FX.

But, quietly and consistently, UBS’s markets business has been recalibrating to the new capital and markets environment, as well as maintaining a commitment to best-in-class electronic platforms. Its overall market share rises to 8.76%; and it breaks into the top three overall in spot/forward, swaps, electronic market share and for bank clients. Like JPMorgan, it is a laggard in options, where it ranks seventh.

JPMorgan and UBS have one other important thing in common: while other banks have lost entire benches of senior management from their FX teams in recent years, JPMorgan and UBS have been relatively stable.

At the former, Troy Rohrbach has overseen the FX business since 2005 (he now also runs rates and public finance globally); at UBS, Chris Murphy and George Athanasopoulos, the global co-heads of FX, rates and credit, both joined the bank more than five years ago and have jointly run the division since 2013. Leadership, it seems, does count.

Bank of America Merrill Lynch continues its steady rise up the rankings of recent years, from a nadir of 12th place from 2009 to 2012. It finally breaks into the top five global FX houses overall, up from sixth place last year.

BAML jumped up the rankings into the top five for corporates and real money accounts, and gained ground in both swaps and options – in the latter, it ranks second globally. But BAML still has work to do in the electronic market, where its overall ranking fell from sixth to seventh place. Other US banks also performed well.

Goldman Sachs rose from ninth to seventh overall and Morgan Stanley jumped three places to break back into the top 10.

It has not been a good year in FX for Barclays. Perhaps the bank’s decision to not have a global head of foreign exchange has backfired. The UK-cum-transatlantic bank dropped from third place overall to sixth, and its market share from 8.11% to 5.67%.

Barclays slipped three places to seventh in spot/forward, four places to seventh in swaps and three places to ninth in options. Among client groups, its biggest reversal came among real money accounts, falling from fourth place last year to outside the top 10.

HSBC has also had a disappointing year, falling from seventh to eighth place overall. It also loses its top ranking among corporates last year, falling out of the top five of that client category altogether. Electronic trading remains the bank’s weakest link, and may even be getting weaker, as the bank falls to ninth place in overall e-market share.

New phenomenon

Banks have always risen and fallen in the Euromoney rankings over the last 40 years, but this year sees a new phenomenon – the advent of the non-bank liquidity provider. Leading the way is XTX Markets, a spin-off of GSA Capital, whose co-CEO Zar Amrolia was a frequent winner of the Euromoney FX rankings in his previous role as head of Deutsche Bank’s FX business.

In its first year of eligibility, the spot-only XTX makes a stunning debut: ninth place in the overall rankings with a market share of 3.87%; fourth in spot/forwards; fifth for bank clients; third for FX trading platforms; fifth overall for e-market share; and third for electronic trading of spot, ahead of Deutsche Bank with a market share of more than 10%.

XTX is the leader, but not the only non-bank entrant to the survey. Tower Research Capital, Jump Trading, Virtu Financial, Lucid Markets and Citadel Securities all make the top 50 overall market share rankings.

XTX’s ninth place overall looks like a line in the sand for the FX markets. The banks above it are, for the most part, the remaining price-makers; the banks below often price-takers, with the ability to make markets in particular currencies or products.

Many of the banks ranked outside the top 10 overall this year are understood to be sourcing liquidity from non-bank providers such as XTX, Tower and Jump. They look set to gain more market share in the future, helped by new technology, more defined business models and a lower-cost infrastructure base than the traditional FX banks. They could look to build capability in forwards and other markets in the near future.

Among multi-dealer platforms, Thomson Reuters – through its FXall service – remains the clear leader with a 30% market share, although its margin over second-ranked FXConnect almost halved. The big riser among MDPs was third-ranked HotspotFXi, which increased its market share from less than 7% to almost 18% this year.

Total volumes in the Euromoney FX survey came in at almost $95 trillion, while the number of votes held steady compared with last year at around 3,500 clients. That represents a volume fall of around 23% on last year, in line with market expectations.

 

 

Electronic FX platforms 

There are three types of trading platforms.

  • Interdealer
  • Multidealer
  • Singledealer

 

Trading platforms can be divided into three different types:

  • Inter-dealer electronic broking platforms. These platforms were developed in the 1990s and are regarded, according to the Bank for international Settlements (BiS, 2010), as the dominant source of interbank liquidity on the foreign exchange market. They mediate information on various market makers’ indicative prices. EBS and Reuters, based in London, are the two dominant platforms within this category.
  • Multi-bank platforms. These platforms are also known as multi-bank ECNs (electronic communication networks). They were created in the first decade of this century and resemble the previous category in that they mediate several market makers’ prices. one difference is that they have freer access regulations for market makers, which makes it easier for market makers to join these platforms. Another difference is that they are largely used outside the interbank market, which is to say by market participants that are not banks. The US platforms Fx All, currenex, Hotspot Fx, State Street and Fx connect are examples of this type of trading platform. There are also platforms that provide standardised algorithmic trading functions as a service. currenex is one such platform.
  • Single-bank platforms. This type of platform is run by an individual bank. The platform mediates only the individual bank’s own prices for various currency pairs, unlike the trading platforms discussed above, which mediate several market makers’ prices. in Sweden, SeB has a platform of this type, SeB Trading Station. other examples of banks with such platforms are JP Morgan, Deutsche Bank and citibank.

 

A. Multi Dealer Platforms

J.P. Morgan has significantly increased its footprint on these platforms over the past couple of years and now ranks first for penetration globally, followed closely by Citi. Bank of America Merrill Lynch, Deutsche Bank and HSBC round out the top five most prominent banks on MDPs.

B. Single Dealer Platforms

While multi-dealer systems are clearly on the rise, an average of more than 20% of trading volume of banks and hedge funds is still executed on single-bank platforms. Barclays, Citi and Deutsche Bank are the clear top three most actively used single-dealer platforms globally.

“Proprietary platforms give banks a means of retaining profitable trading volumes, so dealers are expanding these systems to provide a range of liquidity choices that enable clients to access the market in a variety of ways, including disclosed and non-disclosed liquidity, agency and principal trades, and links to exchange-based execution,” says Greenwich Associates Managing Director Woody Canaday.

C. Algorithmic Trading

Dealers are also in the early days of what promises to be an all-out arms race in algorithmic trading. Currently only 13% of top-tier FX customers use algorithmic trading models. However, that share approaches one-quarter among the market’s biggest buy-side participants and 30% among hedge funds.

Two trends suggest that algorithmic trading is gaining traction in FX. First, market participants that use algo-rithmic models are tapping an expanding number of dealers for algorithms. Second, current users are routing growing shares of trading volume through the models, from 25% in 2014 to 28% in 2015. Hedge funds that trade algorithmically now use these models for about half of total trading volume.

 

A.  Inter-dealer electronic broking platforms

  • Reuters Dealing 3000
  • ICAP EBS

EBS is the primary trading venue for EUR/USD, USD/JPY, EUR/JPY, USD/CHF, EUR/CHF and USD/CNH.

Thomson Reuters Matching is the primary trading venue for commonwealth (AUD/USD, NZD/USD, USD/CAD) and emerging market currency pairs.

 

ICAP EBS

EBS was created by a partnership of the world’s largest foreign exchange (FX) market making banks in 1990 to challenge Reuters’ threatened monopoly in interbank spot foreign exchange and provide effective competition. By 2007, approximately US$164 billion in spot foreign exchange transactions were traded every day over EBS’s central limit order book, EBS Market.

EBS’s closest competitor is Reuters Dealing 3000 Spot Matching. The decision by an FX trader whether to use EBS or Thomson Reuters Matching is driven largely by currency pair. In practice, EBS is the primary trading venue for EUR/USD, USD/JPY, EUR/JPY, USD/CHF, EUR/CHF and USD/CNH, and Thomson Reuters Matching is the primary trading venue for commonwealth (AUD/USD, NZD/USD, USD/CAD) and emerging market currency pairs.

EBS initiated e-trading in spot precious metals, spanning spot gold, silver, platinum and palladium, and remains the leading electronic broker in spot gold and silver through the Loco London Market.

They were the first organisation to facilitate orderly black box or algorithmic trading in spot FX, through an application programming interface (API). By 2007 this accounted for 60% of all EBS flow.

In addition to spot FX and Precious Metals, EBS has expanded trading products through its venues to include NDFs, forwards and FX options. It has also increased the range of trading style to include RFQ and streaming in disclosed and non-disclosed environments.

EBS was acquired by ICAP, the world’s largest inter-dealer broker, in June 2006. ICAP said that the acquisition would combine EBS’ strengths in electronic spot foreign exchange with ICAP’s Electronic Broking business to create a single global multi-product business with further growth potential and significant economies of scale. It went on to say that would provide customers with more efficient electronic trade execution, reduced integration costs and give access to broad liquidity across a wide product range.[1]

In 2014, EBS merged with BrokerTec – a leading service provider in the fixed income markets – to form EBS BrokerTec. BrokerTec’s offering comprises trading solutions for many US and European fixed income products including US Treasuries, European Government Bonds and European Repo.

EBS BrokerTec is now recognised as a market-leading e-trading technology and solutions provider, offering access to multiple execution options and diverse, valuable liquidity across the FX and fixed income markets.

 

  • ICAP EBS is one of the world’s premier inter-dealer brokers with average daily transaction volume in excess of USD 2.3 trillion.
  • ICAP’s electronic EBS platform provides the primary market of natural interest for more than 2800 global FX, Precious Metals and NDF traders.
  • ICAP EBS global access platform delivers anonymous, transparent and reliable FX Liquidity.
  • Authoritative real-time and historical market data.
  • Available for clearing only. Relationship with EBS required.

 

B. Multidealer Platforms – FX ECNs

Since 1999, banks have been developing proprietary systems for their customers to trade foreign exchange and access research material over the internet. To trade with multiple banks online, customers therefore need to use a variety of authentication methods, websites and price request methods. Multi-bank platforms have evolved to allow customers to use a single website to request prices simultaneously from multiple banks and view research material online. Multi-bank platforms (also known as ECNs or electronic communication networks) offer significant advantages to customers, but fewer advantages to banks, and therefore active participation by banks in multi-bank platforms is driven largely by customer demand. However, for the banks it remains preferable for their customers to trade through bank proprietary systems as the banks avoid paying brokerage and customers are encouraged to focus only on the particular bank’s prices.

There are five main customer-facing FX ECNs:

FXall – founded by Bank of America, Credit Suisse First Boston, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley Dean Witter and UBS

Currenex – independent and venture backed by major market participants, e.g. Barclays Capital and Royal Dutch/Shell

FX Connect – owned by State Street

360T – independent and venture backed by financial and major private investors

Hotspot FXi – independent privately held venture capital-backed company

 

 

Currency Trading Shifts to Multi-Dealer Systems, Greenwich Says

Lananh Nguyen
July 14, 2015, 11:28 AM EDT

Currency investors are increasingly using electronic systems connected to multiple dealers as the market comes under greater scrutiny by regulators, according to Greenwich Associates.

Institutional investors and large corporations executed 49 percent of their foreign-exchange trading volumes on multi-dealer platforms last year, up from 45 percent in 2013 and 38 percent in 2008, the Stamford, Connecticut-based consultant said in a report. The increase comes as trading by traditional methods, such as phone, instant messaging and single-dealer platforms, has fallen.

“The FX ‘fixing scandal’ and related bank fines have already played a part in changing buy-side behavior,” wrote Kevin McPartland, head of research for market structure and technology at Greenwich, who co-authored the report based on interviews with more than 1,600 people participating in foreign-exchange markets globally.

Asset-management companies are boosting electronic trading as regulatory scrutiny discourages banks and dealers from providing “market color” to clients to avoid any perception of impropriety, according to Greenwich. The platforms are also becoming more popular as banks become less active in currency markets because of rising capital requirements.

“Asset managers have proactively worked to beef up internal policies to both ensure maximum returns for the impacted funds and to reassure customers, such as pension funds and sovereign wealth funds, that they’re getting the best the market has to offer at that moment in time,” McPartland wrote.

Thomson Reuters Corp.’s FXall platform had the largest volume-weighted share of trading last year at 21 percent, according to Greenwich. It’s followed in popularity by 360T, State Street Corp.’s Currenex, Bloomberg LP’s FXGO and FX Connect.

 

Dealer-to-client platforms

  • State Street FX Connect
  • Thomson Reuters FXall
  • State Street Currenex
  • CBOE/BATS Hotspot FX
  • Bloomberg FXGO

 

fx11

 

C. Single Dealer FX Trading Platforms

  • Barclays BARX
  • Citi Velocity
  • Deutsche Autobahn
  • Morgan Stanley Matrix
  • UBS Neo

 

Best Single-Dealer FX Trading Platform

Financial News is delighted to announce the . The winners will be announced at a gala dinner in London in October.

Here are the nominees in the category of Best Single-Dealer FX Trading Platform:

Barclays BARX
The BARX platform remains a dominant force among single-dealer platforms, with streaming prices in more than 80 currencies and 480 currency pairs, with a wide range of products available. Following the launch of BARX Gator, a liquidity aggregator, Barclays now gives clients access to the increasingly popular agency-style of execution.

Citi Velocity
Since its relaunch in 2012, Citi Velocity 2.0 has become a leading source of single-bank liquidity in FX cash, options and rates trading. Citi has also led the adoption of mobile and tablet technology in this space, and has focused its efforts with Velocity on delivering speed, lower transaction costs, cross-asset information, cross-asset trading, deep liquidity, and desktop efficiency.

Deutsche Bank Autobahn
Deutsche Bank has channelled significant resources into its electronic trading franchise in recent years, and Autobahn remains a major player across asset classes. In FX, Autobahn provides a single blotter for trades executed via both voice and electronic channels. Users can thus benefit from a combined view and take greater control over their portfolios.

Morgan Stanley Matrix
While not a top-tier bank in FX, Morgan Stanley has sought to add unique value with its Matrix platform. That has been achieved in part through execution and post-trade services, but also through the bank’s quantitative solutions and innovations group, which develops unique analytical tools to help users make more informed trading and investment decisions.

UBS Neo
Launched in 2013, UBS Neo is a cross-asset class platform providing a single point of access with a strong user experience, re-establishing the Swiss bank as a significant player in electronic trading. UBS Neo FX covers 550 currency pairs, with access to cash, NDFs and options available through the platform.

 

Trends in use of Electronic Platforms

fx10

 

From The $4 trillion question: what explains FX growth since the 2007 survey?

Electronic execution methods are transforming the FX market The greater activity of all three of the above-mentioned customer types – highfrequency traders, banks as clients and retail investors – is closely related to the growth of electronic execution methods in FX markets. Greenwich Associates estimates that more than 50% of total foreign exchange trading volume is now being executed electronically (Graph 3, left-hand panel).

Electronic execution methods can be divided into three categories: electronic brokers, multi-bank trading systems and single-bank trading systems. Electronic brokers were introduced in the inter-dealer FX market as early as in 1992. For customers, however, the main channel for trading continued to be direct contact with dealers by telephone. In the rather opaque and fragmented FX market of the 1990s, barriers to entry were high and competition was limited. Customers typically paid large spreads on their FX trades.

The first multi-bank trading system was Currenex, which was launched in 1999. By providing customers with competing quotes from different FX dealers on a single page, Currenex increased transparency, reduced transaction costs and attracted a growing customer base. State Street’s FXConnect, which had been launched in 1996 as a single-bank trading system servicing only State Street’s clients, opened up in 2000 and became a multi-bank ECN.

In response to the increased competition, top FX dealers launched proprietary single-bank trading systems for their clients, such as Barclays’ BARX in 2001, Deutsche Bank’s Autobahn in 2002 and Citigroup’s Velocity in 2006. According to data provided to the BIS, daily average trading volumes on the top single-bank trading systems have increased by up to 200% over the past three years.

 

 

Market Participants in

  • Interbank Market
  • Retail Market

Forex Market Players

Forex Market

The Forex market is an international over-the-counter market (OTC). It means that it is a decentralized, self-regulated market with no central exchange or clearing house, unlike stocks and futures markets. This structure eliminates fees for exchange and clearing, thereby reducing transaction costs.

The Forex OTC market is formed by different participants – with varying needs and interests – that trade directly with each other. These participants can be divided in two groups: the interbank market and the retail market.

The Interbank Market

The interbank market designates Forex transactions that occur between central banks, commercial banks and financial institutions.

Central Banks – National central banks (such as the US Fed and the ECB) play an important role in the Forex market. As principal monetary authority, their role consists in achieving price stability and economic growth. To do so, they regulate the entire money supply in the economy by setting interest rates and reserve requirements. They also manage the country’s foreign exchange reserves that they can use in order to influence market conditions and exchange rates.

Commercial Banks – Commercial banks (such as Deutsche Bank and Barclays) provide liquidity to the Forex market due to the trading volume they handle every day. Some of this trading represents foreign currency conversions on behalf of customers’ needs while some is carried out by the banks’ proprietary trading desk for speculative purpose.

Financial Institutions – Financial institutions such as money managers, investment funds, pension funds and brokerage companies trade foreign currencies as part of their obligations to seek the best investment opportunities for their clients. For example, a manager of an international equity portfolio will have to engage in currency trading in order to buy and sell foreign stocks.

The Retail Market

The retail market designates transactions made by smaller speculators and investors. These transactions are executed through Forex brokers who act as a mediator between the retail market and the interbank market. The participants of the retail market are hedge funds, corporations and individuals.

Hedge Funds – Hedge funds are private investment funds that speculate in various assets classes using leverage. Macro Hedge Funds pursue trading opportunities in the Forex Market. They design and execute trades after conducting a macroeconomic analysis that reviews the challenges affecting a country and its currency. Due to their large amounts of liquidity and their aggressive strategies, they are a major contributor to the dynamic of Forex Market.

Corporations – They represent the companies that are engaged in import/export activities with foreign counterparts. Their primary business requires them to purchase and sell foreign currencies in exchange for goods, exposing them to currency risks. Through the Forex market, they convert currencies and hedge themselves against future fluctuations.

Individuals – Individual traders or investors trade Forex on their own capital in order to profit from speculation on future exchange rates. They mainly operate through Forex platforms that offer tight spreads, immediate execution and highly leveraged margin accounts.

 

Trend Towards Exchanges ?

Only 200 billion daily turnover using exchanges

 

Exchanges are staking out the $5tn a day global currency market as part of their latest efforts to tap this lucrative and booming sector that has long been dominated by global banks.

This week Bats Global Markets, the US’s second largest equities exchange, fired the latest salvo by offering three months of free trading on its forthcoming London-based Hotspot currency trading platform, the centrepiece of Bats’ $365m purchase of the venue from KCG Holdings in March.

That came only days after Deutsche Börse, Europe’s largest exchanges operator, bought 360T, one of the world’s largest currency trading networks, for €725m.

Their moves are audacious attempts to break into the world’s most liquid over-the-counter market, where a notional $5.3tn a day is traded in cash, or spot, and derivatives trades. It is dominated by banks, which continue to make billions of dollars in profits from it each year. Exchanges have generally been unable to establish a presence in this and other OTC markets, despite repeated attempts to do so.

In currencies, Chicago’s CME Group dominates futures trading, reflecting how it seized the terrain in the 1970s when the present era of floating foreign exchanges began. Markets in Moscow, Brazil and India also trade local currency, but of that $5.3tn total, global exchanges account for just $200bn according to Aite Group, a financial markets consultancy.

However, cracks are appearing in the market edifice, brought on by a combination of unlawful activity by banks, deep structural change and the emergence of cheap and reliable technology that has allowed alternative ways of trading to emerge.
“The banks as a whole will continue to have a substantial piece of the pie but the regulations will force them to let go of pieces of it,” says Javier Paz, an analyst at Aite Group.

Waves of post financial crisis regulation have accelerated change in equity and interest rate swaps markets, but global policymakers largely left the currency market alone.

However, the currency industry is mopping up after two of its own existential crises — the Wm/Reuters benchmark rate rigging scandal, which resulted in multibillion-dollar fines for banks, and the sudden move by the Swiss franc in January when the national central bank abolished its ceiling against the euro.

Market observers say that end users such as corporations, hedge funds and asset managers are now taking far more care with their orders, and they have the tools to do it, turning the banks more into agency brokers.

“End users are getting used to technology where they have a full view of the market. They are accessing more markets than they could ever do 10 years ago,” says Chris Concannon, chief executive of Bats Global Markets.

At the same time, incidents like the Swiss move have also raised the alarm among banks. By the end of that day in January some smaller retail brokers faced ruin but even several larger broker-dealers such as Barclays, Citigroup and Deutsche Bank nursed tens of millions of dollars in losses. That has also left the market seeking as many different venues as possible where they can offset their customers’ trades.
“People are not holding risk like they were a year ago. A year ago they would warehouse that risk and wait for another customer to come along,” says Mr Concannon.

Not helping matters is how foreign exchange market liquidity is highly concentrated among just a handful of trading pairs, known as the G10. Into the gap on the other side of the trade are stepping high-frequency traders such as the US’s Virtu Financial. It is one of the world’s largest currency market makers.

“Clients that are trading on anonymous platforms by definition have no insight into whom they are trading with, and as such are likely interacting with non-bank liquidity providers more often than they know,” notes a report by Greenwich Associates last month.

However, even if the diagnosis is right, exchanges still face tough competition from well-established platforms not run by banks, such as Thomson Reuters, Bloomberg FXGO and ICAP’s EBS. These make up the majority of the $1.1tn average daily volume traded on electronic FX platforms and provide a role as a more centralised price benchmark independent of banks.

Bats, which has targeted London because it is the world’s main location for forex trading, will aim to provide a reliable venue for pricing and take more trading volume from the 220 banks, asset managers, hedge funds, dealers and retail brokers signed up to the venue.

Deutsche Börse sees 360T as a key part of its growth strategy, using it as a way to sell market data and develop futures, FX forwards and swaps trading to boost its Eurex derivatives business. But it is trading network, not an exchange-like central limit order book.

Critically, OTC markets are historically highly resistant to encroachment from exchanges and some see little sign of that changing.

The head of one currency trading platform says: “I don’t see any signs of moving to an exchange model. I don’t see a slam dunk here, I see some desperate buyers looking for a growth story.”

OTC FX trading becomes ‘exchange-like’

Thursday, April 21, 2016

The acquisition of trading platforms Hotspot and 360T by Bats Global Markets and Deutsche Börse respectively last year were bold statements of intent by exchange operators to grab a larger chunk of the trillions of dollars traded in FX every day.

FXSpotStream

However, while consolidation in the venues supporting FX trading can be expected to result in exchanges becoming more involved in the FX space, any actual market structure change is likely to take a long time to materialize, according to

FXSpotStream CEO Alan Schwarz.

“The FX market continues to do a good job of addressing regulatory requirements and meeting the demands of market participants,” he says.

“We have seen a shift in the FX market looking to trade more on a disclosed basis. Our business has continued to see year-on-year growth because there is a move taking place from exchange-like anonymous trading to bilateral, fully disclosed trading between counterparties.

“Unlike trading on an exchange, the relationship via FXSpotStream is transparent and trading with the liquidity providing banks is on a fully disclosed basis.”

Nuances

Kevin McPartland, head of market structure and technology research at Greenwich Associates, believes that discussion of migration from OTC to exchange fails to take account of some of the nuances of the FX market and that the future lies in venues that support multiple trading models.

“There are a host of non-exchange electronic trading venues that allow clients to trade with each other in a variety of ways,” he says.

Kevin McPartland,
Greenwich Associates

On the question of whether there is a discernible shift towards fully disclosed trading, McPartland refers to both central limit order book (CLOB) and request-for-quote (RFQ) having their merits.

Despite observations made by the likes of TeraExchange – that order book platforms offer a democratic marketplace through transparent, firm and executable prices – corporates have remained reluctant to abandon the RFQ model.

The key question for CLOB platform providers continues to be not why market participants have migrated to alternative models but rather when they will be in a position to win new business for products that are most suited for order books, such as the benchmarks and plain vanilla products.

“RGQ offers liquidity on demand and identification of counterparties, whereas CLOB is faster and its anonymity can be helpful,” says McPartland.

“But we are now seeing demand for a solution that provides the best of both worlds by enabling trading in an order book format while maintaining a bilateral relationship with counterparties.”

Regulation

According to James Sinclair, CEO of MarketFactory, options and other derivatives are moving closer to an exchange model due to the direct effects of regulation and the increased costs of compliance in OTC markets.

He refers to CME FX options as an example, noting they are effectively options on futures.

“However, the situation in the spot market is more complicated – some aspects are becoming closer to an exchange, others are moving further away,” he says. “FX has its own market structure that is hard to fit into the OTC/exchange paradigm.”

James Sinclair,
MarketFactory

One of the fundamental reasons why the market does not become centrally cleared, says Sinclair, is that a cleared model carries the cost of insurance against both settlement and market risk.

“CLS insures you against settlement risk but not the market risk,” he adds. “Counterparts still find it cheaper to self-insure against market risk in case of a counterparty default than to pay the extra cost of a fully cleared solution.”

A senior platform source observes that growth in exchange-traded products has largely come from futures traders who have looked for diversification and added FX as another asset class.

“Very little business has moved from OTC – some banks have added exchanges as additional liquidity sources to cover risk, but that is really the only business that has crossed the divide,” the source says.

OTC has become more exchange-like in that the largest banks have continued to extend their internalization of flow, so each now runs an order book trading structure internally.

However, our source also points out that the tightening of credit has reduced the number of prime brokers in FX and costs have risen “so the nearest thing that the FX OTC market has to centralized clearing has actually reduced its volume and capacity”, he concludes.

 

Evolution of Information Exchange in Trading Platforms

  • Clients C
  • Voice Broker VB
  • Dealers D
  • Electronic Broker EB
  • Prime Broker PB
  • Retail Aggregator – RA
  • Multi Bank Trading – MBT
  • Single Bank Trading – SBT

 

fx12

 

fxtradingplatforms_1

 

Top 10 FX Turnover Locations

  • United Kingdom – 37%
  • United States – 20%
  • Singapore – 7.9%
  • Hong Kong SAR – 6.7%
  • Japan – 6.1 %
  • France – 2.8%
  • Switzerland – 2.4%
  • Australia – 1.9%
  • Germany – 1.8%
  • Canada – 1.3%

 

fx13

 

FX Instruments

  • Spot
  • FX Swap
  • Outright Forward
  • Currency Swaps
  • FX Options

 

fx3

 

fx4

fx15

 

 

Currencies and Currency Pairs

US Dollar is the king in FX market.  87.6% of transactions include USD on one side of currency pair.  Euro comes at second with 31%.  Japanese Yen is at 21.6%.  UK Pound Sterling is at 12.8%.  Chinese Yuan has moved to 4%.

fx

 

Currencies and Currencies Pairs

fx2

 

Trends in FX Market

  • Electronic Trading
  • Algorithmic Trading
  • High Frequency Trading
  • Non Bank Liquidity Providers (Market Makers)

 

Non Bank Electronic Market Makers

The diverse set of non-bank electronic market-makers includes

  • XTX Markets
  • Virtu Financial
  • Citadel Securities
  • GTS
  • Jump Trading.

These market-makers’ trading volume is captured in the Triennial because their trades are prime-brokered by a dealer bank. They are active on multilateral trading platforms, where they provide prices to banks’ e-trading desks, retail aggregators, hedge funds and institutional clients.

 

 

Chinese RMB – in FX Markets

  • Second in Trade Finance
  • Sixth in Payments
  • Eighth in FX Trading

 

Considering China’s Renminbi for International Settlement and Forex Trading

On October 1, 2016, the International Monetary Fund added China’s renminbi1 (RMB) to its elite Special Drawing Right (SDR) basket of currencies, alongside the U.S. dollar, euro, yen and British pound. IMF said the change reflected China’s progress in reforming its monetary, foreign exchange and financial systems, and improving its financial market infrastructure.2 Short-term, this means countries can now include RMB assets in official FX reserves, making it easier for them to meet IMF guidelines.3 Beyond this, however, inclusion in SDR is a symbol of RMB’s emergence as an international currency for forex trading and settlement of global business transactions.

RMB’s ongoing progress is an important consideration for businesses involved in any FX trading, and particularly for those whose business or currency trading activities involve China.

RMB Usage Grows in Trade and Currency Trading

IMF’s decision arrives in the context of growing RMB usage in trade finance, international payments, and forex trading. In trade finance, RMB is now second amongst world currencies, reflecting enormous international trade with China.4

Since 2013, according to the Society for Worldwide Interbank Financial Telecommunication’s (SWIFT’s) monthly Renminbi Tracker, China’s currency has risen from ninth to fifth worldwide in total payments sent and received by value, not counting payments by central banks. During that period, it surpassed the Swedish Krona (SEK), Canadian Dollar (CAD), Swiss Franc (CHF), Australian Dollar (AUD) and, briefly during summer 2015, even the yen (JPY). RMB use is growing slowly in some markets (such as France, Switzerland and Germany), and is rapidly accelerating in others (e.g., the United Arab Emirates).5 SWIFT has elsewhere reported that 50 countries now use RMB for 10 percent or more of their trade with China.6

Meanwhile, according to the Bank for International Settlements’ (BIS’) September 2016 Central Bank Survey, RMB has doubled its share of OTC currency trading transactions since 2013. It has surpassed Mexico’s peso to become the most active developing market currency on forex trading exchanges, and is now eighth in FX trading amongst all currencies worldwide. BIS’s report notes that “as much as 95 percent of renminbi trading volume was against the U.S. dollar.”7

Building the Global Infrastructure for an Internationalized Currency

To promote RMB usage abroad, the People’s Bank of China (PBOC) – China’s central bank – has authorized 18 new official clearing banks worldwide since December 2012. These have opened in locations including Toronto, Buenos Aires, London, Paris, Johannesburg, Sydney, Seoul and Taipei.8 In September 2016, PBOC announced the first RMB clearing and settlement services in the U.S.9

Domestically, China has eliminated a cap on the number of enterprises permitted to carry out cross-border RMB settlements. Any company permitted to engage in import-export business may settle in RMB, unless it appears on a “black name list” (in which case its transactions may be reviewed individually).10 Restrictions have also been relaxed on RMB-denominated investments by foreigners.11

As Yu Yongding of the Asian Development Bank Institute has pointed out, China is the only country that has ever decided on its own to make internationalizing its currency a national priority.12 In determining how far RMB’s internationalization will go, China’s authorities appear to be balancing the benefits and risks of liberalization,13 carefully timing their decisions accordingly.

They face significant obstacles, not least the continuing downward pressure on the value of China’s currency on forex trading exchanges since it peaked against the U.S. dollar in early 2014. Some market observers believe RMB faces bank sector headwinds that might require a government bailout,14 as well as increased protectionist pressures in the U.S.15 and elsewhere. If these events lead to further reductions in RMB’s value, China could face accelerating capital flight,16 deepening internal opposition to the full elimination of capital controls.

Transacting in RMB

China’s reforms have made it easier for companies that do business in China to settle their transactions in RMB if they so desire. Many of their Chinese trading partners would welcome this, and some may even offer discounts if they can invoice in RMB.17 China’s central bank has estimated that transacting in U.S. dollars may add 2-to-3 percent in administrative expenses alone.18

The risk of currency fluctuation, however, remains a significant issue. Hedging vehicles exist; of course, these have their own costs. In making the decision about whether to transact business in RMB or another currency, companies may wish to make careful and timely assessments about currency risk.

The Takeaway

As China’s financial and market reforms move forward, RMB is emerging as a leading international currency. It has become far easier for international businesses and currency traders to transact in China’s home currency. International businesses may wish to carefully consider currency risk in developing their own plans for RMB forex trading and settlement.

 

 

Key Terms:

  • PB (Prime Brokerages)
  • Inter Dealer
  • Multi Dealer Trading
  • Single Dealer Trading
  • HFT (High Frequency Trading)
  • Market Makers
  • Liquidity Providers
  • Retail Aggregators
  • Retail FX Systems
  • Algorithmic Trading
  • FX ECNs (Electronic Communication Networks)
  • e-Trading
  • Hedge Funds
  • Institutional Clients
  • Non Bank Liquidity Providers
  • FXPB (Foreign Exchange Prime Brokerage)

 

 

Key Sources of Research:

 

Buttonwood The financial markets in an era of deglobalisation

Why the global volume of foreign-exchange trading is shrinking

Dec 15th 2016

http://www.economist.com/news/finance-and-economics/21711887-why-global-volume-foreign-exchange-trading-shrinking-financial?zid=295&ah=0bca374e65f2354d553956ea65f756e0

 

 

Downsized FX markets: causes and implications

BIS

http://www.bis.org/publ/qtrpdf/r_qt1612.pdf

 

 

Triennial Central Bank Survey Foreign exchange turnover in April 2016

 

http://www.bis.org/publ/rpfx16fx.pdf

 

 

TheForeign Exchange andInterest Rate Derivatives Markets:Turnover in the United States, April 2016

https://www.newyorkfed.org/medialibrary/media/markets/pdf/2016triennialreport.pdf

 

 

 

The foreign exchange and over-the-counter interest rate derivatives market in the United Kingdom 

Quarterly Bulletin 2016 Q4
16 December 2016

By Alexander Hutton and Edward Kent

http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2016/q4/a6.aspx

 

 

The anatomy of the global FX market through the lens of the 2013 Triennial Survey

http://www.bis.org/publ/qtrpdf/r_qt1312e.pdf

 

 

The foreign exchange and over-the-counter interest rate derivatives market in the United Kingdom

2013

 

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130410.pdf

 

 

The $4 trillion question: what explains FX growth since the 2007 survey?

http://www.bis.org/publ/qtrpdf/r_qt1012e.pdf

 

 

 

CME Group OTC FX Clearing

 

http://www.cmegroup.com/trading/fx/files/otc-fx-clearing.pdf

 

 

 

CME Group Cleared OTC Financial Products

 

http://www.cmegroup.com/trading/otc/files/cleared-otc-financial-products.pdf

 

 

Citi tops Euromoney global FX poll again, but big banks lose grip

http://www.reuters.com/article/global-forex-euromoney-idUSL5N18M29O

 

 

Foreign Exchange Market

https://en.wikipedia.org/wiki/Foreign_exchange_market

 

 

All change in the 2016 Euromoney FX rankings

http://www.euromoney.com/Article/3556871/All-change-in-the-2016-Euromoney-FX-rankings.html?single=true

 

 

World’s Best FX Providers 2017

Automation, “algo trading” and a tighter regulatory environment are driving change in the industry

https://www.gfmag.com/topics/blogs/it-pays-have-good-forex-bank

 

 

360T

http://www.360t.com/about-us/press/

 

 

CBOE Will Acquire BATS Global Markets for $3.2 Billion

http://fortune.com/2016/09/26/cboe-acquires-bats/

 

 

e-FOREX

http://www.e-forex.net/institutional-fx-ecommerce.html

 

 

Providing Differentiated Service in an Ever-Evolving Market

2016 Greenwich Leaders: Global Foreign Exchange Services

https://www.greenwich.com/fixed-income-fx-cmds/providing-differentiated-service-ever-evolving-market

 

 

Press Release: Best FX Awards 2017 – Providers and Corporate

https://www.gfmag.com/media/press-releases/best-fx-awards-2017-providers-and-corporate

 

 

 

Global Finance Names The World’s Best Foreign Exchange Providers 2016

https://www.gfmag.com/media/press-releases/global-finance-names-worlds-best-foreign-exchange-providers-2016

 

 

Global Banking & Finance Review Awards – 2015

https://www.globalbankingandfinance.com/global-banking-finance-review-awards-2015/

 

 

New Electronic Trading Systems in Foreign Exchange Markets

2003

D Rime

http://www.unich.it/~vitale/Rime-1.pdf

 

http://faculty.georgetown.edu/evansm1/New%20Micro/Rime%20New%20Electronic%20FX1.pdf

 

 

Foreign exchange market structure, players and evolution

Michael R. King, Carol Osler and Dagfinn Rime

2011

http://www.unich.it/~vitale/Rime-2.pdf

 

 

Settlement Risk in the Global FX Market: How Much Remains?

8 Nov 2016

Dino Kos

Richard M. Levich

https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2827530

 

 

The Retail Spot Foreign Exchange Market Structure and Participants
John H. Forman III

March 22, 2016

https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2753823

 

 

Algorithmic trading in the foreign exchange market

Maria Bergsten and Johannes Forss sandahl

2013

 

http://www.riksbank.se/Documents/Rapporter/POV/2013/2013_1/rap_pov_artikel_2_130321_eng.pdf

 

 

The Future of the Foreign Exchange Market

Richard K. Lyons

 

http://faculty.haas.berkeley.edu/lyons/Lyons%20Brookings.pdf

 

 

Multi Bank Platforms

http://www.londonfx.co.uk/ecn.html

 

 

ECNs/Alternative Trading Systems

https://www.sec.gov/divisions/marketreg/mrecn.shtml

 

 

The Transition to Electronic Communications Networks in the Secondary Treasury Market

Bruce Mizrach and Christopher J. Neely

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.205.6479&rep=rep1&type=pdf

 

 

Deal or no deal: anatomy of an FX portal

http://treasurytoday.com/2013/06/deal-or-no-deal-anatomy-of-an-fx-portal

 

 

The 3 Pillars of Forex

http://www.zerohedge.com/news/2016-06-11/3-pillars-forex

 

 

THE VALUE OF APAMA

IN FAST-CHANGING FX MARKETS

 

https://www.softwareag.com/corporate/images/sec_SAG_Apama_In-Fast-Changing-FX-Markets_4PG_WP_Feb16_tcm16-116205.pdf

 

 

The Global Foreign Exchange Market: Growth and Transformation

 

William Barker

 

http://www.bankofcanada.ca/wp-content/uploads/2010/06/barker.pdf

 

 

FX ALL

http://www.fxall.com

 

 

Currenex

https://www.currenex.com

 

 

Most Innovative Bank e-FX Trading Platform: Citi

http://www.fxweek.com/fx-week/interview/2464092/most-innovative-bank-e-fx-trading-platform-citi#

 

 

Citi sells its electronic FX platform

https://ftalphaville.ft.com/2010/01/04/118946/citi-sells-its-electronic-fx-platform/

 

 

Nasdaq poised to launch FX trading platform: top executive

http://www.reuters.com/article/us-nasdaq-forex-idUSKCN0QT1VD20150824

 

 

State Street buys electronic foreign exchange trading platform Currenex

http://www.thetradenews.com/Asset-Classes/Foreign-exchange/State-Street-buys-electronic-foreign-exchange-trading-platform-Currenex/

 

 

EBS

http://www.ebs.com

 

 

Electronic Platforms in Foreign Exchange Trading

http://celent.com/reports/electronic-platforms-foreign-exchange-trading

 

 

HOTSPOT FX

https://www.hotspotfx.com

 

 

Icap’s EBS BrokerTec Inks Deal With China’s CFETS

http://www.waterstechnology.com/sell-side-technology/news/2460560/icaps-ebs-brokertec-inks-deal-with-chinas-cfets

 

 

Best Single-Dealer FX Trading Platform

https://www.fnlondon.com/articles/fn-trading-and-technology-awards-shortlist-2015-best-single-dealer-fx-trading-platform-20150810

 

 

Multi-Dealer Platforms to gain ground in 2015

http://www.e-forex.net/articles/apr-2015-multidealer-platforms-to-gain-ground-in-2015.html

 

 

PERSPECTIVE ON NEW ELECTRONIC PLATFORMS, FROM EXECUTION TO DISTRIBUTION

http://fintank.net/position_papers/electronic_platforms/

 

 

FX Trading Platforms: Models Converge and Competition Heats Up

http://celent.com/reports/fx-trading-platforms-models-converge-and-competition-heats

 

 

Trends in Foreign Exchange Markets and the Challenges Ahead

https://www.newyorkfed.org/newsevents/speeches/2015/pot150714

 

 

Restoring trust in global FX markets

https://www.lmax.com/pdf/restoring-trust-report.pdf

 

 

2016 – Entering the Age of the “Non-Bank”

http://www.financemagnates.com/thought-leadership/prime-of-prime/2016-entering-the-age-of-the-non-bank/

 

 

The New Wall Street: Even Big Banks Want Help Navigating Markets

Matthew Leising and Annie Massa

Aug 10, 2016

http://www.wealthmanagement.com/markets/new-wall-street-even-big-banks-want-help-navigating-markets

 

 

The Future of Computer Trading in Financial Markets

An International Perspective

 

http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/tacfuturecomputertrading1012.pdf

 

 

Small Fish Big Prize:  Market Makers out to eat Bank’s lunch

https://www.citadel.com/_files/uploads/2015/12/Small-fish-big-prize-The-Market-makers-out-to-eat-the-banks.pdf

 

 

Automated Trading in Treasury Markets

 

https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG%20HFT%20White%20Paper%20FINAL%20-%202015-04-08.pdf

 

 

High Frequency Traders Elbow Their Way Into the Currency Markets

by Lananh Nguyen

September 12, 2016

https://www.bloomberg.com/news/articles/2016-09-12/fastest-guys-in-stocks-are-becoming-a-force-in-currency-markets

 

 

Exclusive: U.S. investigates market-making operations of Citadel, KCG

http://www.reuters.com/article/us-usa-stocks-probe-exclusive-idUSKCN0Y11CJ

 

 

Considering China’s Renminbi for International Settlement and Forex Trading

By Bill Camarda

https://www.americanexpress.com/us/content/foreign-exchange/articles/renminbi-for-forex-trading/

 

 

Pound plummet blamed on ‘liquidity holes’

Sterling’s flash crash was triggered during Asian ‘graveyard shift’ when US/European traders away

https://www.ft.com/content/dc7c0846-8e00-11e6-a72e-b428cb934b78

 

 

Settlement risk in foreign exchange markets and CLS Bank

http://www.bis.org/publ/qtrpdf/r_qt0212f.pdf

 

 

CLS Bank

https://www.cls-group.com/Pages/default.aspx

Global Financial Safety Net: Regional Reserve Pools and Currency Swap Networks of Central Banks

Global Financial Safety Net: Regional Reserve Pools and Currency Swap Networks of Central Banks

 

You can read this post from two perspectives

  • Geo Strategic (International Financial and Economic Architecture)
  • Financial and Economic stability / Macro-prudential Policy

 

Recent Financial Crisis has exposed the fact that global financial liquidity can be in shortage.  Since US Dollar is the global currency and is used in more that 40 percent of all financial transactions globally.

Asian Countries faced dollar shortage during 1997-1998 asian financial crisis.  Recent Global Financial crisis caused dollar shortage in advanced countries.  US Central Bank Federal Reserve responded by setting up currency swap lines with central banks of other countries.  These swap lines were made permanent in 2013.

After Asian financial crisis in 1997, many countries in developing world started accumulating FX reserves.  There was also a swap agreement (known as Chiang Mai Initiative) which was set up between ASEAN countries in south east Asia.

Nations also go to IMF to get conditional financing which they do not like to do.  New Trend is toward regional pooling of financial resources.  Latest example is BRICS CRA.

Even advanced economies such as EU have established European Stability Mechanism (ESM).

Chiang Mai Initiative has been revamped as Chiang Mai Initiative Multilateralism (CMIM).

 

Financial and Economic Stability / Macro Prudential Policy

A. Reserve Pools

  • Chiang Mai Initiative (CMI)
  • Chiang Mai Initiative Multi-Lateralism (CMIM)
  • BRICS Contingent Reserve Arrangement (CRA)
  • European Stability Mechanism (ESM)

B. Currency Swap Lines

  • Federal Reserve Central Bank US Dollar Swap Lines
  • PBOC China Central bank RMB Swap Lines

C. Global

  • IMF Financing

D. Self Insurance

  • Nation’s Foreign Exchange (FX) Reserves

 

From The decentralised global monetary system requires an efficient safety net

The global financial safety net as a set of protection mechanisms

The current decentralised system also lacks a central authority that is actively integrated and, above all, contractually bound into the maintenance of the monetary system by providing temporary liquidity, such as the IMF in the Bretton Woods system. Instead, various protection mechanisms have evolved because the current system has not led to greater external stability of national economies and the global economy. The problem of volatile capital flows became particularly clear once again in the course of the financial crisis of 2008 and 2009. For emerging market economies, the warning of a sudden reversal of capital flows has been omnipresent ever since the Asian crisis. However, the last crisis has demonstrated that even for industrialised countries their developed financial markets are a significant contagion mechanism for crisis developments. The following are regarded as key elements of the global financial safety net:11

International reserves. These include official foreign exchange and gold reserves as well as claims on inter-national financial institutions such as the IMF that can be rapidly converted into foreign currency under the countries’ own responsibility. •

Bilateral swap arrangements between central banks.  In a currency swap two central banks agree to exchange currency amounts, e.g. US dollars for euros. They agree on a fixed date in the future on which they will reverse the transaction applying the same exchange rate. During the term central banks can make foreign currency loans to private banks. •

IMF programmes and regional financing arrangements (e.g. European Stability Mechanism, Chiang Mai Initiative Multilateralisation Agreement, BRICs CRA, Arab Monetary Fund, Latin American Reserve Fund). They make financial resources available to the members to tackle balance of payments difficulties, manage crises and prevent regional contagion effects. Depending on their design, they may impose conditions and requirements for economic policy measures on the recipient countries. Some regional programmes require a combination with IMF funds.

The most important element of the protection mechanisms: international reserves

International reserves are by far the largest element of the global safety net.12 The lack of predictability and robustness of other elements has led to an over-accumulation of reserves. After the Asian crisis, upper middle income countries in particular built up reserves. While China holds a major portion of the reserves in this group of countries, all other countries also boosted their reserves significantly. As a result of central bank interventions in the foreign exchange market, reserves have decreased since the year 2013.

The renaissance of bilateral swap arrangements

Bilateral swap arrangements were used by the US Treasury as early as in 1936 to supply developing countries with bridging loans. During the Bretton Woods period, the Fed introduced a network of swap lines known as reciprocal currency arrangements to prevent a sudden and substantial withdrawal of gold by official foreign institutions.13 A swap protected foreign central banks from the exchange rate risk when they had obtained excess and unwanted dollar positions. It allowed them to dispense with the temporary conversion of dollars into gold. Between 1973 and 1980, the swap lines were used instead of US currency reserves to finance interventions by the Fed in the foreign exchange market. Gains and losses were shared with the other central bank when the Fed drew on a line. However, the G10 central banks could try to use the swap arrangements to influence the US foreign currency market interventions, so the Fed stopped using them in the mid-1980s. All existing swap lines except those with Canada and Mexico were ended in 1998. After the terror attacks of September 11, 2001, the Fed established swap lines with the European Central Bank and the Bank of England for 30 days and expanded the existing line with the Bank of Canada. Currency swaps were used here for the first time to restore liquidity in financial markets. During the global financial crisis, the Fed then financed the lender-of-last-resort actions of other central banks in industrialised and emerging market economies, with the latter assuming the credit risk. The international reserves of many central banks at the start of the crisis were smaller than the amounts they borrowed under the swap lines. In 2013 the swap arrangements between the six most important central banks were converted into standing arrangements. All these swap arrangements have one thing in common: they signal the central banks’ willingness to cooperate with each other, whether it be in defence of the parities under the Bretton Woods system, to avert speculative attacks on the Fed, or with the aim of providing dollar liquidity during the financial crisis. China has also set up a far-reaching system of swap arrangements, mainly with the aim of pushing ahead with the internationalisation of the renminbi. But from the perspective of these central banks, the agreements with the Bank of England, the Monetary Authority of Singapore, the Reserve Bank of Australia and the ECB also serve the goal of being able to provide renminbi liquidity in their area of responsibility when needed Swaps represent a powerful and flexible tool of central banks that issue reserve currencies to regulate international capital flows. Central banks are the only institutions capable of changing their balance sheets quickly enough to keep pace with the volatility of international capital flows. Swaps are unsuitable, however, for longer-lasting crises, sovereign debt crises and to finance balance of payments imbalances. That is why they would be the most suitable tool for emerging market economies, as they are more likely to face abrupt changes in capital flows. Nevertheless, so far only the most important central banks that issue reserve currencies have been able to access unlimited swaps. Granting them is determined by the mandate of the central banks and they represent contractual, not institutional agreements. Accordingly, the central banks are able to choose their contractual partners, and there is no central independent authority to supervise swap arrangements. The swap arrangements for central banks in industrial countries that do not issue a reserve currency can therefore be expected to be reinstated in the event of a global shock, while they are less likely to be employed in case of a regional shock. Their use is even less predictable for systemic emerging market economies.

 

Growth of Global Financial Safety Net

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Features of Instruments in the Global Financial Safety net

 

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Use of GFSN in various shock Scenarios

  • Balance of Payment shock
  • Banking Sector FX Liquidity shock
  • Sovereign Debt shock

 

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US Dollar Swap Lines

These six central banks have permanent US Dollar swap lines since 2013.

  • USA (Fed Reserve),
  • Canada (BoC),
  • Japan (BoJ),
  • Switzerland (SNB),
  • EU (ECB),
  • UK(BOE)

 

During the global financial crisis, the Federal Reserve extended swap arrangements to 14 other central banks. The ECB drew very heavily, followed by the BoJ. At one point during the crisis in 2009, outstanding swaps amounted to more than $580 billion and represented about one-quarter of the Fed’s balance sheet. The novel element of this effort was the extension of swaps to four countries outside the usual set of advanced-country central banks: Mexico, Brazil, South Korea and Singapore.16 Mexico previously had a standing swap facility with the Federal Reserve by virtue of geographic proximity and the North American Free Trade Agreement, but the new arrangement expanded the amount that Mexico’s central bank could draw and the Fed’s swaps with Brazil, South Korea and Singapore broke new ground. The swaps in general were credited with preventing a more serious seizing up of interbank lending and financial markets during 2008 to 2009 (Helleiner 2014, 38–45; Prasad 2014, 202–11; IMF 2013a; 2014a, Box 2). The Federal Reserve board of governors considered the “boundary” question at length, torn between opening itself up to additional demands for coverage from emerging markets and creating stigma against those left outside the safety net. Fed officials used economic size and connections to international financial markets as the main criteria for selecting Brazil, Mexico, Singapore and South Korea. Chile, Peru, Indonesia, India, Iceland and likely others also requested swaps but were denied. The governors wanted to deflect requests by additional countries to the IMF, which coordinated its announcement of the SLF with the Fed’s announcement of the additional swaps at the end of October 2008. Governors and staff saw in this tiering a natural division of labour that coincided with the resources and analytical capacity of the Fed and IMF.17 The ECB extended swaps to Hungary, Poland, Sweden, Switzerland and Denmark, in addition to its arrangement with the United States. The BoJ extended swaps as well, notably to South Korea after the Federal Reserve announced its Korean swap. The PBoC began to conclude a set of swap agreements with Asian and non-Asian central banks that would eventually number more than 20 and amount to RMB 2.57 trillion. Only those swaps with the central banks of Hong Kong, Singapore and South Korea are known to have been activated (Zhang 2015, 5). Boosting the role of the renminbi in international trade was the express objective of these swaps, although their establishment also helped to secure market confidence during unsettled times. The proliferation of swaps resulted in a set of star-shaped networks of agreements among central banks that were linked by Fed liquidity (Allen and Moessner 2010). Although a number of the swaps in the network were activated, only those swaps of the Federal Reserve were heavily used during the crisis. The “fortunate four” emerging market countries among the Fed 14 were each covered for amounts up to $30 billion, but only temporarily. When the Fed later declined to renew the swaps,  these countries became as vulnerable to liquidity shortfalls as the others. So, when South Korea took the chair of the G20 in 2010, its government proposed that the central bank swaps be multilateralized on a more permanent basis. It argued this would be increasingly necessary to stabilize the global financial system and would be in the interest of swap providers and recipients alike. Specifically, during the preparations for the G20 summit, South Korean officials proposed that the advanced-country central banks provide swaps to the IMF, which would conduct due diligence and provide liquidity to qualifying central banks. In this way, the global community could mobilize enough resources to address even a massive liquidity crunch and central banks would avoid credit risk.

In late 2013, six key-currency central banks made their temporary swap arrangements permanent standing facilities. Each central bank entered into a bilateral arrangement with the five others, comprising a network of 30 such agreements.18 But they prefer to maintain a constructive ambiguity with respect to whether they would re-extend swap arrangements to the other central banks that were covered during the global financial crisis, including Brazil, Mexico,19 South Korea and Singapore (Papadia 2013).

 

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During the global financial crisis of 2008-2009, Federal Reserve extended USD swap lines to several central banks.  The financial institutions in these countries faced USD shortages as the normal channels of money markets froze during crisis.

 

US Dollar Swap amounts extended during 2008-2009 Global Financial Crisis

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China RMB Swap Lines

During the 2007-8 global financial crisis, the international monetary system experienced an acute US dollar shortage that severely curtailed global trade and pressured international banking business (McCauley and McGuire, 2009; McGuire and von Peter, 2009). The US authorities, in response to the elevated strain in the global market, have arranged dollar swap lines with major central banks to mitigate the global dollar squeeze (Aizenman and Pasricha, 2010; Aizenman, Jinjarak and Park, 2011). On Thursday, October 31, 2013, the network of central banks comprises the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank agreed to convert their bilateral liquidity swap arrangements to standing arrangements until further notice.1 The dollar squeeze critically illustrated the danger of operating a US-centric global financial system. Against this backdrop, China has actively implemented measures of promoting the cross-border use of the Chinese currency, the renminbi (RMB), to reduce its reliance on the US dollar. The aggressive policy move was considered a clear signal of China’s efforts to internationalize RMB (Chen and Cheung, 2011; Cheung, Ma and McCauley, 2011). In 2009, China launched the scheme of cross-border trade settlement in RMB to encourage the denomination and settlement of international trade in its own currencies. One practical issue of settling trade in RMB is the limited availability of the currency outside China. China at that time had strict regulations on circulating the RMB across its border. To facilitate its RMB trade settlement initiative, China signed its first bilateral RMB local currency swap agreement with the Bank of Korea in December 2008, and the second one with Hong Kong in January 2009. Since then, China has signed various swap agreements with economies around the world.2

 

crossbor7

 

rr2

 

 

BRICS CRA

The 5th and 6th BRICS summits in 2013–2014 marked a watershed in the evolution of the BRICS group with the establishment of the first BRICS institutions. These included the BRICS New Development Bank, the CRA, the BRICS Business Council and the Think Tanks Council. Although this has weakened the ‘political talk shop’ perception of the group, critics have questioned whether these institutions will have a substantive effect. In particular, doubts have been cast upon the effectiveness of the CRA.

The CRA is modest in size in comparison to the IMF and other similar arrangements such as the Chiang Mai Initiative Multilateralization (CMIM). At this stage the BRICS countries have committed $100 billion to the CRA, with China committing $41 billion, Russia, Brazil and India $18 billion each and South Africa $5 billion. The CMIM reportedly has a reserve pool of $240 billion and the IMF resources of $780 billion. It has been noted that with BRICS’s foreign reserves standing at about $5 trillion, a commitment of 16% would take the CRA pool to $800 billion.

 

From GLOBAL AND REGIONAL FINANCIAL SAFETY NETS: LESSONS FROM EUROPE AND ASIA

ASEAN +3 CMIM

ASEAN + Japan Korea China

The embryo of an Asian regional safety net arrangement has existed since 1977, when the five founding members of the ASEAN signed the ASEAN Swap Arrangement (ASA)5. Following the Asian crisis and after aborted discussion on the creation of an Asian Monetary Fund, Japan launched the New Miyazawa Initiative in October 1998 amounting to about $35 billion, which was targeted at stabilising the foreign exchange markets of Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand6. The initiative was particularly valuable in containing instability in Malaysia’s financial sector, since that country had refused an IMF Stand-By Arrangement. The Japanese manoeuvre was deemed somewhat mutinous, since the IMF was very critical of Malaysia’s approach. But it also cemented the idea that Asia could gather enough resources to sandbag itself during a crisis period so long as Asian countries were united and managed to roll out timely and credible support mechanisms. In Asian countries under IMF programmes, the conditionality associated with the loans included severe fiscal cuts, deep structural reforms, and substantial increases in interest rates to stabilise currency markets. The economic and social cost of the adjustment was so high and abrupt that it provoked social unrest in a number of countries. This would reverberate strongly in the months that followed and leave a lasting scar in relations between Asian countries and the IMF7. This experience fuelled both a willingness to self-insure through accelerated reserve accumulation and to strengthen regional arrangements to reduce the reliance on global financial safety nets. Building on this lesson, the CMI was formalised in May 2000 during the ASEAN+3 Finance Ministers Meeting8. It largely built on the original ASA and bilateral swap agreements involving the PRC, Japan, and the Republic of Korea but was grounded in a broader programme that also included developing Asia’s local currency bond market and introduced a regional economic review and policy dialogue to enhance the region’s surveillance mechanism (Kawai and Houser 2007). The initiative included the new ASEAN members, increasing the total number of parties to the arrangement from 5 to 10. Table A.1 in the appendix highlights the evolution of the CMI. The question of cooperation between the CMI and the IMF quickly became quite heated, with a number of countries arguing that strong ties to the Fund would defeat the initial purpose of the initiative (Korea Institute of Finance, 2012), but the ties were kept nonetheless both to mitigate moral hazard (Sussangkarn, 2011) and to ensure some consistency with conditionality attached to the IMF’s own programmes. After the formal creation of the CMI in 2000, the era of Great Moderation that followed to some degree doused further ambitions to strengthen regional arrangements. As a result, when the global financial crisis hit in 2008, the Asian regional financial safety net proved too modest to play a meaningful role.

Indeed, instead of seeking support under CMI, the Bank of Korea and the Monetary Authority of Singapore sought a swap agreement with the US Federal Reserve for some $30 billion each. The Republic of Korea concluded bilateral agreements with Japan and the PRC that were not related to the CMI. Similarly, Indonesia established separate bilateral swap lines with Japan and the PRC to shore up its crisis buffer and did not resort to the CMI for credit support (Sussangkarn, 2011). The plan to consolidate the bilateral swap arrangements and form a single, more solid, and effective reserve pooling mechanism – which had initially been put forward by the finance ministers of the ASEAN+3 in May 2007 in Kyoto – was accelerated and evolved in several iterations before the final version was laid out more than two years later. In December 2009, the CMI was multilateralised and the ASEAN+3 representatives signed the Chiang Mai Initiative Multilateralisation (CMIM) Agreement, which effectively became binding on March 24, 2010 (BSP, 2012). These successive transformations have strengthened the initiative, but it remains largely untested. In addition, other aspects of any credible regional financial arrangement, such as surveillance capacity and coordination of some basic economic policies, remain relatively embryonic.

 

 

From GLOBAL AND REGIONAL FINANCIAL SAFETY NETS: LESSONS FROM EUROPE AND ASIA

 

EU ESM

The history of European financial safety nets cannot be dissociated from the history of European monetary integration. With this perspective in mind, it dates back to the late 1960s and has been an ongoing debate to this day. The history of European political integration at every turn is marked by failed projects or actual mechanisms of financial solidarity, ranging from loose exchange rate arrangements to the project of a full-fledged European Monetary Fund. The advent of the monetary union was precisely designed to reduce the need for financial safety nets within the euro area. But the architectural deficiencies of the euro area and the lack of internal transfers have required the establishment of alternative mutual insurance mechanisms since the onset of the euro crisis in 2010. In 2008, when the global financial crisis hit, Hungary had accumulated important external imbalances and large foreign exchange exposures. It had to seek financial assistance almost immediately and initiated contacts with the IMF. The total absence of coordination with European authorities came as an initial shock because it showed that despite decades of intense economic, political, and monetary integration, EU countries could still come to require international financial assistance. The experience pushed European institutions to unearth a forgotten provision of the Maastricht Treaty to provide financial assistance through the Balance of Payments Assistance Facility9. This created preliminary and at first ad-hoc coordination between the IMF and the European Commission, which was then rediscovering design and monitoring of macroeconomic adjustment programmes. Despite the rapid use of this facility and the emergence of a framework of cooperation with the IMF, contagion from the global financial crisis continued for months and prompted some Eastern European leaders to seek broader and more pre-emptive support10, which failed. However, beyond official sector participation, there was a relatively rapid realisation that cross-border banking and financial retrenchment could become a major source of financial disruption and effectively propagate the crisis further – including back to the core of Europe, as large European banks were heavily exposed to Eastern Europe through vast and dense networks of branches and subsidiaries. In response, in late February 2009, under the leadership of the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the World Bank decided to establish what was known as the Vienna Initiative. This was designed as a joint multilateral and private sector coordination and enforcement mechanism to reduce the risk of banking sector sudden stops. In particular, it compelled cross-border European banks to continue to provide appropriate liquidity to their branches and subsidiaries in Central and Eastern Europe. The formalisation of such an arrangement11 quite early in the crisis has certainly proven the case for coordination of financial institutions in emerging-market economies, especially when a relatively small number of institutions have a disproportionate impact on capital flows. But with the crisis spreading to the euro area, starting with Greece in the fall of 2010, new regional arrangements proved necessary. The lack of instruments forced European officials to first consider bilateral assistance from member states. The idea of involving the IMF was initially violently rejected 9 on intellectual and political grounds12 but proved inevitable. In a number of successive iterations, more solid regional arrangements were designed (Bijlsma and Vallée 2012). Table A.2 in the appendix shows the evolution of European regional financial safety nets.

 

List of Regional Financial Agreements (RFA)

rr5

 

rr

 

rr7

rr14

 

Key Terms:

  • RMB
  • Bilateral Currency Swaps
  • Reserve Pooling
  • CMI
  • CMIM
  • BRICS CRA
  • AMRO
  • IMF SDR Basket
  • Currency Internationalization
  • Global Liquidity
  • Funding Liquidity
  • Market Liquidity
  • BRICS NDB
  • CHINA AIIB
  • Regional Integration
  • Multilateralism
  • Multipolar
  • FX Swap Networks
  • Central Banks
  • Reserve Currency
  • Global Financial Safety Nets (GFSN)
  • Foreign Exchange Reserves
  • Regional Financial Agreements (RFA)
  • Regional Financial Networks (RFN)
  • Bilateral Currency Swap Agreement (BSA)
  • RMB (Renminbi also known as Yuan)
  • International Lender of Last Resort (ILOLR)
  • Regional Financial Safety Net (RFSN)
  • Multilateral Financial Safety Net (MFSN)
  • National Financial Safety Net (NFSN)

 

Key Sources of Research:

 

Self-Insurance, Reserve Pooling Arrangements, and Pre-emptive Financing

Sunil Sharma

 

https://www.imf.org/external/np/seminars/eng/2006/cpem/pdf/sharma.pdf

 

 

Regional Reserve Pooling Arrangements

Suman S. Basu Ran Bi

Prakash Kannan

First Draft: 8 February, 2010 This Draft: 7 June, 2010

 

http://www.frbsf.org/economic-research/files/Prakash.pdf

 

 

Toward a functional Chiang Mai Initiative

15 May 2012

Author: Chalongphob Sussangkarn, TDRI

http://www.eastasiaforum.org/2012/05/15/toward-a-functional-chiang-mai-initiative/

 

 

The International Financial Architecture and the Role of Regional Funds

Barry Eichengreen

University of California, Berkeley

August 2010

 

http://eml.berkeley.edu/~eichengr/intl_finan_arch_2010.pdf

 

 

Examining the case for Reserve Pooling in East Asia: Empirical Analysis

Ramkishen S. Rajan, Reza Siregar and Graham Bird

2003

 

https://www.adelaide.edu.au/cies/documents/papers/0323.pdf

 

 

Financial Architectures and Development: Resilience, Policy Space and Human Development in the Global South

by Ilene Grabel

2013

 

http://hdr.undp.org/sites/default/files/hdro_1307_grabel.pdf

 

 

International reserves and swap lines: substitutes or complements?

Joshua Aizenman,
Yothin Jinjarak, and Donghyun Park,

March 2010

 

http://economics.ucsc.edu/research/downloads/ajp-ir-sw-0301.pdf

 

 

How can we fix the global financial safety net?

WEF

https://www.weforum.org/agenda/2015/10/how-can-we-fix-the-global-financial-safety-net/

 

 

Regional Monetary Cooperation: Lessons from the Euro Crisis for Developing Areas?

Sebastian Dullien

Barbara Fritz

Laurissa Mühlich

 

http://wer.worldeconomicsassociation.org/files/WEA-WER2-Dullien.pdf

 

 

The Global Dollar System

Stephen G Cecchetti

 

http://people.brandeis.edu/~cecchett/Polpdf/Polp61.pdf

 

 

The Future of the IMF and of Regional Cooperation in East Asia

Yung Chul Park, Charles Wyplosz

2008

 

http://www.nomurafoundation.or.jp/en/wordpress/wp-content/uploads/2014/09/20081111-12_Y-C_Park-C_Wyplosz.pdf

 

 

China’s Bilateral Currency Swap Agreements: Recent Trends

Aravind Yelery

 

http://journals.sagepub.com/doi/pdf/10.1177/0009445515627210

 

 

The Spread of Chinese Swaps

CFR

 

https://www.cfr.org/international-finance/central-bank-currency-swaps-since-financial-crisis/p36419#!/

 

 

Chiang Mai Initiative Multilateralization

http://www.bsp.gov.ph/downloads/Publications/FAQs/CMIM.pdf

 

 

The Chiang Mai Initiative

https://piie.com/publications/chapters_preview/345/3iie3381.pdf

 

 

Beyond the Chiang Mai Initiative: Prospects for Regional Financial and Monetary Integration in East Asia

 

https://www.g24.org/wp-content/uploads/2016/01/Session-2_1-4.pdf

 

 

Currency internationalisation: an overview

 

Peter B Kenen

 

http://www.bis.org/repofficepubl/arpresearch200903.01.pdf

 

 

 

Why Was the CMI Possible?

Embedded Domestic Preferences and Internationally Nested Constraints in Regional Institution Building in East Asia

Saori N. Katada

 

http://web.isanet.org/Web/Conferences/FLACSO-ISA%20BuenosAires%202014/Archive/1f1966fe-1c48-4d32-a463-ea268ecb2903.pdf

 

 

Emergent International Liquidity Agreements: Central Bank Cooperation after the Global Financial Crisis

Daniel McDowell

 

http://faculty.maxwell.syr.edu/dmcdowel/mcdowell_eln.pdf

 

 

Regional Financial Cooperation in Asia

Daikichi Momma

 

https://www.imf.org/external/np/seminars/eng/2013/PIC/pdf/Session_2_Momma.pdf

 

 

East Asian Economic Cooperation and Integration: Japan’s Perspective

Takatoshi Ito

 

https://www8.gsb.columbia.edu/apec/sites/apec/files/files/discussion/41RegionalCoop.pdf

 

 

What Motivates Regional Financial Cooperation in East Asia Today?

JENNIFER AMYX

 

http://www.eastwestcenter.org/system/tdf/private/api076.pdf?file=1&type=node&id=32049

 

 

Evaluating Asian Swap Arrangements

Joshua Aizenman, Yothin Jinjarak, and Donghyun Park

No. 297 July 2011

 

https://www.adb.org/sites/default/files/publication/156152/adbi-wp297.pdf

 

 

Regional Monetary Cooperation in East Asia Should the United States Be Concerned?

Wen Jin Yuan Melissa Murphy

 

https://csis-prod.s3.amazonaws.com/s3fs-public/legacy_files/files/publication/101129_Yuan_RegionalCoop_WEB.pdf

 

 

Chiang Mai Initiative as the Foundation of Financial Stability in East Asia

http://www.asean.org/uploads/2012/10/17902.pdf

 

 

COMPLEX DECISION IN THE ESTABLISHMENT OF ASIAN REGIONAL FINANCIAL ARRANGEMENT

Iwan J Azis

 

http://www.isahp.org/2003Proceedings/paper/p02.pdf

 

 

Chiang Mai Initiative Multilateralization

December 2013

 

http://www.obela.org/system/files/ChiangMaiInitiative_0.pdf

 

 

 

RMBI or RMBR?
Is the Renminbi Destined to Become a Global or Regional Currency?

Barry Eichengreen

Domenico Lombardi

 

http://clausen.berkeley.edu/assets/clausen_open_pages/3/RMBI_or_RMBR_-_Eichengreen.pdf

 

 

 

Monetary and financial cooperation in Asia: taking stock of recent ongoings

Ramkishen S. Rajan

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.473.361&rep=rep1&type=pdf

 

 

FINANCIAL CRISES AND EAST ASIA’S FINANCIAL COOPERATION

 

By Park Young-joon

 

http://keia.org/sites/default/files/publications/ParkYJ.pdf

 

 

MONETARY INTEGRATION IN EAST ASIA

Peter B. Kenen
Ellen E. Meade

 

http://www.frbsf.org/economic-research/files/Kenen.pdf

 

 

Regional cooperation for financial and exchange rates stability in East Asia

 

Kenichi Shimizu

https://www.swp-berlin.org/fileadmin/contents/products/arbeitspapiere/WP_FG7_2013_01_Dezember_Kenichi_Shimizu.pdf

 

 

ASIAN FINANCIAL CO-OPERATION

Address by Mr GR Stevens

 

https://www.rba.gov.au/publications/bulletin/2005/nov/pdf/bu-1105-3.pdf

 

 

The Rise of China and Regional Integration in East Asia

 

https://www.researchgate.net/publication/290788291_The_Rise_of_China_and_Regional_Integration_in_East_Asia

 

 

REGIONAL FINANCIAL COOPERATION IN EAST ASIA: THE CHIANG MAI INITIATIVE AND BEYOND

 

http://www.unescap.org/sites/default/files/Bulletin02-ch8.pdf

 

 

Financial RegionaliSm: a Review oF the iSSueS

Domenico lombaRDi

2010

 

https://www.brookings.edu/wp-content/uploads/2016/06/11_global_economy_lombardi.pdf

 

 

The layers of the global financial safety net: taking stock

2016

 

https://www.ecb.europa.eu/pub/pdf/other/eb201605_article01.en.pdf

 

 

Regional Financial Arrangements for East Asia: A Different Agenda from Latin America

By Yung Chul Park

 

http://www19.iadb.org/intal/intalcdi/PE/2007/00510.pdf

 

 

Elasticity and Discipline in the Global Swap Network

Perry Mehrling

Working Paper No. 27 November 12, 2015

 

https://www.ineteconomics.org/uploads/papers/WP27-Mehrling.pdf

 

 

 Swap Agreements & China’s RMB Currency Network

https://www.cogitasia.com/swap-agreements-chinas-rmb-currency-network/

 

 

Central Bank Currency Swaps and the International Monetary System

Christophe Destais

 

http://www.obela.org/system/files/CentralBankCurrencySwap_ChristopheDestais.pdf

 

 

Renminbi internationalisation – The pace quickens

https://www.sc.com/en/resources/global-en/pdf/Research/2015/Renminbi-internationalisation-The-pace-quickens.pdf

 

 

What Will China’s RMB Bilateral Currency Swap Deals Lead To?

 

https://www.chinamoneynetwork.com/2013/11/08/what-will-chinas-rmb-bilateral-currency-swap-deals-lead-to

 

 

Emergent International Liquidity Agreements: Central Bank Cooperation after the Global Financial Crisis

Daniel McDowell

 

http://faculty.maxwell.syr.edu/dmcdowel/mcdowell_eln.pdf

 

 

Currency Swap of Central Bank: Influence on International Currency System

 

http://www.sdrf.org.cn/upfile/2016/03/16/20160316142214_202.pdf

 

 

Building Global and Regional Financial Safety Nets

February 2016

Yung Chul Park

 

http://www.reinventingbrettonwoods.org/sites/default/files/35E%20Yung%20Chul%20Park£∫Building%20Global%20and%20Regional%20Financial%20Safety%20Nets%20%20Final.pdf

 

 

RMBI or RMBR?

Is the Renminbi Destined to Become a Global or Regional Currency?

Barry Eichengreen

Domenico Lombardi

 

http://clausen.berkeley.edu/assets/clausen_open_pages/3/RMBI_or_RMBR_-_Eichengreen.pdf

 

 

China’s Bilateral Currency Swap Lines

Yin-Wong Cheung, Hung Hing Ying  LIN Zhitao

ZHAN Wenjie

2016

 

https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232016-013%20_YW.pdf

 

 

Internationalisation of the Chinese Currency: Towards a Multipolar International Monetary System?

Lucia Országhová

 

http://www.nbs.sk/_img/Documents/_PUBLIK_NBS_FSR/Biatec/Rok2016/01-2016/biatec_01_2016_orszaghova.pdf

 

 

Central bank: China currency swap deals surpass 3t yuan

http://english.gov.cn/state_council/ministries/2015/06/11/content_281475125318660.htm

 

 

The International Lender of Last Resort for Emerging Countries: A Bilateral Currency Swap?

Camila Villard Duran

http://www.geg.ox.ac.uk/sites/geg/files/documents/WP_108%20-%20The%20International%20Lender%20of%20Last%20Resort%20for%20Emerging%20Countries%20-%20Camila%20Duran.pdf

 

http://www.modernmoneynetwork.org/sites/default/files/biblio/Duran%20-%20The%20International%20Lender%20of%20Last%20Resort%20for%20Emerging%20Countries.pdf

 

 

Entry of yuan into SDR may give a boost to global liquidity

http://www.marketwatch.com/story/entry-of-yuan-into-sdr-may-give-a-boost-to-global-liquidity-2016-10-17

 

 

Redback Rising: China’s Bilateral Swap Agreements and RMB Internationalization

Steven Liao
Daniel E. McDowell

 

http://www.stevenliao.org/uploads/2/5/6/9/25699716/yuan_isq.pdf

 

 

International reserves and swap lines: substitutes or complements? 

Joshua Aizenman
Yothin Jinjarak,  Donghyun Park

March 2010

 

http://economics.ucsc.edu/research/downloads/ajp-ir-sw-0301.pdf

 

 

The Asian Monetary Fund Reborn? Implications of Chiang Mai Initiative Multilateralization

William W. Grimes

2011

 

https://www.bc.edu/content/dam/files/schools/cas_sites/economics/pdf/Seminars/SemS2011/Grimes.pdf

 

 

Avoiding the next liquidity crunch: how the G20 must support monetary cooperation to increase resilience to crisis

Camila Villard Duran

 

http://www.geg.ox.ac.uk/sites/geg/files/GEG%20Villard%20Duran%20October%202015.pdf

 

Stitching together the global financial safety net

Edd Denbee, Carsten Jung and Francesco Paternò

2016

 

http://www.bankofengland.co.uk/financialstability/Documents/fpc/fspapers/fs_paper36.pdf

 

 

Why Are There Large Foreign Exchange Reserves?  The Case of South Korea

Franklin Allen

Joo Yun Hong

 

http://www.kossrec.org/wp-content/uploads/2015/04/01_KSSJ_11-02-03.pdf

 

 

Federal Reserve Policy in an International Context

Ben S. Bernanke

 

http://www.imf.org/external/np/res/seminars/2015/arc/pdf/Bernanke.pdf

 

 

The dollar’s international role: An “exorbitant privilege”?

Ben S. Bernanke

Thursday, January 7, 2016

https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/

 

 

TRADE AND DEVELOPMENT REPORT, 2015

Making the international financial architecture work for development

 

http://unctad.org/en/PublicationChapters/tdr2015ch3_en.pdf

 

 

Global Economic Governance in Asia: Through the Looking Glass of the European Sovereign Debt Crisis

China in Global Financial Governance: Implications from Regional Leadership Challenge in East Asia

Takashi Terada

 

https://lkyspp.nus.edu.sg/cag/wp-content/uploads/sites/5/2013/07/China-in-Global-Financial-Governance-Implications-from-Regional-Leadership-Challenge-in-East-Asia-by-Takashi-Terada.pdf

 

 

Central Bank Currency Swaps Key to International Monetary System

http://andrewsheng.net/Article_Central_bank_currency_swaps_key_to_IMS.html

 

 

The Federal Reserve’s Foreign Exchange Swap Lines

Michael J. Fleming and Nicholas J. Klagge

 

https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci16-4.pdf

 

 

Central Bank Liquidity Swaps

https://www.newyorkfed.org/markets/liquidity_swap.html

 

 

Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs

Linda S. Goldberg, Craig Kennedy, and Jason Miu

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.422.11&rep=rep1&type=pdf

 

 

eXperience With foreign currency liquidity-providing centrAl bAnK sWAps

 

https://www.ecb.europa.eu/pub/pdf/other/art1_mb201408_pp65-82en.pdf

 

 

Banking on China through Currency Swap Agreements

October 23, 2015

By Cindy Li

http://www.frbsf.org/banking/asia-program/pacific-exchange-blog/banking-on-china-renminbi-currency-swap-agreements/

 

 

TESTING THE GLOBAL CENTRAL BANK SWAP NETWORK

http://www.perrymehrling.com/2015/07/testing-the-global-central-bank-swap-network/

 

 

The impact of international swap lines on stock returns of banks in emerging markets

Alin Marius Andries1 Andreas M. Fischer2 Pınar Ye ̧sin

June 2015

 

http://www.snb.ch/n/mmr/reference/sem_2015_07_09_Andries_Fischer_Yesin/source/sem_2015_07_09_Andries_Fischer_Yesin.n.pdf

 

 

Why Did the US Federal Reserve Unprecedentedly Offer Swap Lines to Emerging Market Economies during the Global Financial Crisis? Can We Expect Them Again in the Future?

Hyoung-kyu Chey

 

http://www.grips.ac.jp/r-center/wp-content/uploads/11-18.pdf

 

 

International reserves and swap lines: substitutes or complements? 

Joshua Aizenman,
Yothin Jinjarak,  Donghyun Park

July 2010

 

https://pdfs.semanticscholar.org/3145/037b0b0312cfb51cee7dffd5c3399332a669.pdf

 

 

Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs

Linda S. Goldberg Craig Kennedy Jason Miu

 

https://pdfs.semanticscholar.org/4cbb/9a564d30e508dcd3799ceb7a99b5e2c2e273.pdf

 

 

Central Bank Liquidity Swaps

https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2011-economic-trends/et-20111219-central-bank-liquidity-swaps.aspx

 

 

Central bank currency swaps key to international monetary system

April 2014

Author: Andrew Sheng, Fung Global Institute

http://www.eastasiaforum.org/2014/04/01/central-bank-currency-swaps-key-to-international-monetary-system/

 

 

Evaluating Asian Swap Arrangements

Joshua Aizenman, Yothin Jinjarak, and Donghyun Park

No. 297 July 2011

 

https://www.adb.org/sites/default/files/publication/156152/adbi-wp297.pdf

 

 

Central Bank Liquidity Swaps Overview

Yubo Wang

February 15, 2010

 

http://www.centerforfinancialstability.org/research/Central_Bank_Liquidity_Swaps_201002.pdf

 

 

The implications of cross-border banking and foreign currency swap lines for the international monetary system

 

Már Guðmundsson:

https://www.imf.org/external/np/seminars/eng/2011/res/pdf/MGpresentation.pdf

 

 

The Politics of Rescuing the World’s Financial System: The Federal Reserve as a Global Lender of Last Resort

J. Lawrence Broz

 

2014

http://robobees.seas.harvard.edu/files/pegroup/files/broz2014.pdf

 

 

From Exorbitant Privilege to Existential Trilemma

 

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&sourceid=em&document_id=1067001821&serialid=FdgDLSRBS51YJLr69%2BcO6H1iGqGyLNuzqEDE5DwoUt8%3D

 

 

The dollar is now everyone’s problem

September 29, 2014

http://www.moneyandbanking.com/commentary/2014/9/29/the-dollar-is-now-everyones-problem

 

 

The Global Dollar System

Stephen G Cecchetti

 

http://people.brandeis.edu/~cecchett/Polpdf/Polp61.pdf

 

 

Central Bank Swaps and International Dollar Illiquidity

Andrew K. Rose Mark M. Spiegel∗

March 14, 2012

 

http://faculty.haas.berkeley.edu/arose/RSGJE.pdf

 

 

DOLLAR FUNDING AND THE LENDING BEHAVIOR OF GLOBAL BANKS

VICTORIA IVASHINA DAVID S. SCHARFSTEIN JEREMY C. STEIN

First draft: October 2012 This draft: March 2015

 

http://www.hbs.edu/faculty/Publication%20Files/ISS%20revision%20march%202015%20FINAL_7529aa88-fe19-4fd1-8427-43b83c5d8589.pdf

 

 

THE INTERNATIONALIZATION OF THE RENMINBI AND THE RISE OF A MULTIPOLAR CURRENCY SYSTEM

By Miriam Campanella

 

http://www.ecipe.org/app/uploads/2014/12/WP201201_1.pdf

 

 

Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis

Andrew K. Rose Mark M. Spiegel

August 2011

 

http://www.frbsf.org/economic-research/files/wp11-18bk.pdf

 

 

Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs

Linda S. Goldberg, Craig Kennedy, Jason Miu

http://www.nber.org/papers/w15763.pdf

 

 

US Dollar Swap Arrangements between Central Banks

 

https://www.rba.gov.au/publications/smp/2008/nov/pdf/box-b.pdf

 

 

Currency Swaps with Foreign Central Banks

 

BY RENEE COURTOIS

 

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/region_focus/2010/q2/pdf/policy_update.pdf

 

 

Central Banks Make Swaps Permanent as Crisis Backstop

Jeff Black

October 31, 2013

https://www.bloomberg.com/news/articles/2013-10-31/ecb-makes-crisis-cash-lines-at-central-banks-permanent

 

 

Swap Lines Underscore the Dollar’s Global Role

 

https://www.frbatlanta.org/-/media/documents/regional-economy/econsouth/12q1currencyswaps.pdf

 

 

Central bank co-operation and international liquidity in the financial crisis of 2008-9

by William A Allen and Richhild Moessner

Monetary and Economic Department

May 2010

 

http://www.bis.org/publ/work310.pdf

 

 

Financial instability, Reserves, and Central Bank Swap Lines in the Panic of 2008

Maurice Obstfeld Jay C. Shambaugh  Alan M. Taylor

 

http://www.dartmouth.edu/~jshambau/Papers/ObstfeldShambaughTaylorAEAPP.pdf

 

 

The Federal Reserve as Global Lender of Last Resort, 2007-2010

 

J. Lawrence Broz

 

http://ucrpoliticaleconomy.ucr.edu/wp-content/uploads/2013/09/Broz_Fed.pdf

 

 

Lenders of Last Resort and Global Liquidity

Rethinking the system

 

http://siteresources.worldbank.org/WBI/Resources/213798-1259968479602/outreach_obstfeld_dec09.pdf

 

 

The Fed’s FX swap facilities have been quiet… too quiet?

https://ftalphaville.ft.com/2016/07/13/2169137/the-feds-fx-swap-facilities-have-been-quiet-too-quiet/

 

 

Swap Lines Underscore the Dollar’s Global Role

 

https://frbatlanta.org/-/media/documents/regional-economy/econsouth/12q1currencyswaps.pdf

 

 

THE EVOLUTION OF THE FEDERAL RESERVE SWAP LINES SINCE 1962

Michael D. Bordo Owen F. Humpage Anna J. Schwartz

2014

 

http://www.nber.org/papers/w20755.pdf

 

 

How China Covered The World In “Liquidity Swap Lines”

http://www.zerohedge.com/news/2015-05-17/how-china-covered-world-liquidity-swap-lines

 

 

The Federal Reserve’s Foreign Exchange Swap Lines

Michael J. Fleming  Nicholas Klagge

April 1, 2010

https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=1597320

 

 

The Federal Reserve as Global Lender of Last Resort, 2007-2010

 

J. Lawrence Broz

 

http://eprints.lse.ac.uk/60951/1/dp-30.pdf

 

 

The Fed’s Role in International Crises

Donald Kohn

Thursday, September 18, 2014

https://www.brookings.edu/on-the-record/the-feds-role-in-international-crises/

 

 

Options for meeting the demand for international liquidity during financial crises

 

http://www.bis.org/publ/qtrpdf/r_qt1009g.pdf

 

 

The Chiang Mai Initiative Multilateralization: Origin, Development and Outlook

Chalongphob Sussangkarn

No. 230 July 2010

 

https://www.adb.org/sites/default/files/publication/156085/adbi-wp230.pdf

 

 

The Amended Chiang Mai Initiative Multilateralisation (CMIM) Comes Into Effect on July 17, 2014

 

https://www.boj.or.jp/en/announcements/release_2014/rel140717a.pdf

 

 

Note on Chiang Mai Initiative Multilateralization (CMIM)* 

Chalongphob Sussangkarn

 

http://policydialogue.org/files/events/Chalongphabs_Note.pdf

 

 

SOURCES AND EVOLUTION OF THE CHIANG MAI INITIATIVE

 

Vyacheslav Amirov

https://interaffairs.ru/i/pdf_asean/7.pdf

 

 

The Chiang Mai Initiative

PIIE

https://piie.com/publications/chapters_preview/345/3iie3381.pdf

 

 

Why Was the CMI Possible?

Embedded Domestic Preferences and Internationally Nested Constraints in Regional Institution Building in East Asia**

Saori N. Katada

 

http://web.isanet.org/Web/Conferences/FLACSO-ISA%20BuenosAires%202014/Archive/1f1966fe-1c48-4d32-a463-ea268ecb2903.pdf

 

 

From the Chiang Mai Initiative to an Asian Monetary Fund

Masahiro Kawai

No. 527 May 2015

 

https://www.adb.org/sites/default/files/publication/160056/adbi-wp527.pdf

 

 

Asian Monetary Fund: Getting Nearer

By Pradumna B. Rana

 

https://www.rsis.edu.sg/wp-content/uploads/2014/07/CO11079.pdf

 

 

Panel on Financial Affairs Meeting on 2 November 2009

 

Background Brief
on Hong Kong’s participation in Chiang Mai Initiative Multilateralization

 

http://www.legco.gov.hk/yr09-10/english/panels/fa/papers/fa1102cb1-144-e.pdf

 

 

The Chiang Mai Initiative Multilateralisation: Origin, Development and Outlook

 

 

Much Ado about Nothing? Chiang Mai Initiative Multilateralisation and East Asian Exchange Rate Cooperation

Wolf HASSDORF

 

http://www.ritsumei.ac.jp/acd/cg/ir/college/bulletin/e-vol.10/06Hassdorf.pdf

 

 

Financial Safety Nets in Asia: Genesis, Evolution, Adequacy, and Way Forward

Hal Hill and Jayant Menon

 

https://crawford.anu.edu.au/acde/publications/publish/papers/wp2012/wp_econ_2012_17.pdf

 

 

Financial Community Building in East Asia

The Chiang Mai Initiative: Its Causes and Evaluation

 

EPIK 2010 Economics of Community Building

Yoon Jin Lee

 

http://www.eai.or.kr/data/bbs/kor_report/YoonJinLee.pdf

 

 

FROM “TAOGUANG YANGHUI” TO “YOUSUO ZUOWEI”:

CHINA’S ENGAGEMENT IN FINANCIAL MINILATERALISM

HONGYING WANG

 

https://www.cigionline.org/sites/default/files/cigi_paper_no52.pdf

 

 

Foundation of Regional Integration: Common or Divergent Interests?

Yong Wook Lee

 

http://www.eastasiair.com/uploads/2/9/7/5/29758289/이용욱-_foundation_of_regional_integration__1_.pdf

 

 

CMIM and ESM: ASEAN+3 and Eurozone Crisis Management and Resolution Liquidity Provision in Comparative Perspective

Ramon PACHECO PARDO

 

http://law.nus.edu.sg/cbfl/pdfs/working_papers/CBFL-WP-RPP01.pdf

 

 

An Overview of Regional Financial Cooperation: Implication for BRICS Contingent Reserve Arrangement

Zhang Liqing,NianShuting

 

http://www.sdrf.org.cn/upfile/2016/03/16/20160316142109_641.pdf

 

 

CMIM-Asian Multilateralism and Cooperation

Keynote speech by Dr. Junhong Chang, AMRO Director, at the 6th Asia Research Forum
1 July 2016

http://www.amro-asia.org/keynote-speech-by-dr-junhong-chang-amro-director-at-the-6th-asia-research-forum-cmim-asian-multilateralism-and-cooperation/

 

 

Financial RegionaliSm: a Review oF the iSSueS

Domenico lombaRDi

 

https://www.brookings.edu/wp-content/uploads/2016/06/11_global_economy_lombardi.pdf

 

 

Practices of Financial Regionalism and the Negotiation of Community in East Asia

Mikko Huotari

 

https://www.southeastasianstudies.uni-freiburg.de/Content/files/occasional-paper-series/op8_huotari_feb-2012_end.pdf

 

 

Financial Integration in Emerging Asian Economies

Gladys Siow

 

http://www.ipedr.com/vol38/032-ICEBI2012-A10048.pdf

 

 

Regional Monetary Cooperation: Lessons from the Euro Crisis for Developing Areas?

Sebastian Dullien

Barbara Fritz

Laurissa Mühlich

 

http://wer.worldeconomicsassociation.org/files/WEA-WER2-Dullien.pdf

 

 

The Need and Scope for Strengthening Co-operation Between Regional Financing Arrangements and the IMF

 

Ulrich Volz

 

http://edoc.vifapol.de/opus/volltexte/2014/5026/pdf/DP_15.2012.pdf

 

 

Towards institutionalization: The BRICS Contingent Reserve Arrangement (CRA)

http://www.postwesternworld.com/2013/05/12/the-politics-of-the-brics-contingency-reserve-arrangement-cra/

 

 

The BRICS Contingent Reserve Arrangement and its Position

in the Emerging Global Financial Architecture

NIColETTE CATTANEo, MAyAMIko BIzIwICk & DAvID FRyER

 

https://www.saiia.org.za/policy-insights/752-policy-insights-10-the-brics-contingent-reserve-arrangement-and-its-position-in-the-emerging-global-financial-architecture/file

 

 

Financial Architectures and Development:

Resilience, Policy Space and Human Development in the Global South

by Ilene Grabel

 

http://hdr.undp.org/sites/default/files/hdro_1307_grabel.pdf

 

 

Financial Regionalism in East Asia

 

http://www.economia.uniroma2.it/mondragone/Public/16/File/VOLZ.pdf

 

 

Enhancing the Effectiveness of CMIM and AMRO: Selected Immediate Challenges and Tasks

Reza Siregar and Akkharaphol Chabchitrchaidol

No. 403 January 2013

 

http://saber.eaber.org/sites/default/files/documents/2013.01.17.wp403.enhancing.effectiveness.cmim_.amro_.pdf

 

 

Regional and Global Liquidity Arrangements

Ulrich Volz / Aldo Caliari (Editors)

 

http://eml.berkeley.edu/~eichengr/regional_funds_oct2010.pdf

 

 

A regional reserve fund for Latin America

Daniel Titelman, Cecilia Vera, Pablo Carvallo and Esteban Pérez Caldentey

 

http://repositorio.cepal.org/bitstream/handle/11362/37018/RVI112Titelmanetal_en.pdf

 

 

Financial Crises as Catalysts for Regional Integration? The Chances and Obstacles for Monetary Integration in ASEAN+3 and MERCOSUR

Sebastian Krapohl  Daniel Rempe

 

http://www.eisa-net.org/be-bruga/eisa/files/events/stockholm/KrapohlRempe.pdf

 

 

Financial Integration

 

http://www.aec.com.mm/download/Financial%20Integration.pdf

 

 

Framework of the ASEAN Plus Three Mechanisms Operating in the Sphere of Economic Cooperation

Prof. Dr. Vyacheslav V. Gavrilov

 

http://cale.law.nagoya-u.ac.jp/_src/sc597/CALE20DP20No.207-110826.pdf

 

 

Regional Integration in Europe and East Asia: Experiences of Integration and Lessons from Functional Multilateralism

Uwe Wissenbach

 

http://gsis.korea.ac.kr/wp-content/uploads/2015/04/13-2-02_Uwe_Wissenbach.pdf

 

 

General Overview: “Financial Risk and Crisis Management after the Global Financial Crisis”

 

https://www.jeri.or.jp/en/activities/pdf/Jun2016No9.pdf

 

 

Remaking the architecture: the emerging powers, self-insuring and regional insulation 

GREGORY T. CHIN

 

http://www.risingpowersinitiative.org/wp-content/uploads/chin1.pdf

 

 

The Origins and Transformation of East Asian Financial Regionalism

 

http://dspace.uni.lodz.pl:8080/xmlui/bitstream/handle/11089/18824/6-069_084-Klecha-Tylec.pdf?sequence=1&isAllowed=y

 

 

Regional Financial Arrangement: An Impetus for Regional Policy Cooperation

Reza Siregar and Keita Miyaki

 

https://mpra.ub.uni-muenchen.de/51050/1/MPRA_paper_51050.pdf

 

 

Role of Regional Institutions in East Asia

 

http://www.eria.org/RPR_FY2011_No.10_Chapter_11.pdf

 

 

Asia’s new financial safety net: Is the Chiang Mai Initiative designed not to be used?

Hal Hill, Jayant Menon

25 July 2012

http://voxeu.org/article/chiang-mai-initiative-designed-not-be-used

 

 

Will the new BRICS institutions work?

 

https://www.weforum.org/agenda/2014/08/brics-new-development-bank-contingent-reserve-agreement/

 

 

BRICS NEW DEVELOPMENT BANK AND CONTINGENT RESERVE ARRANGEMENT

 

http://pmg-assets.s3-website-eu-west-1.amazonaws.com/150428BRICS_Bank.pdf

 

 

The Contingent Reserve Arrangement and the International Monetary System

Manmohan Agarwal

 

http://www.icsin.org/uploads/2015/04/12/2ead896b5e52456a098bbd2d0b25774b.pdf

 

 

The BRICS Bank and Reserve Arrangement: towards a new global financial framework?

2014

 

http://www.europarl.europa.eu/RegData/etudes/ATAG/2014/542178/EPRS_ATA(2014)542178_REV1_EN.pdf

 

 

China’s Bilateral Currency Swap Lines

Lin Zhitao Zhan Wenjie Yin-Wong Cheung

CESIFO WORKING PAPER NO. 5736 CATEGORY 7:MONETARY POLICY AND INTERNATIONAL FINANCE JANUARY 2016

 

 

Elasticity and Discipline in the Global Swap Network

Perry Mehrling Barnard College and INET

November 6, 2015

http://www.perrymehrling.com/wp-content/uploads/2015/11/Global-Swap-Network.pdf

 

 

A Proposal for a New Regional Financial Arrangement: The Reserve Liquidity Line

Young-Joon Park

2014

 

 

International Liquidity in a Multipolar World

Barry Eichengreen

 

 

 

International Liquidity Swaps: Is the Chiang Mai Initiative Pooling Reserves Efficiently ?

Emanuel Kohlscheen and Mark P. Tayl

http://macro.soc.uoc.gr/11conf/docs/liquidity_swaps.pdf

http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_752.pdf

 

 

International Reserves and Swap Lines in Times of Financial Distress: Overview and Interpretations

Joshua Aizenman

No. 192 February 2010

https://www.adb.org/sites/default/files/publication/156047/adbi-wp192.pdf

 

 

Coordinating Regional and Multilateral Financial Institutions

C. Randall Henning

 

https://piie.com/publications/wp/wp11-9.pdf

 

 

The Asian Monetary Fund Reborn? Implications of Chiang Mai Initiative Multilateralization

William W. Grimes

https://www.bc.edu/content/dam/files/schools/cas_sites/economics/pdf/Seminars/SemS2011/Grimes.pdf

 

 

REGIONAL LIQUIDITY MECHANISMS IN DEVELOPING COUNTRIES

Gustavo Rojas de Cerqueira César

http://repositorio.ipea.gov.br/bitstream/11058/6420/1/PWR_v4_n3_Regional.pdf

 

 

Much Ado about Nothing? Chiang Mai Initiative Multilateralisation and East Asian Exchange Rate Cooperation

Wolf HASSDORF

http://www.ritsumei.ac.jp/acd/cg/ir/college/bulletin/e-vol.10/06Hassdorf.pdf

 

 

Global Liquidity: Public and Private

Jean-Pierre Landau

 

http://www.jeanpierrelandau.com/wp-content/uploads/2013/05/Jackson-Hole-Print.pdf

 

 

Safety for whom? The scattered global financial safety net and the role of regional financial arrangements

Mühlich, Laurissa; Fritz, Barbara

 

http://www.ssoar.info/ssoar/bitstream/handle/document/48298/ssoar-2016-muhlich_et_al-Safety_for_whom_The_scattered.pdf?sequence=1

 

 

The International Financial Architecture and the Role of Regional Funds

Barry Eichengreen

August 2010

 

http://eml.berkeley.edu/~eichengr/intl_finan_arch_2010.pdf

 

 

The evolving multi-layered global financial safety net : role of Asia

 

 

 

Asian Regional Financial Safety Nets? Don’t Hold Your Breath

Iwan J Azis

https://www.mof.go.jp/english/pri/publication/pp_review/ppr017/ppr017e.pdf

 

 

STITCHING TOGETHER THE GLOBAL FINANCIAL SAFETY NET

Minouche Shafik,

Deputy Governor, Bank of England

26th February 2016

 

http://www.reinventingbrettonwoods.org/sites/default/files/31E%20Minouche%20Shafik£∫Stitching%20Together%20The%20Global%20Financial%20Safety%20Net.pdf

 

 

The Global Financial Safety Net through the Prism of G20 Summits

Gong Cheng

European Stability Mechanism

https://mpra.ub.uni-muenchen.de/68070/1/MPRA_paper_68070.pdf

 

 

ADEQUACY OF THE GLOBAL FINANCIAL SAFETY NET

 

 The Evolving Multi-layered Global Financial Safety Net: Role of Asia

Pradumna B. Rana

 

Global Financial Safety Nets: Where Do We Go from Here?
Eduardo Levy-Yeyati and Eduardo Fernández-AriasFriday,
January 14, 2011
 Strengthening the Global Financial Safety Net

 

The Global Liquidity Safety Net

Institutional Cooperation on Precautionary Facilities and Central Bank Swaps

https://www.cigionline.org/sites/default/files/new_thinking_g20_no5_web.pdf

 

 

Inadequate Regional Financial Safety Nets Reflect Complacency

Iwan J. Azis

No. 411 March 2013

 

https://www.adb.org/sites/default/files/publication/156266/adbi-wp411.pdf

 

 

Stitching together the global financial safety net

by Edd Denbee, Carsten Jung and Francesco Paternò

 

https://www.bancaditalia.it/pubblicazioni/qef/2016-0322/QEF_322_16.pdf

 

 

GLOBAL AND REGIONAL FINANCIAL SAFETY NETS: LESSONS FROM EUROPE AND ASIA

CHANGYONG RHEE, LEA SUMULONG AND SHAHIN VALLÉE

 

http://bruegel.org/wp-content/uploads/imported/publications/WP_2013_02.pdf

 

 

Financial Safety Nets in Asia: Genesis, Evolution, Adequacy, and Way Forward

 

Hal Hill and Jayant Menon

No. 395 November 2012

https://www.adb.org/sites/default/files/publication/156250/adbi-wp395.pdf

 What we really know about the global financial safety net

 

Beatrice Scheubel, Livio Stracca

04 October 2016

Global Financial Safety Nets: Where Do We Go from Here?

Eduardo Fernandez-Arias

Eduardo Levy Levy-Yeyati

November 2010

Global Financial Safety Nets
How can countries cooperate to mitigate contagion and limit the spread of crises?November 7, 2011

 

What do we know about the global financial safety net? Rationale, data and possible evolution

 Global Financial Safety Net

Cross Border/Offshore Payment and Settlement Systems

Cross Border/Offshore Payment and Settlement Systems

 

There are several ways by which international payment transactions are done around the globe.

Main mechanisms for payment and settlements are as follows:

  • Correspondent Banks Network – loosely coupled network of private banks.
  • Clearing Bank Model -using international clearing banks – China’s RMB Clearing Banks
  • Cross border RTGS – used mainly in regional economic and monetary blocs such as EMU – TARGET2.
  • Clearing House model – Offshore Payment, Clearing, and settlements through systems such CHIPS in USA and CIPS in China.

 

Central Banks also have created a Currency Swap network for providing liquidity in international financial markets.

Recently, there has been a decline in correspondent banks network transactions.  Many global banks have withdrawn correspondent relationships with other banks due to increased regulations.

There is also a newer trend in using ACH networks for international transactions.  SEPA in Europe and FedGlobal ACH in USA are two examples.

SWIFT and CLS bank also play a critical role in international payments.

There is also very large OTC FX market in which 5.1 trillion USD per day are traded.  I am not yet sure about the clearing and settlements of these transactions.

There are some newer technology platforms which have started providing Global payment services.  Earthport in UK and Ripple Labs are two such examples.

 

Large Value Transfer Methods (B2B Transfers)

  • Cross border, Same Currency – TARGET2, SEPA, EURO1
  • Offshore, currency specific – CHIPS for USD, CIPS for RMB
  • Cross border, multiple currencies – SWIFT, CLS
  • Offshore Clearing Houses – Hong Kong, Singapore, London, Japan, Frankfurt, USA
  • OTC FX markets (FX SWAPS, FX SPOT, FX Forward, FX Futures)
  • Network of Correspondent Banks
  • Network of Clearing Houses
  • CB FX Swap Network
  • Intra bank payment networks: Multinational Banks (Branch or subsidiary in a foreign country)
  • FEDGlobal ACH
  • Hawala System

 

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Regional Blocs (where new RTGS are being developed)

  • East Africa Community (EAC)
  • West African Monetary Zone (WAMZ)
  • Common Market for East and South Africa (COMESA)
  • South African Development Community (SADC) – SIRESS RTGS
  • Automated Clearing House in Common Monetary Area (CMA)
  • ASEAN  AEC ?
  • South Asian (Asian Clearing Union) ?

 

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LVPS used for International Payments

  • EURO1 ( Pan Europe)
  • euroSIC (Frankfurt) used for Euro transactions between countries in EU but not in EMU.
  • FXYCS (Japan)
  • EAF (Germany)
  • SIC (Switzerland)
  • CHIPS ( USA)
  • CHAPS (UK)
  • LVTS (Canada)
  • CIPS (China)

 

 

I am not sure how many of these networks are currently operational since countries in EU have migrated to TARGET2 since 2008.

G-LVTN (Global Large Value Transfer Networks)

  • ELLIPS (Belgium)
  • IIPS (Canada)
  • SNP (France)
  • EAF2 (Germany)
  • Ingrosso (Italy)
  • Top (Netherland)
  • RIX (Sweden)
  • SIC (Switzerland)
  • CHAPS (UK)
  • CHIPS (USA)
  • FXYCS (Japan)

 

There are several newer solutions for international payment and money remittances at retail level.  B2C and C2C international money transfers.  They are listed here but are not discussed in this post.

New Solutions (Retail B2C, C2C)

  • Block chain
  • Ripple
  • Earthport
  • Transferwise
  • Xoom
  • Paypal
  • Bitcoins
  • Western Union
  • MoneyGram
  • Money2India/ICICI Bank
  • State Bank of India
  • Global ACH with FX Conversion
  • International ACH Transactions

 

 

China CIPS

One of the main reasons for this discrepancy is the inadequacy of the infrastructure for cross-border renminbi payments. Cross-border payments are currently made via a patchwork of clearing hubs and correspondent banks. These payments are hindered by complicated routing procedures, the need to maintain multiple foreign correspondent accounts, liquidity shortages in some offshore RMB centers, different hours of operations between clearing centers, a lack of common standards between international and Chinese domestic payment systems, and China’s capital controls.

Despite these hurdles, the use of the renminbi as an international payments currency has continued to grow rapidly. In the first half of 2015, there were more than RMB 5.7 trillion (USD 866.7 billion) worth of payments made to and from China using the renminbi. Currently, around a third of payments between China and the Asia Pacific region are conducted using renminbi. These numbers are projected to increase substantially over the coming years due to the desirability for Chinese businesses to use their own currency for trade transactions.

The increased use of the renminbi has led to around RMB1.5 trillion (USD 231 billion) in offshore renminbi deposits, with the largest amounts in Hong Kong, Taiwan and Singapore, respectively. As more renminbi accumulate outside of China, investors will increase their demands for channels to repatriate funds back onshore.

China’s Cross-border Inter-bank Payment System (CIPS) seeks to address many of the existing problems facing cross-border renminbi payments. CIPS provides one-point entry by participants and a central location for clearing renminbi payments It allows participation by both onshore and offshore banks and provides direct access to China National Advanced Payment System (CNAPS). These features reduce the need for banks to navigate complicated payment pathways via offshore clearing hubs or through correspondent banks. This should result in faster payment processing and reduced costs for cross-border payments.

CIPS is a real time gross settlement system, meaning that banks settle payments immediately between each other on a gross rather than a net basis. This reduces credit risks that can arise in systems where payments are netted before settlement.

Payment messages sent within CIPS are written in both English and Chinese. This eliminates the necessity of translating messages into Chinese before they can be transmitted to CNAPS. CIPS utilizes the ISO20022 messaging standard, a widely used international messaging scheme for cash, securities, trade and foreign exchange transactions. CIPS will also utilize SWIFT bank identifier codes, rather than CNAPS clearing codes. These factors will allow CIPS to smoothly process payments flowing between offshore banks using SWIFT and mainland banks using CNAPS. As a result, cross-border payments made through CIPS should be able to achieve straight through processing.

CIPS operating hours will extend from 9:00am to 8:00pm Shanghai-time. This allows the system to overlap with business hours in Europe, Africa, Oceania, and Asia. Banks within these jurisdictions will be able to settle renminbi transactions during their business day. Though North and South America are not currently covered, the People’s Bank of China (PBoC) has stated that an expansion of CIPS’ operating hours is possible.

As of the launch in October 2015, CIPS had 19 direct participants and 176 indirect participants. The initial direct members of CIPS include 11 Chinese banks and the Chinese subsidiaries of 8 foreign banks. There is currently only one American bank that is a direct participant in the system, Citibank. Of the indirect participants, 38 were Chinese banks and 138 are foreign banks.

Details on plans for the future development of CIPS are sparse. Chinese officials have spoken of a Phase II for CIPS that will improve liquidity management and the efficiency of cross-border clearing and settlement. PBoC officials have also stated that Phase II will include longer operating hours, support for securities settlement and central counterparties.

The creation of CIPS is an important milestone on the renminbi’s road to becoming a major global currency. It has the potential to significantly improve the efficiency of cross-border payment transactions and increase liquidity in the offshore market. CIPS provides a more direct pathway for processing transactions, improving speed and lowering fees. Liquidity in the offshore renminbi market will be improved due to the large number of participating financial institutions and the direct link the system has with CNAPS.

The fact that the renminbi has progressed so quickly despite the underlying deficiencies in the payments infrastructure is a testament to the global demand for the currency. CIPS seeks to rectify these deficiencies and is likely to play a critical role in the renminbi’s future growth as an international payments currency.

 

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USA  CHIPS

The Clearing House Interbank Payments System (CHIPS) is a bank-owned, privately operated electronic payments system.

CHIPS is both a customer and a competitor of the Federal Reserve’s Fedwire service.

The average daily value of CHIPS transactions is about $1.2 trillion a day.

The Clearing House Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS enables banks to transfer and settle international payments more quickly by replacing official bank checks with electronic bookkeeping entries. As of January 2002, CHIPS had 59 members, including large U.S. banks and U.S. branches of foreign banks.

History

The New York Clearing House Association, a group of the largest New York City commercial banks, organized CHIPS in 1970 for eight of its members with Federal Reserve System membership. Participation in CHIPS expanded gradually in the 1970s and 1980s to include other commercial banks, Edge corporations, United States agencies and branches of foreign banks, and other financial institutions.
Until 1981, final settlement, or the actual movement of balances at the Federal Reserve, occurred on the morning after a transfer. Sharply rising settlement volumes raised concerns that next-day settlement exposed funds unduly to various overnight and over-weekend risks. In August 1981, the Federal Reserve agreed to provide same-day settlement to CHIPS participants through Fedwire, the Fed’s electronic funds and securities transfer network.

The number of CHIPS members has fallen from about 140 in the late 1980s, mainly because of consolidations in the banking industry. Membership might have fallen even more sharply if CHIPS had not acted in 1998 to eliminate a requirement that members maintain an office in New York City.

CHIPS is governed by a ten-member board consisting of senior officers of large banks that establishes rules and fees and admits and reevaluates participants. CHIPS handles about 240,000 transactions a day with a total dollar value of about $1.2 trillion. Historically, CHIPS specialized in settling the dollar portion of foreign exchange transactions, and CHIPS estimates that it handles 95 percent of all U.S. dollar payments moving between countries. However, the CHIPS focus has shifted to domestic business since CHIPS introduced intraday settlement in January 2001.

Intraday Settlement

Until January 2001, CHIPS conducted all of its settling at the end of the business day. Now, however, CHIPS provides intraday payment finality through a real-time system. CHIPS settles small payments, which can be accommodated by the banks’ available balances, individually. Other payments are netted bilaterally (e.g., when Bank A has to pay $500 million to Bank B, and Bank B has to pay $500 million to Bank A), without any actual movement of funds between CHIPS participants.

Other payments are netted multilaterally. Suppose Bank A must pay $500 million to Bank B, and Bank A is also expecting to receive $500 million from Bank C. Without netting, Bank A would send $500 million to Bank B, and it would thus experience a decline in its available cash while it was awaiting the payment from Bank C.

Using the CHIPS netting system, however, Bank A submits its $500 million payment for Bank B to a payments queue, where it waits until Bank C’s offsetting payment is received. The effect of matching and netting these payments is that Bank A’s cash position is simultaneously reduced by its payment to Bank B and increased by receipt of its payment from Bank C. The overall effect on Bank A’s cash position is thus zero.
Payments for which no match can be found are not made until the end of the day, but each payment is final as soon as it is made. To facilitate the working of the intraday netting system, each participant pre-funds its CHIPS account by depositing a certain amount between 12:30 and 9:00 a.m. The size of this “security deposit,” which is recalculated weekly, is set by CHIPS based on the number and size of the bank’s recent CHIPS transactions, and none of it can be withdrawn during the day. At the end of the day, CHIPS uses these deposits to settle any still-unsettled transactions. Any participant that has a negative closing position at the end of the day (that is, it owes more than what it has in its security deposit) has 30 minutes to make up the difference. The 30-minute period is referred to as the final prefunding period. If any banks do not meet their final prefunding requirement, CHIPS settles as many of the remaining payments as possible with funds that are in the system, and any payments still unsettled must be settled outside of CHIPS.

Banks that have positive closing positions at the end of the day receive the amounts that they are due in the form of Fedwire payments. Because the ultimate CHIPS settlements are provided by Fedwire, CHIPS is a customer, as well as a competitor, of Fedwire. The vast majority of CHIPS members are also Fedwire participants, and the daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers.

CHIPS has recently added electronic data interchange (EDI) capability to its payment message format. EDI allows participants to transmit business information (such as the purpose of a payment) along with their electronic funds transfers.

 

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USA FedGlobal ACH Payments

To facilitate this mapping process, the Federal Reserve Bank of Atlanta joined with U.S. and foreign depository institutions, international clearing and settlement service providers, and other interested parties to form the International Payments Framework Association (IPFA). The IPFA is a nonprofit membership association comprising 29 members representing Brazil, Canada, Europe, Japan, South Africa, the United Kingdom, and the United States whose purpose is to create a framework for bridging national formats for non-urgent international credit transfers. IPFA establishes rules, standards, and operating procedures for the exchange of these payments. The first effort by IPFA was to create rules that would facilitate a bridge between the IAT format for ACH credit transfers and the payment format, ISO 20022, which supports the several retail networks within the single euro payments area (also known as SEPA), under the SEPA credit transfer scheme. The next step underway is to leverage the framework created for the United States and SEPA in order to add other countries—such as Brazil, Canada, and South Africa—that want to exchange payments with the United States or SEPA ACH networks.

The Reserve Banks, through FedGlobal, launched their first commercial international ACH service with Canada in 1999.43 The service began as a pilot program for outbound commercial ACH transfers from the United States to Canada and became a production service in December 2001. Subsequent to the Canadian service, the Reserve Banks launched individual services to Europe,Mexico, Panama, and Latin America, covering 34 countries in total.44 In 2010, the Reserve Banks processed 1.3 million international ACH transfers—accounting for about 20 percent of the total volume of international payments being cleared and settled through the U.S. ACH network.45

The Reserve Banks offer FedGlobal account-to-account services to Canada, Mexico, Panama, and 22 countries in Europe. The Reserve Banks offer FedGlobal A2R services to Argentina, Brazil, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru, and Uruguay.

 

 

Europe Cross Border LVPS

  • Target 2
  • Euro1
  • SEPA
  • CLS/SWIFT
  • STEP 2
  • STEP 1

 

EU EBA Clearing – EURO1, STEP1, STEP2, MyBank

EBA Clearing is a provider of pan-European payment infrastructure with headquarters in Paris. It is wholly owned by its shareholders.

Its initial mission consisted in the operation of the clearing and settlement system for single euro transactions of high value EURO1, which the Euro Banking Association (EBA) had transferred to EBA Clearing for the launch of the system in 1999. Besides EURO1, EBA Clearing also owns and operates STEP1, a payment system for single euro payments for small and medium-sized banks, and STEP2, a Pan-European Automated Clearing House (PE-ACH) for euro retail payments. In March 2013, EBA CLEARING launched MyBank, an e-authorisation solution for online payments, which is geared at facilitating the growth of e-commerce across Europe.[1]

Both EURO1 and STEP2 have been identified as Systemically Important Payment Systems (SIPS) by the European Central Bank (ECB). EBA CLEARING is also planning to deliver a pan-European instant payments infrastructure solution in the course of 2017.

The organisation is based in Paris and has representative offices in Brussels, Frankfurt and Milan.

EURO1
EURO1 is a RTGS-equivalent large-value payment system on a multilateral net basis, for single euro transactions of high priority and urgency, and primarily of large amount. EURO1 is owned and operated by EBA CLEARING. It is open to banks that have a registered address or branch in the European Union and fulfil a number of additional requirements. EURO1 is subject to German law (current account principle/single obligation structure) and is based on a messaging and IT infrastructure provided by SWIFT.

STEP1
Since 2000, EBA CLEARING has been offering a payment service named STEP1 for small and medium-sized banks for single euro payments of high priority and urgency. The technical infrastructure is the same as that of the EURO1 system, both use the messaging and IT infrastructure of SWIFT.

STEP2
STEP2 was put into operation in 2003 with Italian payment system provider SIA S.p.A. It processes mass payments in euro. STEP2 is a Pan-European Automated Clearing House (PE-ACH). This means that it complies with the principles set by the European Payments Council (EPC) for a PE-ACH Compliant Clearing and Settlement System.

From the beginning of Single Euro Payments Area (SEPA) on 28 January 2008, STEP2 has been offering SEPA Credit Transfer processing services across all SEPA countries through its SEPA Credit Transfer (SCT) Service. Since 2 November 2009, the transposition date of the Payment Services Directive, EBA CLEARING has been processing SEPA Direct Debits with its STEP2 SDD Core and STEP2 SEPA Direct Debit (“Business to Business”) Services. Through its SEPA Credit Transfer and Direct Debit offerings, STEP2 provides banks across Europe with one channel through which they can send and receive their SEPA Credit Transfers and SEPA Direct Debits. The STEP2 platform reaches nearly 100 percent of all banks that have signed the SCT and SDD Scheme Adherence Agreements of the European Payments Council (EPC).

MyBank
MyBank is a pan-European e-authorisation solution for online payments that was launched in March 2013 by EBA CLEARING. The solution enables customers across Europe to pay for their online purchases via their regular online or mobile banking environment without having to disclose confidential data to the merchant or other third parties. The solution can be used for authorising SEPA Credit Transfers as well as the creation of SDD mandates. At a later stage, MyBank may also be used for transactions in currencies other than euro or for e-identity services.

Today, MyBank is owned and managed by PRETA S.A.S., a wholly owned subsidiary of EBA CLEARING.[2]

 

From ECB website

ECB identifies systemically important payments systems

21 August 2014

Four systems were identified: TARGET2, EURO1, STEP2-T and CORE(FR);

Goal is to ensure efficient management of risks and sound governance arrangements
The European Central Bank (ECB) has identified four key payment systems that are now under the new ECB Regulation on oversight requirements for systemically important payment systems (SIPS), which entered into force on 12 August 2014. The regulation covers large-value and retail payment systems in the euro area operated by both central banks and private entities, and aims at ensuring efficient management of legal, credit, liquidity, operational, general business, custody, investment and other risks as well as sound governance arrangements, namely with a view towards promoting the smooth operation of safe and efficient payment systems in the euro area.

The four systems identified today are: TARGET2, operated by the Eurosystem; EURO1 and STEP2-T, operated by EBA CLEARING; and CORE(FR), operated by STET, a joint initiative of six major French banks. They were identified according to the combination of at least two of four main criteria, i.e. the value of payments settled, market share, cross-border relevance and provision of services to other infrastructures. The Eurosystem will review this list annually on the basis of updated statistical data.

 

 

From CLS Bank & the World of FX Settlement

 

Starting my career as a trader on Wall Street, one of the big mysteries I had, was just how all these trades on the NYSE got executed and reported. Within the maze of specialist booths and flying paper, trades were being crossed and buyers and sellers were recognized. While the occasional errors occur, the wild system is highly efficient at reporting and settling trades.

In the world of OTC, settlement represents a larger factor, as participants are not bound by a central exchange system that insures against counterparty risk. As such, companies are on their own to ensure that trades are settled correctly with their counterparties, and an exchange of funds takes place.

In Forex Magnates’s Q1 2013 Industry Report, we took a look at the world of FX settlement and post-trade flow and researched CLS Bank and Traiana. We wanted to know just what they did, and how their products help FX players handle their settlement needs, create efficient markets, and lower overall transaction costs. In this first part, we focus on CLS Bank.

CLS Bank

Launched in 2002, CLS Bank was created as a private sector initiative, to deliver and operate services to mitigate settlement risk in the FX market. Owned and operated by member institutions and working alongside central banks, CLS offers members the ability to settle trades within a central location, thus, providing efficiencies to FX markets.

To understand what CLS does, it is first important to know how settlement works. Settlement is the process in which the payment and securities of a transaction are delivered. Within the securities world, this occurs in a three day window. For example, if a trader buys 100 shares of IBM stock at $100/share, the broker has three days to collect the $10,000 from the client, transfer it to the seller, and collect the shares back for the client.

Within FX, settlement does not involve securities, but instead different currencies. Therefore, in a EUR/USD trade, the seller sends dollars while receiving euros. For OTC participants, one of the greatest worries is settlement risk, which occurs when a counterparty is unable or unwilling to provide either the payment or transfer of securities.

While a deal between two parties can easily be voided, thus limiting impact of a problematic counterparty, the greater concern is the systemic risk. As traders are simultaneously trading with multiple parties, if one party fails to honor a transaction, it can affect counterparties and could prevent them from having the funds and/or securities to settle other trades.

Jake Smith, Head of Communications at CLS, explained that “FX settlement risk is also known as ‘Herstatt Risk’ ”. The name is derived from the failure of a privately owned German bank in 1974. At the time, Bankhaus Herstatt had received delivery of Deutsche marks from US counterparty banks, but had been put into receivership before the corresponding dollars were sent, due to the time zone difference.” Smith explained that, while this occurred nearly 40 years ago, “due to volumes growing substantially since that time, settlement risk has grown significantly.”

To mitigate this risk, CLS was created. Currently, there are over 60 members, who represent some of the largest financial institutions from around the world. CLS provides a central settlement network for FX transactions between its members and their customers. To facilitate settlement, all members are required to have a single multi-currency account with CLS, supporting the 17 currencies that are settled by its system.

Settlement

After conducting a trade, members send transactional details to CLS Bank, including trade details, counterparties, and settlement data. On the day of settlement, CLS Bank multilaterally nets all the instructions between the settlement members, calculating each institution’s pay-in obligations for the day, to ensure settlement of all their instructions on a payment-versus- payment basis. As settlement completes, pay-out of multi-laterally netted long balances will occur.

Example: GBP/USD = 1.50, EUR/USD = 1.25
Member 1: Buys 1,000,000 GBP/USD from Member 2
Member 2: Buys 1,000,000 EUR/USD from Member 3
Member 3: Buys 1,000,000 GBP/USD from Member 1

Member 1: Owes 1.5M USD & 1M GBP, collects 1.5M USD & 1M GBP
Member 2: Owes 1.25M USD & 1M GBP, collects 1M EUR & 1.5 USD
Member 3: Owes 1.5M USD & 1M EUR, collects 1.25M USD & 1M GBP

CLS then multi-laterally nets the total obligations:
Member 1: Pays 0.0
Member 2: Pays 1M GBP
Member 3: Pays 0.25M USD & 1M EUR

These obligations are funded into each member’s respective multi-currency account.

Settlement occurs
CLS then redistributes the obligations to the corresponding members
Member 1: Receives 0.0
Member 2: Receives 1M EUR & 0.25M USD
Member 3: Receives 1M GBP

By multi-laterally netting (also known as trade compression) payment obligations for each currency, CLS eliminates the need to fund trades on an individual basis per currency, resulting in approximately 96% netting efficiency. This increases to 99% with In/Out Swaps (an In/Out Swap is an intraday swap consisting of two equal and opposite FX transactions.)

That means, that for every $1 trillion of In/Out swaps settled, members need to provide funding for less than $10 billion, and $40 million for spot FX. With CLS handling nearly $5 trillion worth of daily settlements, the netting rates are a key element in allowing firms to grow their transactional volumes, while substantially reducing the amount of funding required. According to Smith, “CLS believes this safer and efficient process is one of the factors that led to the increase in FX volumes over the last 10 years.”

Smith explained that CLS provides a number of benefits to the FX industry, including, settlement risk mitigation, multi-lateral netting, operational and IT efficiencies, business growth opportunities, and the ability to develop industry solutions best practices, common standards and rules that benefit the FX market.

Within settlement risk mitigation also comes credit recognition. By being CLS members, credit departments have a greater understanding of each other and the counterparty risk. This allows firms to allocate less risk between trades to other members. For example, while a bank may decide to trade up to $10 billion with another member, they are more likely to limit their trade exposure to non-members.

In terms of operational efficiencies, a key factor is with regard to CLS’s one rule and oversight committee. Having one set of guidelines for members and central banks, provides all participants with a clearer understanding of their counterparties. When adding a new currency, the corresponding central bank needs to follow the standardized guidelines. These rules provide protection for members who benefit from the increased transparency a participating central bank will need to follow.

Regulatory Recognition

In July 2012, the critical role that CLS plays in global financial markets was recognised by the US Department of the Treasury’s Financial Stability Oversight Council, when it designated CLS as a systemically important Financial Market Utility (FMU). CLS’s importance was highlighted further in November 2012, with the announcement of the US Treasury Department’s exemption of FX swaps and forwards from the clearing requirements required for many financial products under the Dodd-Frank legislation. The role that CLS plays in the mitigation of FX settlement risk was believed to be a contributing factor towards that decision.

Technology

CLS’s increased investment in technology, has enabled it to materially expand peak capacity as it updated core technologies, to meet the elevated standards required of a systemically important FMU. The result is that CLS can now accommodate trade matching volumes of up to five times the average daily volume, and process 20 per cent of a peak day’s volume in a one hour period.

Furthermore, CLS has put in place a flexible technology infrastructure, which enables “capacity on demand”, supporting future software upgrades to be delivered to increase capacity in a matter of days and weeks. This structure, allows CLS to pay for technology only when required, while fulfilling obligations to the market to settle all eligible FX settlement instructions.

The need to build capacity was demonstrated on January 22, 2013, when CLS settled more than 2.6 million instructions, 18 per cent more than the previous high, recorded on 19 September, 2012.

Future

Looking to the future, as emerging markets grow, CLS has received interest from settlement members to include additional currencies. As such, CLS has been evaluating the addition of the Brazilian real, Chilean peso, Chinese renminbi, Russian ruble and Thai baht, amongst others.

Another area where CLS is extending its services is in same day settlement. A significant percentage of USD/CAD trades are intra-day and are not currently included in CLS settlement, due to the time of day. CLS is developing a same day settlement service between US and Canadian dollars to address this settlement risk, which has a proposed launch date in late 2013.

 

 

From The complexity of correspondent banking

Correspondent Banking Network

Correspondent banking, which can be broadly defined as the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”), is essential for customer payments, especially across borders, and for the access of banks themselves to foreign financial systems. The ability to make and receive international payments via correspondent banking is vital for businesses and individuals, and for the G20’s goal of strong, sustainable, balanced growth. At the extreme, if an individual bank loses access to correspondent banking services, this may affect its viability and if a country’s banks more generally face restricted access then it may affect the functioning of the local banking system. In addition, loss of correspondent banking services can create financial exclusion, particularly where it affects flows such as remittances which are a key source of funds for people in many developing countries.

Banks have traditionally maintained broad networks of correspondent banking relationships, but there are growing indications that this situation might be changing. In particular, some banks providing these services are reducing the number of relationships they maintain and are establishing few new ones. The impact of this trend is uneven across jurisdictions and banks. As a result, some respondent banks are likely to maintain relationships, whereas others might risk being cut off from international payment networks. This implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow.

Rising costs and uncertainty about how far customer due diligence should go in order to ensure regulatory compliance (ie to what extent banks need to know their customers’ customers – the so-called “KYCC”-) are cited by banks as among the main reasons for cutting back their correspondent relationships. To avoid penalties and the related reputational damage correspondent banks have developed an increased sensitivity to the risks associated with correspondent banking. As a consequence, they have cut back services for respondent banks that (i) do not generate sufficient volumes to overcome compliance costs; (ii) are located in jurisdictions perceived as very risky; or (iii) provide payment services to customers about which the necessary information for an adequate risk assessment is not available.

The regulatory framework, and in particular the AML/CFT (Anti-Money Laundering/Counter Financing of Terrorism) requirements and the related implementing legislation and regulations in different jurisdictions, are taken as given in this report. It is acknowledged that these requirements, as agreed by the competent authorities, along with strict implementation, are necessary to prevent and detect criminal activities and ensure a healthy financial system.

 

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From Redefining the Landscape of Payment Systems

Regional Integration of Payment Systems

Cross-border and cross-currency commercial and financial payments have traditionally been made through regional and global correspondent banking networks. Correspondent banking networks typically involve multiple levels of intermediation to link national payment systems. Similar arrangements exist for cross-border securities and other market-based transactions. Such decentralized, highly-tiered cross-border arrangements for payment and securities transfer, clearing and settlement involve substantial liquidity, operating and user costs. Moreover, the services provided are often too slow and unreliable for the rising volume of payments associated with closer regional commercial and financial ties. Consequently, more tightly organized and integrated regional and even inter-regional payment and securities infrastructures are developing as a result of integration initiatives in the African, Asian and Latin American regions, among others. The discussions around the theme of regional integration of systems extended even further to the need for harmonized development of central bank payment system and monetary policies.

 

Integration in Wholesale Systems

The regional integration of national payment systems directly links the large-value payment systems of the participating countries. The link-up is through a distributed payment communications network involving either bilateral connectivity and system-to-system intra-regional payment settlement or connectivity to a central hub operating an intra-regional clearing and settlement facility. With large-value payment systems typically operated by national central banks, the distributed connectivity model of a regional payment system can substitute for the private correspondent banking network. The correspondent central banking arrangement concentrates intra-regional payments into a single central bank correspondent that participates in a network having more standardized service levels and agreements than the private system (i.e. correspondent banking). Over the medium-term, relative liquidity, operating and user costs should generally be lower and intra-regional payment settlement faster and more predictable than in the private system. A centralized model with a regional settlement bank can facilitate even greater standardization and more effective settlement risk control and, given a common settlement currency, permits multilateral netting that can lower liquidity costs even more as payment values and volumes rise.

The successful regional integration of national large-value payment systems does, however, require several pre-conditions. In addition to the obvious business case, the most critical pre-conditions are the harmonization of key institutional and structural elements in the national systems of the member countries and a sustainable commitment to the regional payment system, and the regional commercial and financial initiatives that underpin it. Experiences cited in a number of regional payment system initiatives indicate that unreasonable expectations of immediate pay-offs from integration and inadequate harmonization of key institutional elements during network expansion, such as those involving sound legal and oversight requirements, cause commitment to the project to waver and can sometimes cause the initiative to collapse. Organized and focused collaboration among all the key stakeholders and cooperation among the overseers of the national payment systems of the member countries is considered critical to sustaining commitment to the regional integration program.

Although several national securities depositories and securities settlement systems have developed bilateral system-to-system links in recent years, only a few have begun to integrate regionally or inter-regionally into an organized multilateral system. While the most developed cross-border systems are within the Eurozone, others have begun to develop elsewhere, as in the South African Development Community. The discussion concerning the role of CCPs in securities and derivatives settlement extended to consideration of regional, and even global, developments.

 

 

Integration of Retail Payment Systems

Aside from the major global card payment systems, which are expanding their products and services into new payment applications for cross-border retail payments, there are only a few bilateral and multilateral system-to-system links that facilitate the clearing and settling of cross-border payments. Correspondent banking arrangements, even for the ultimate settlement of cross-border card payments, are still the primary network arrangements for the ultimate settlement of cross-border retail payments. The regional integration of large-value payment systems, in conjunction with the integration of retail and large-value payment systems at the national level, has spawned some initiatives for the regional integration of national retail payment systems. The SEPA (Single European Payment Area) initiative is perhaps the most ambitious of these integration initiatives. Triggered by policy action and driven by industry initiatives, SEPA is aimed at creating a single integrated market for retail payment instruments and services throughout the Eurozone. The most critical challenges faced by the SEPA initiative have been the set-up of public and private sector collaboration mechanisms for decision-making, user support from public sector administrations, and the harmonization of national legal barriers. SEPA-compliant credit and debit transfers are now in place and work is proceeding on the introduction of SEPA-compliant card payments and on the development of SEPA-based online and mobile payment channels.

 

Transnational Payment Systems

While once there were only domestic payment channels in each country, we have witnessed the emergence of transnational systems such as TARGET, CLS (Continuous Linked Settlement), the Federal Reserve’s International ACH Project, known as FedACH International and the proposed pan-European automated clearinghouse known as PE-ACH. On the other end of the spectrum, card systems such as those operated by Visa and MasterCard are truly global in scope and have been expanding from consumer based transactions into commercial payments for more than a decade. Transnational systems have traditionally focused on providing payments within a region or to a small number of countries and usually support a single currency. Although none of these systems are yet global in scope, it is likely they will continue to expand their coverage to additional countries and currencies. Networks such as Visa and MasterCard are examples of global payment systems that also support multiple currencies, though they are primarily used for retail payments and ad hoc/T&E commercial transactions. Recently, in countries like Switzerland and Hong Kong13, new arrangements have been developed for the settlement of local payments in foreign currency. These arrangements neither fit perfectly in the traditional category of “correspondent banking” or in that of “payment systems”. The main common characteristic of these arrangements or systems is that they do not settle in central bank money but across accounts held with a commercial bank and that they are based on clearly defined and transparent rules for payment activities. Compared to traditional correspondent banking, these new solutions are standardized and settle payments in real time with continuous finality. In 1999, Swiss financial institutions established a cross-border solution in order to facilitate their cash management in euros. This solution involves a fully licensed bank in Germany, Swiss Euro Clearing Bank (SECB). To process euro transactions, SECB uses the euroSIC platform in Switzerland, which is often referred to as the euro payment system of Switzerland. EuroSIC is a replication of the Swiss franc RTGS system, Swiss Interbank Clearing (SIC). SIC and euroSIC are operated by Swiss Interbank Clearing AG. SECB is the settlement institution and shares the role of settlement agent with the operator SIC AG. SECB is also the liquidity provider in euroSIC. It extends intraday and overnight credit to the participants of euroSIC against collateral. SECB provides a link to the euro area, as it is a direct participant in RTGSPLUS through which access to TARGET is established. In Hong Kong, the U.S. dollar and euro clearing systems, USD CHATS (Clearing House Automated Transfer System) and Euro CHATS, were introduced in 2000 and 2003, respectively. They enhance the safety and efficiency of settling these foreign currencies in the local time zone. These systems are almost exact replicas of the Hong Kong dollar RTGS system (HKD CHATS). The key functions of both systems are to enable settlement of foreign exchange transactions between HK dollars, US dollars and euros in their respective currencies through a linkage with the Central Moneymarkets Unit (CMU) in Hong Kong.

The Hong Kong Monetary Authority has appointed the Hong Kong and Shanghai Banking Corporation as the settlement institution for USD CHATS and Standard Chartered Bank (Hong Kong) Limited as the settlement institution for Euro CHATS. Both institutions provide intraday liquidity to the direct participating banks by means of repos as well as overdraft facilities. One of the key benefits of both the US dollar and euro systems is the same day clearing of transactions. Also driving transnational systems is the implementation of “straight through processing (STP)” standards for transfers between banks as well as between banks and customers. To ensure simultaneous and dependable deliveries, payment-versus-payment (PVP), delivery-versus-payment (DVP), and delivery-versus-delivery (DVD) processes have also been established. The growth in transnational systems can improve the efficiency of cross-border payments by reducing clearing and settlement times, minimizing float. Better visibility of funds flows supports improved cash forecasting. Finally, standardized formats will reduce costly errors and repairs.

 

Intra bank Payments Networks – Multinational Banks

Mergers and acquisitions have been the single biggest force reshaping the global payments landscape over the past two decades. The most recent round of consolidation has left a disparity between large and small never before seen. For example, we have witnessed the emergence of mega banks such as the combining of Bank of America and Nations Bank, as well as JP Morgan Chase combining Chase Manhattan Bank, Manufacturers Hanover Bank, Morgan Guaranty Trust and Bank One. In a scale-driven, technology-intensive business like payments, the emergence of true mega-players may lead to markedly different competitive dynamics. Acting as their own transnational systems, large international banks such as JP Morgan Chase, Citibank, Bank of America, and Hongkong Shanghai Banking Corporation operate their own internal global payments networks. Through these, they can route payments to destinations in different countries. Such internal networks do not necessarily differentiate between domestic and cross-border payments as these flows are all within the bank. The trend toward consolidation in the banking sector, both globally and in domestic markets, exerts influence on payment systems. Increased concentration of payment flows may have important credit, liquidity and operational risk implications. For example, the credit exposures that arise within a payments system that does not achieve intraday finality are likely to become concentrated on a smaller number of banks. Operational problems experienced by a single large bank could have significant repercussions for other participants in the system. A concentration of payment flows in commercial banks has emerged to reflect the increasing role that modern commercial banks, especially large global banks, have played in the payment systems around the world. The volumes and values settling across their books are, in some countries, quite substantial. Such traffic has often been accompanied by increased formalization of the correspondent relations within, as well as across, national boundaries. Banks that achieve global economies of scale can further drive down per transaction costs and derive higher revenues by keeping payments within their own networks. For global corporations, it has allowed them to match their global needs with a handful of banks rather than managing a large number of local relationships.

 

From The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

A survey of major systems facilitating cross-border payments

American Express: is a publicly traded company that issues charge and credit card products both directly and through nearly 100 financial institutions around the world. American Express had $484 billion in global sales in 2005.15

CHAPS (Clearing House Automated Payment System): CHAPS, established in 1984, is the United Kingdom’s high-value payment system, consisting of two systems: CHAPS Sterling and CHAPS Euro, which provide settlement facilities for sterling and euro payments, respectively. Over a dozen large banks and building societies are “direct” or settlement members, while there are also over 400 “indirect” members – typically smaller banks and building societies – who have access to the system through a settlement member.

CHIPS (Clearing House Interbank Payment System): CHIPS is a bank-owned, privately operated, real-time, multilateral electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS began operations in 1970 with 9 participating banks and, as of mid 2006, it processes about 300,000 payments a day with an average daily amount of $1.5 trillion. It currently has 46 participants from 19 countries around the world, including large U.S. banks and U.S. branches of foreign banks. The payments transferred over CHIPS are often related to international interbank transactions, including the payments resulting from foreign currency transactions (such as spot and currency swap contracts) and Euro placements and returns.

CLS (Continuous Linked Settlement): The CLS system is the private sector response to a G-10 strategy to reduce foreign exchange settlement risk. CLS was founded in 1997 to create the first global settlement system, eliminating settlement risk in the foreign exchange market. Formed in response to regulatory concern related to the temporal and systemic risks (Herstatt risk) associated with foreign exchange transactions, CLS simultaneously settles both sides of foreign exchange trades using a multi-currency payment-versus-payment (PVP) mechanism. CLS is a unique real-time process enabling simultaneous foreign exchange settlement across the globe, eliminating the settlement risk caused by delays arising from time-zone differences. CLS settles well over $1 trillion per day, accounting for a substantial majority of cross-currency transactions across the globe.

Eurogiro: owned by 16 banks/postal financial service companies, is an electronic payment network for postal and giro (postbank) organizations that exchange cross-border credit transfers and cash-on-delivery orders. Established in 1989, Eurogiro has more than 40 participants from 37 countries in Europe, Asia, Africa, South America and the U.S. Members act as correspondents for one another and hold reciprocal accounts with each other to execute payments.

EURO1: a private sector-owned high-value payment system, operated by the EBA Clearing Company for cross-border and domestic transactions in euro between banks operating in the European Union, and it is the largest of Europe’s four large-value, net settlement systems, processing on average 170,000 payments a day with a total value of about €170 billion. Launched in 1998, EURO1 was developed to provide an efficient, secure and cost-effective infrastructure for large-value payments in the new single currency environment of the EU. EURO1 is based on state-of-art messaging infrastructure and computing facilities supplied by SWIFT.

FedACH International Services: This international gateway arrangement service is owned and operated by the Federal Reserve System. Currently, the Federal Reserve Banks offer a suite of FedACH International Services as part of FedACH Services and provide U.S.- originating depository financial institutions with the ability to send international non-time-critical payments via the same process used to send domestic transactions for many decades. FedACH International Services offer an integrated, uncomplicated method to ensure straight-through processing (STP) of cross-border transactions, using NACHA formats that are supported by most software vendors.

Fedwire (Federal Reserve Wire Network): This is a high-speed electronic network through which the U.S. Federal Reserve provides the Fedwire Funds Service, the Fedwire Securities Service, and the National Settlement Service. The Fedwire Funds Service provides an RTGS system in which more than 9,500 participants initiate funds transfers that are immediate, final, and irrevocable when processed.

LVTS (Large Value Transfer System): The fully electronic LVTS, Canada’s real-time gross settlement system, became operational in early 1999. As Canada’s wire payment mechanism, it facilitates the electronic transfer of Canadian dollar payments across the country in real-time. Canada’s national payments system has been operated by the Canadian Payments Association (CPA) since 1980.

MasterCard: is a publicly-traded company that operates a global payment system. In addition to the MasterCard brand, the Maestro and Cirrus brands are also part of the company. MasterCard branded cards generated $1.7 trillion in global sales in 2005.16

RTGSPLUS: is the German Bundesbank’s new liquidity-saving RTGS, which became operational in November 2001. It combines the risk-reducing benefits of gross settlement of the former German RTGS system known as the Euro Link System (ELS) with the advantages of liquidity-saving processing of the former hybrid system known as Euro Access Frankfurt (EAF).

SWIFT (Society for Worldwide Interbank Financial Telecommunications): SWIFT is an industry-owned limited liability cooperative that supplies secure messaging services and interface software for financial transactions to more than 7,650 banks, securities brokers and investment managers in more than 200 countries.

SWIFT payment messages are processed by the Financial Information Network (FIN), which operates on a secure IP network called SWIFTNet. SWIFT is integrating into the ACH market segment as a payment service provider via its FileAct messaging service. ACH networks such as the EBA Clearing Company and the South African Automated Clearing Bureau are already using SWIFT’s messaging platform.

STEPS (Straight Through Euro Payment System): The STEPS program was launched by the Euro Banking Association (EBA) to offer a full range of euro payments across Europe. STEPS has evolved into two systems aimed at accommodating a broad base of processing needs within the European Union: STEP1 (a pan-European system designed to process single cross-border, low-value retail payments) and STEP2 (a pan-European ACH for bulk/high volume, low-value, cross-border and domestic interbank payments).

STEP2: a pan-European ACH solution, is a joint venture between the EBA and Italy’s ACH operator SIA. STEP2 processes high-volume, commercial and retail payment orders sent to the system via files through a secure network. Characteristics of payment orders that are processed via STEP2 are commercial and retail transfers in euro that are formatted to agreed technical standards. Accessible through SWIFTNet, STEP2 offers payment processing and settlement in euro.

TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer): The Eurosystem, which comprises the European Central Bank (ECB) and the national central banks (NCBs) of the 12 EU member states which have adopted the euro, has created TARGET for large-value payments in euro. The TARGET system is a “system of systems” composed of the national payment systems of 16 of 25 countries that are currently members of the EU, the ECB payment mechanism (EPM) and an interlinking mechanism that enables the processing of payments between the linked systems.

TARGET2: The current structure of TARGET was decided on in 1994 and was based on the principles of minimum harmonization and interconnection of existing infrastructures. This was the best way of ensuring that the system would be operational from the very start of the European Economic and Monetary Union (EMU) in 1999. TARGET2 is an enhanced version of the current TARGET incorporating technical consolidation, a single system-wide pricing structure for domestic and cross-border payments, a harmonized service level, and the system-wide pooling of available intraday liquidity. The go-live date for TARGET2 is set for November 19, 2007, with gradual migration to the new system by the member states in four waves. All central banks participating in TARGET2, together with their national banking communities, are expected to be using the new system by May 2008.

Visa: is a private, membership association jointly owned by more than 20,000 member financial institutions around the world. Visa develops common standards and specifications to facilitate commerce and provide member financial institutions with the global payment platform to support transactions on 1.46 billion cards that generate more than $4.3 trillion in global transactions in over 160 countries.17

Voca: was formed in 1968 and was known as the “Bankers Automated Clearing System” or BACS which is similar to ACH in the US. BACS changed its name to Voca in 2004. Voca is one of a number of domestic ACH-type systems in Europe and owns the BACS infrastructure that processes the majority of non-RTGS, non-card, electronic credit and debit payments for B2C, C2B and B2B in the UK. VOCA performed 5 billion transactions in 2005. 28

 

China’s Central Bank RMB Currency Swap Lines

 

crossbor7

 

China’s Offshore RMB Clearing Centers

 

crossbor8

 

 

Key Sources of Research:

 

Explaining cross-border large-value payment flows: Evidence from TARGET and EURO1 data

Simonetta Rosati, Stefania Secola

 

 

The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

Written by Yoon S. Park, PHD & DBA, George Washington University

 

http://euro.ecom.cmu.edu/resources/elibrary/epay/crossborder.pdf

 

 

 

There Is No Such Thing As An International Wire

by ERIN MCCUNE on MAY 15, 2014

http://paymentsviews.com/2014/05/15/there-is-no-such-thing-as-an-international-wire/

 

 

 

The Elements of the Global Network for Large-Value Funds Transfers

James F. Dingle

2001

 

http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp01-1.pdf

 

 

 

The Payment System

ECB

 

https://www.ecb.europa.eu/pub/pdf/other/paymentsystem201009en.pdf

 

 

 

Cross-border RMB Settlements

 

https://www.mizuhobank.com/service/global/cndb/rmb/pdf/cross_border.pdf

 

 

 

China launch of renminbi payments system reflects Swift spying concerns

https://www.ft.com/content/84241292-66a1-11e5-a155-02b6f8af6a62

 

 

 

Possible RMB – Clearing model for the city of Frankfurt

RMB Initiative Frankfurt Frankfurt, December 2013

Working Group on the establishment of an RMB clearing house

 

 

 

CIPS and the International Role of the Renminbi

 

 

 

CHIPS

https://www.newyorkfed.org/aboutthefed/fedpoint/fed36.html

 

 

 

Correspondent banking July 2016

BIS

http://www.bis.org/cpmi/publ/d147.pdf

 

 

 

Rethinking correspondent banking

2016

mckinsey

 

 

 

The complexity of correspondent banking

http://thefinanser.com/2015/11/the-complexity-of-correspondent-banking.html/

 

 

 

CLS Bank & the World of FX Settlement

Ron Finberg

2013

http://www.financemagnates.com/institutional-forex/execution/cls-bank-the-world-of-fx-settlement/

 

 

 

Foreign exchange trading and settlement: Past and present

by John W. McPartland, financial markets consultant

Chicago Fed Letter 2006

 

 

Settlement risk in foreign exchange markets and CLS Bank

http://www.bis.org/publ/qtrpdf/r_qt0212f.pdf

 

 

 

 

Cross-Border Payments Perspectives

September 2011

Research conducted by Glenbrook Partners

 

http://www.earthport.com/wp-content/uploads/2014/02/Cross-Border-Payments-Perspectives-A-Glenbrook-Earthport-Research-Brief.pdf

 

 

 

Redefining the Landscape of Payment Systems

Summary of Proceedings of the World Bank Conference

 

http://documents.worldbank.org/curated/en/728251468192564101/pdf/705740ESW0P1100Cape0Town0April02009.pdf

 

 

 

Report to the Congress on the Use of the Automated Clearinghouse System for Remittance Transfers to Foreign Countries

July 2011

 

https://www.federalreserve.gov/boarddocs/rptcongress/ACH_report_201107.pdf

 

 

 

ESTABLISHING AN INTEGRATED PAYMENT SYSTEM

(REAL-TIME GROSS SETTLEMENT) IN ASEAN

A Proposal for a Cross-Border Mechanism to Support the AEC 2015

 

http://www.rug.nl/research/portal/files/19296815/Complete_dissertation.pdf

http://www.rug.nl/research/portal/en/publications/establishing-an-integrated-payment-system-realtime-gross-settlement-in-asean(59f7f186-51c5-47e3-8e1a-2745e19fd998).html

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

 

http://www.unescap.org/sites/default/files/Development%20Paper_1403.pdf

 

 

 

Implementing Cross-border Payment, Clearing and Settlement Systems: Lessons from the Southern African Development Community

Albert Mutonga Matongela

 

 

 

The emerging single market in South-East Asia 

SWIFT

 

 

 

 

 

 

Regional Monetary Co-operation in the Developing World Taking Stock

Barbara Fritz / Laurissa Mühlich

http://www.lai.fu-berlin.de/homepages/fritz/publikationen/Paper-Stocktaking-Regional-Monetary-Cooperation-Fritz-Muehlich-22-07-14-end.pdf

 

 

 

ASIA FINANCE 2020

FRAMING A NEW ASIAN FINANCIAL ARCHITECTURE

 

http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/files/archive/2013/Asia_Finance_2020.pdf

 

 

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

2013

 

https://www.adb.org/sites/default/files/publication/156277/adbi-wp422.pdf

 

 

 

Payments in ASEAN post AEC

 

https://www.hsbc.com.my/1/PA_ES_Content_Mgmt/content/website/commercial/cash_management/PDF_141107/5-Payments-in-ASEAN-post-AEC.pdf

 

 

 

Regional Integration and Economic Development in South Asia

Sultan Hafeez Rahman

Sridhar Khatri

Hans-Peter Brunner

https://www.adb.org/sites/default/files/publication/29871/regional-integration-economic-development-south-asia.pdf

 

 

 

Towards South Asia Economic Union

 

Proceedings of the
7th South Asia Economic Summit (SAES)

5-7 November 2014 New Delhi, India

 

http://ris.org.in/pdf/Towards%20South%20Asia%20Economic%20Union.pdf

Large Value (Wholesale) Payment and Settlement Systems around the Globe

Large Value (Wholesale) Payment and Settlement Systems around the Globe

 

LVPS are managed by the Central Banks.

LVPS are Systemically important financial market infrastructure and critical for smooth functioning of the national and International financial system.

The FEDWIRE is the LVPS is the USA.  TARGET2 is the LVPS in the European Monetary Union.  TARGET2 is a unique system  as it is a common LVPS among many nations in the EMU. CNAPS is the LVPS in China.  CLS System is unique as it is a global FX settlement system.

CIPS of China and CHIPS of USA are also LVPS but are used as offshore clearing and settlement.

 

From Reducing risk and increasing resilience in RTGS payment systems

1.1 The benefits of RTGS

Real Time Gross Settlement (RTGS) is a clumsy term for a crucial process in the financial markets. This is the reduction of counterparty credit risk by the delivery of cash or the delivery of securities in exchange for cash, instantaneously and without the netting of the obligations outstanding between the parties. Since the 1980s, the central banks which operate payment market infrastructures (PMIs)1 around the world have gradually adopted RTGS for the settlement of high value payments (HVP). Their private sector equivalents which settle low value payments (LVP) are also gravitating towards RTGS. In RTGS settlement, credit risk is reduced because cash is transferred between banks continuously in real time, transaction by transaction. Every payment is settled finally and irrevocably in central bank money, obviating the need to settle obligations between banks in batches on a net basis.

1.2 What is an RTGS?

The role of a PMI is to provide predictable and secure multilateral payment services to banks and their corporate and retail clients, usually within a single country, but sometimes across several countries within a region. They tend to divide into two broad groups.

The first are HVP systems, which settle a relatively low volume of high value and high priority payments.

The second are LVP systems, which are also known as Retail Payment Systems (RPS), because they net relatively high volumes of low value and low priority payments.

There is a further distinction to be made between HVP systems. Not all HVP systems settle on a gross basis in real time (RTGS). Some settle on a net basis, in which case they are technically described as High Value Payment Deferred Net Settlement (HVP DNS) systems. This is because settlement of transactions does not take place instantaneously but is instead deferred until transactions can be aggregated into batches, and the sums owed by one bank to another netted into a single net payment, made either at the end of the business day or at regular intervals throughout the business day. The net settlement typically takes place in central bank money at the RTGS. LVP or RPS systems tend to net transactions in a fashion comparable with HVP DNS systems. Operated mainly by automated clearing houses (ACHs), they aggregate and net transactions between banks, and then settle net amounts between banks in central bank money at the RTGS either in a single payment at the end of the business day or in multiple payments made at regular intervals throughout the day. Although a variety of net settlement systems persist, more than half the PMIs in the world are now RTGS, and even net settlement systems ultimately settle in RTGS (see Chart 1).

It follows that RTGS systems are crucial to the settlement of both HVP, LVP and CSD transactions. In fact, the purpose of every RTGS is to provide final, irrevocable settlement of transactions in a specific currency, usually through the transfer of the reserves held by banks at the central bank. They act on payment instructions, and settle transaction by simultaneously debiting the account of the paying bank and crediting the account of the receiving bank. Reserves are a vital tool of monetary policy. They are the cash balances that banks are required to hold at central banks, both to limit the ability of banks to lend deposits without limit, and to guarantee the stability of the financial system by ensuring banks can always settle their obligations to each other. This makes RTGS an essential tool for every central bank in managing the stability of the financial system, because it is a means by which it can inject and withdraw liquidity (see Chart 2).

 

From Reducing risk and increasing resilience in RTGS payment systems

lvps5lvps6

 

From Reducing risk and increasing resilience in RTGS payment systems

History and Evolution of RTGS

Since they emerged in the late 1990s, RTGS systems have become the industry standard for settlement of high value payments. In 1985, only three countries in the world operated an RTGS system. By December 1999, when the Bank for International Settlements (BIS) published the first draft of what became the ten Core Principles for Systemically Important Payment Systems, the number had risen to 25 countries. After the publication of the final version of the Core Principles, the number of countries operating RTGS systems grew exponentially (see Chart 4). In July 2000, the final version of the BIS Core Principles paper declared, “there has been extensive progress in payment system design in the course of the past ten years, notably in the development and widespread adoption of systems involving real-time gross settlement (RTGS), which can very effectively address the financial risks highlighted by the Core Principles”.3 Today, the adoption of RTGS systems continues to grow, and has reached 124 systems supporting payments in 160 countries.4

 

Regional (Cross Border) RTGS

The fact that more countries enjoy the benefits of an RTGS system than there are RTGS systems in existence reflects the fact that several RTGS systems are used by more than one country. Obvious examples include the TARGET2 system operated by the European Central Bank (ECB) in the euro-zone, the shared platform operated by the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) in west Africa, and the equivalent platform operated by the Banque des Etats de l’Afrique Centrale (BEAC) in central Africa.

 

Systemic Importance of RTGS

As RTGS systems are adopted by more countries, their systemic importance is increasing. Cross-border transactions mean domestic RTGS systems are also becoming part of a global network of RTGS systems, which in turn links the capital market infrastructures of each country with the capital infrastructures of every country. Domestic PMIs, CSDs and banks are now all part of a complex international eco-system.

In some parts of the world, such as the European Union and west and central Africa, RTGS systems are now formally operating on a regional basis (see Table 1). Some of these regional systems operate from a single shared RTGS platform, while others link a number of separate RTGS platforms. In these regions, it is obvious that the failure of an RTGS system can no longer be confined to one country only. But the same is true of RTGS systems everywhere. They are systemically important, and on a global scale.

 

From Global Trends in Large-Value Payments

Global Trends in LVPS

Globalization and technological innovation are two of the most pervasive forces affecting the financial system and its infrastructure. Perhaps nowhere are these trends more apparent than in the internationalization and automation of payments. The evolving landscape is most obvious in retail payments. The use of paper checks is in rapid decline or has been eliminated in most of the industrialized world. Credit and debit cards can be used in the most surprising places. Internet banking with money transfer capabilities is common, and several providers are competing to service consumers’ payments over the Internet and mobile devices.

In wholesale, or interbank, payments, the effect of globalization and technological innovation is probably less obvious to the casual observer—but it has been equally impressive. Given the importance of payments and settlement systems to the smooth operation as well as resiliency of the financial system, stakeholders need to understand and assess the potential consequences of this evolution. This article offers an in-depth look at the current environment for large-value payments systems (LVPSs). We describe ten trends common to LVPSs around the world and identify the key drivers of these developments and the most important policy issues facing central banks (see box). Furthermore, we provide empirical support for each of the trends by using numerous publicly available sources, including Bank for International Settlements (BIS) statistics on payments and settlement systems in selected countries (the “Red Book”). We focus on large-value payments systems in countries where the central bank is a member of the Committee on Payment and Settlement Systems (CPSS), a body under the auspices of the BIS (Appendix A).

Technological innovation, structural changes in banking, and the evolution of central bank policies are the three main reasons for the recent developments in large-value payments. First, technological innovation has created opportunities to make existing large-value payments systems safer and more efficient. Such innovation has also accommodated the industry’s growing need for new types of systems that are not limited to a single country or a currency. Second, the financial sector has experienced immense growth over the last few decades accompanied by changes in the role of individual firms and the products they offer. In addition, financial institutions and their services have become increasingly globalized. These structural changes have affected how participants use largevalue payments systems. Third, the role of central banks in large-value payments systems has changed significantly in recent years. Central banks have become more involved in payments systems and have created formal and systematic oversight functions. The main focus lies in promoting safety and efficiency in LVPSs and in maintaining overall financial stability. Central banks therefore have taken more active roles in monitoring existing and planned systems, in assessing systems according to international standards, and, if necessary, in inducing change.

 

From Global Trends in Large-Value Payments

lvps4

From Global Trends in Large-Value Payments

As the box illustrates, the ten trends that we describe can be assigned to three key drivers.

The first four trends

  • the diffusion of real-time gross settlement (RTGS) systems,
  • the take-off of hybrid systems,
  • the emergence of cross-border and offshore systems,
  • and the rise of Continuous Linked Settlement (CLS) Bank

are all associated with settlement technology and fall into the first category. Technological innovation has enabled new settlement methodologies to emerge that allow a better balance between settlement risks, immediacy, and liquidity requirements. RTGS systems have to a large extent replaced deferred net settlement (DNS) systems. However, the high liquidity needs associated with RTGS have led some system operators to explore liquidity-saving mechanisms and have motivated them to develop hybrid systems. Developments in payments system technology have also facilitated the emergence of systems that settle payments across national borders in one or more currencies. In addition, the clearing of payments is in some instances moving offshore and the ability of participants to connect remotely—eliminating the need for a physical “footprint” in the jurisdiction of LVPSs—is becoming more widespread. Foreign exchange (FX) settlement and counterparty risk are being managed more tightly in part because of the use of payment-versus-payment (PvP) mechanisms.1 CLS Bank operates a multicurrency payments system for the simultaneous settlement of both sides of a foreign exchange transaction on a PvP basis. With CLS Bank, existing risks associated with FX trades are virtually eliminated.

The next three trends

  • increasing settlement values and volumes,
  • shrinking average payment sizes,
  • and falling numbers of system participants

as well as the emergence of crossborder and offshore systems (Trend 3) fall into the second category. They are determined largely by how the banking sector uses payments systems and by the structural changes taking place therein. The values and volumes originated over LVPSs grew exponentially until the turn of the century. However, in terms of value, growth has since slowed and is no longer outpacing economic growth as measured by GDP.  Because many LVPSs process a large amount of relatively low-value payments, the average payment size settled has shrunk. Hence, the dichotomy between small- and large-value payments systems is not always applicable. In addition, consolidation in the banking sector has led to fewer participants in LVPSs. Structural changes have also resulted in the emergence of global banks that require a global payment infrastructure, which in turn has led to the creation of new systems that accommodate these needs.

The last three trends and the rise of CLS Bank (Trend 4) fall into the third category. They are associated with central banks’ operating policies regarding LVPSs. The service level of all systems is improving with longer operating hours. Some systems are even approaching a twenty-four-hour settlement cycle. Transaction costs in various LVPSs have been falling since the late 1990s because the savings achieved through improvements in operating efficiency have been passed on to system participants in the form of lower fees. Through the adoption of common standards, such as the CPSS’ Core Principles for Systemically Important Payments Systems, risk management in LVPSs has become more standardized. Furthermore, the central bank community was the driving force behind the development of CLS Bank.

 

These networks are also known as High Value payment (HVPS) networks.

 

List of LVPS Systems in some countries

UK

  • CHAPS Sterling
  • CHAPS Euro

Canada

  • LVTS

China

  • CIPS
  • CNAPS

India

  • RTGS

EU

  • TARGET2
  • EURO1

USA

  • CHIPS
  • FEDWIRE

International Foreign Exchange FX Networks

  • CLS

 

From Global Trends in Large-Value Payments

From  Clearing and Settlement Systems from Around the World: A Qualitative Analysis

lvpslvps3lvps2

 

From Cross-Border Inter-Bank Payments System/Wikipedia

China’s Cross-border Inter-bank Payment System (CIPS)

The Cross-Border Interbank Payment System (CIPS) is a payment system which, offers clearing and settlement services for its participants’ in cross-border RMB payments and trade. It is a significant financial market infrastructure in China. As planned, CIPS will be developed in two phases. On 8th October 2015, CIPS (Phase I) went live. The first batch of direct participants includes 19 Chinese and foreign banks which were set up in mainland China and 176 indirect participants which cover 6 continents and 47 countries and regions. On 25th March 2016, CIPS signed an MoU with SWIFT with mu- tual understanding of deploying SWIFT as a secure, effi- cient and reliable communication channel for CIPS’s con- nection with SWIFT’s members, which would provide a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardised and reliable environment. CIPS is sometimes referred to as the China Interbank Pay- ment System.

CIPS would not facilitate funds transfer; rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.

However, it was reported in July 2015 that CIPS would be ‘”watered down” and used only for cross-border yuan trade deals rather than including capital-related transac- tions, which would delay billions of dollars worth of trans- actions, including securities purchases and foreign direct investment, that would have gone through the system. It was reported to be a second setback to the plan to provide a unified network for settling deals in yuan after technical problems delayed its launch, and that other measures to open up China’s financial infrastructure have been dented by the 2015 Chinese stock market crash. It was said to now offer, at best, a complementary network for settling trade-related deals in the Chinese currency to a current patchwork of Chinese clearing banks around the world.[1]

 

From ECB Website

TARGET2 – Eurosystem Cross Border RTGS System

TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is the real- time gross settlement (RTGS) system for the Eurozone, and is available to non-Eurozone countries. It was devel- oped by and is owned by the Eurosystem. TARGET2 is based on an integrated central technical infrastructure, called the Single Shared Platform (SSP).[1] SSP is operated by three providing central banks: France (Banque de France), Germany (Deutsche Bundesbank) and Italy (Banca d’Italia). TARGET2 started to replace TARGET in November 2007.

TARGET2 is also an interbank RTGS payment system for the clearing of cross-border transfers in the eurozone. Participants in the system are either direct or indirect. Di- rect participants hold an RTGS account and have access to real-time information and control tools. They are re- sponsible for all payments sent from or received on their accounts by themselves or any indirect participants op- erating through them. Indirect participation means that payment orders are always sent to and received from the system via a direct participant, with only the relevant di- rect participant having a legal relationship with the Eu- rosystem. Finally, bank branches and subsidiaries can choose to participate in TARGET2 as multi-addressee access or addressable BICs (Bank Identifier Code).

Since the establishment of the European Economic Community in 1958, there has been a progressive movement towards a more integrated European financial market. This movement has been marked by several events: In the field of payments, the most visible were the launch of the euro in 1999 and the cash changeover in the euro area countries in 2002. The establishment of the large-value central bank payment system TARGET was less visible, but also of great importance. It formed an integral part of the introduction of the euro and facilitated the rapid integration of the euro area money market.

The implementation of TARGET2 was based on a decision of the ECB Council of autumn 2002. TARGET2 started operations on 19 November 2007, when the first group of countries (Austria, Cyprus, Germany, Latvia, Lithuania, Luxembourg, Malta and Slovenia) migrated to the SSP. This first migration was successful and con- firmed the reliability of SSP. After this initial migration, TARGET2 already settled around 50% of overall traffic in terms of volume and 30% in terms of value.

On 18 February 2008, the second migration successfully migrated to TARGET2, comprising Belgium, Finland, France, Ireland, the Netherlands, Portugal and Spain.

On 19 May 2008, the final group migrated to TARGET2, comprising Denmark, Estonia, Greece, Italy, Poland and the ECB. The six-month migration process went smoothly and did not cause any operational disruptions.

Slovakia joined TARGET2 on 1 January 2009, Bulgaria joined in February 2010, and Romania joined on 4 July 2011.

A unique feature of TARGET2 is the fact that its payment services in euro are available across a geographical area which is larger than the euro area. National central banks which have not yet adopted the euro also have the option to participate in TARGET2 to facilitate the settlement of transactions in euro. When new Member States join the euro area the participation in TARGET2 becomes mandatory. The use of TARGET2 is mandatory for the settlement of any euro operations involving the Eurosystem.

As of February 2016, 25 central banks of the EU and their respective user communities are participating in, or connected to, TARGET2:

  • The 20 euro area central banks (including the ECB) and
  • five central banks from non-euro area countries: Bulgaria, Croatia, Denmark, Poland and Romania.

 

From ECB website

lvps8

 

From The Continuous Linked Settlement foreign exchange settlement system (CLS)

 

Continuous Linked Settlement (CLS)

Continuous Linked Settlement (CLS) is an international payment system which was launched in September 2002 for the settlement of foreign exchange transactions. In the conventional settlement of a foreign exchange transaction the exchange of the two currencies involved in the trade is not normally synchronous. For one party to the trade there is therefore a risk that it will transfer the currency it has sold without receiving from the counterparty the currency it has bought (settlement risk). Even if a bank’s risk position vis-à-vis a counterparty is short-term, it may be many times greater than its capital. With CLS, an infrastructure has been created which eliminates settlement risk by means of a payment-versus-payment (PvP)2 mechanism.

CLS has 59 direct participants and more than 6,000 indirect participants (as of October 2009), and in 2008 it settled on average around 546,000 instructions to a value of around USD 4 trillion a day.3 Because of the vast volume of transactions on the global foreign exchange market, with its risk-reducing settlement mechanism CLS makes a significant contribution to the stability of the global financial system. By now, around a half of all foreign exchange transactions in the world are settled via CLS.4 The Swiss franc was one of the currencies settled in CLS from the very start, together with the US dollar, the pound sterling, the Japanese yen, the Canadian dollar, the Australian dollar and the euro. By now, the number of currencies settled in CLS has expanded from seven to 17. The Danish krone, the Norwegian krone, the Singapore dollar and the Swedish krona joined in September 2003, followed by the Hong Kong dollar, the Korean won, the New Zealand dollar and the South African rand in December 2004. The last two currencies up to now, the Israeli shekel and the Mexican peso, joined in May 2008.

 

From CHIPS website

CHIPS

CHIPS is the largest private-sector U.S.-dollar funds-transfer system in the world, clearing and settling an average of $1.5 trillion in cross-border and domestic payments daily. It combines best of two types of payments systems: the liquidity efficiency of a netting system and the intraday finality of a RTGS.

The Clearing House Interbank Payments System (CHIPS®1) is a funds-transfer system that transmits and settles payment orders in U.S. dollars for some of the largest and most active banks in the world. On an average day, CHIPS transmits and settles over 430,000 “payment messages”2 worth an aggregate of $1.5 trillion. It has been estimated that CHIPS carries a very high percentage of all international interbank funds transfers that are denominated in U.S. dollars. For these reasons, CHIPS has been widely regarded as a systemically important payment system, and on July 18, 2012, FSOC designated The Clearing House Payments Company L.L.C. (), which owns and operates CHIPS, as a systemically important financial market utility (SIFMU) under Title VIII of the Dodd-Frank Act on the basis of its role as the operator of CHIPS.3

The Clearing House

The Clearing House11 was founded in 1853, and is the oldest, most innovative bank association and payments processor in the United States. Established to simplify the daily check exchanges in New York City, The Clearing House later became a pioneer in the emerging field of electronic funds transfers and continues to be a leader in the payments arena, operating in addition to CHIPS, an automated clearinghouse (ACH) known as EPN (Electronic Payments Network), and a check-image clearinghouse. PaymentsCo continues to pioneer in emerging areas of the payment system in its work to protect account credentials through tokenization12 and to design and build a new low-value real-time payment system13 for the United States.

CHIPS

CHIPS is a real-time system for transmitting and settling high-value U.S.-dollar payments among its participating banks. The Clearing House began operating CHIPS in 1970 to simplify and expedite interbank payments in New York City.

Backed by over 44 years of reliable operation, CHIPS serves 49 foreign and domestic banks,14 representing 21 countries, through a network of sending and receiving devices, which range from microcomputers to large-scale mainframe computers. CHIPS participants include U.S. commercial banks and foreign banks with offices in the United States.

 

 

 

Key Sources of Research:

 

Payment and settlement systems in selected countries

Prepared by the Committee on Payment and Settlement Systems of the Group of Ten Countries

April 2003

 

http://www.bis.org/cpmi/publ/d53.pdf

 

 

Payment, clearing and settlement systems in the CPSS countries

Volume 1

2011

 

http://www.bis.org/cpmi/publ/d97.pdf

 

 

Payment, clearing and settlement systems in the CPSS countries

Volume 2

November 2012

http://www.bis.org/cpmi/publ/d105.pdf

 

 

 

Payment, clearing and settlement systems in the United States

 

https://www.bis.org/cpmi/publ/d105_us.pdf

 

 

 

Payment, clearing and settlement systems in Japan

https://www.bis.org/cpmi/publ/d105_jp.pdf

 

 

 

Payment, clearing and settlement systems in the United Kingdom

 

https://www.bis.org/cpmi/publ/d105_uk.pdf

 

 

 

 

 

Payment, clearing and settlement systems in India

 

https://www.bis.org/cpmi/publ/d97_in.pdf

 

 

A Primer on Canada’s Large Value Transfer System

 

http://www.bankofcanada.ca/wp-content/uploads/2010/05/lvts_neville.pdf

 

 

 

Payment, clearing and settlement systems in Canada

 

https://www.bis.org/cpmi/publ/d97_ca.pdf

 

 

 

Global Trends in Large-Value Payments

Morten L. Bech, Christine Preisig, and Kimmo Soramäki

2008

 

https://www.newyorkfed.org/medialibrary/media/research/epr/08v14n2/0809prei.pdf

 

 

 

Reducing risk and increasing resilience in RTGS payment systems

SWIFT

2014

https://www.swift.com/node/4001

 

 

 

The Continuous Linked Settlement foreign exchange settlement system (CLS)

2009

http://www.snb.ch/en/mmr/reference/continuous_linked_settlement/source/continuous_linked_settlement.en.pdf

 

 

 

 

Overview of the U.S. Payments, Clearing and Settlement Landscape

2015

 

https://www.newyorkfed.org/medialibrary/media/banking/international/03.Overview-US-PCS-landscape-Merle.pdf

 

 

International payment arrangements

 

https://www.bis.org/cpmi/publ/d53p16.pdf

 

 

International Settlements: A New Source of Systemic Risk?

ROBERT A. EISENBEIS

 

https://pdfs.semanticscholar.org/3984/82b045cb0c5c7a82da1f43ff61006fe73c18.pdf

 

 

 

Clearing and Settlement Systems from Around the World: A Qualitative Analysis

 

http://www.bankofcanada.ca/wp-content/uploads/2016/06/sdp2016-14.pdf

 

 

 

SYSTEMIC RISK IN INTERNATIONAL SETTLEMENTS

ESRC Centre for Business Research, University of Cambridge

Rahul Dhumale

1999

 

http://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-for-business-research/downloads/working-papers/wp152.pdf

 

 

PAYMENT SYSTEMS IN INDIA VISION 2009-12

RBI

 

https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/VDF16022010.pdf

 

 

 

Payment systems to facilitate South Asian integration

 

http://www.igidr.ac.in/pdf/publication/WP-2015-021.pdf

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

http://www.unescap.org/sites/default/files/Development%20Paper_1403.pdf

 

 

 

Federal Reserve Policy on Payment System Risk

As amended effective September 23, 2016

 

https://www.federalreserve.gov/paymentsystems/files/psr_policy.pdf

 

 

 

Contagion in Payment and Settlement Systems

 

Matti Hellqvist

2006

 

https://www.imf.org/external/np/seminars/eng/2006/stress/pdf/mh.pdf

 

 

 

Overview of payment system settlement

BOE UK

http://www.bankofengland.co.uk/markets/Pages/paymentsystem/default.aspx

 

 

 

A Guide to the Bank of England’s Real Time Gross Settlement System

2013

http://www.bankofengland.co.uk/markets/Documents/paymentsystems/rtgsguide.pdf

 

 

 

Evolution of payment systems in India – or is it a revolution?

Speech by Mr R Gandhi, Deputy Governor of the Reserve Bank of India

Banaras Hindu University, Varanasi, 22 October 2016.

http://www.afi-global.org/speeches/2016/10/evolution-payment-systems-india

 

 

 

How Modernizing India’s Payment System can Drive Financial Inclusion

April 26, 2016

By Sean Creehan

 

http://www.frbsf.org/banking/asia-program/pacific-exchange-blog/how-modernizing-indias-payment-system-can-drive-financial-inclusion/

http://www.frbsf.org/banking/files/Asia-Focus-Modernizing-the-Payment-System-to-Increase-Financial-Inclusion-in-India.pdf

 

 

 

Payment Systems in India: Opportunities and Challenges

DEEPANKAR ROY

 

http://www.icommercecentral.com/open-access/payment-systems-in-india-opportunities-and-challenges.pdf

 

 

Payment Systems in India and Current Status: A Perspective

March 2016 by Graham Wright and Anil Kumar Gupta

 

http://blog.microsave.net/payment-systems-in-india-and-current-status-a-perspective/

 

 

 

PAYMENT AND SETTLEMENT SYSTEMS

RBI India

https://www.rbi.org.in/scripts/paymentsystems.aspx

https://www.rbi.org.in/scripts/PaymentSystems_UM.aspx

http://www.npci.org.in/aboutus.aspx

 

 

NPCI playing a key role in India’s push towards cashless economy

http://www.livemint.com/Industry/Sp5XB4G687Kq5eCAI8Y51O/NPCI-playing-a-key-role-in-Indias-push-towards-cashless-eco.html

 

 

India Has The Most Sophisticated Payments System In The World – And Six Men Made It Happen

R Jagannathan – Apr 12, 2016,

https://swarajyamag.com/economy/india-has-the-most-sophisticated-payments-system-in-the-world-and-six-men-made-it-happen

 

 

Supervision of U.S. Payment, Clearing, and Settlement Systems: Designation of Financial Market Utilities (FMUs)

 

Marc Labonte

Specialist in Macroeconomic Policy

September 10, 2012

 

https://pdfs.semanticscholar.org/4f53/8a3d9e1f088d8cba80d4fd5cf6f28d62a462.pdf

 

 

Interdependencies among payment and settlement systems Overview of forms and

challenges for risk management

 

Denis Beau

 

https://info.publicintelligence.net/slides2beau.pdf

 

 

 

SELECTED ISSUES ON LIQUIDITY RISK MANAGEMENT IN FEDWIRE FUNDS AND PRIVATE SECTOR PAYMENT SYSTEMS

TECHNICAL NOTE MAY 2010

 

https://www.treasury.gov/resource-center/international/standards-codes/Documents/FSAP_Technical%20Note_Payment%20Systems_Liquidity%20Risk%20Management_Final_5%2011%2010.pdf

 

 

 

Managing Operational Risk in Payment, Clearing, and Settlement Systems

by

Kim McPhail

 

http://bibvir1.uqac.ca/archivage/17521118.pdf

 

 

Interdependencies of payment and settlement systems: the Hong Kong experience

 

http://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb200903/fa2_print.pdf

 

 

Fundamentals oF Payment systems

 

http://www.treasuryalliance.com/assets/publications/payments/Fundamentals_of_Payment_Systems.pdf

 

 

GLOSSARY OF TERMS RELATED TO PAYMENT, CLEARING AND SETTLEMENT SYSTEMS

https://www.ecb.europa.eu/pub/pdf/other/glossaryrelatedtopaymentclearingandsettlementsystemsen.pdf

 

 

Central bank oversight of payment and settlement systems

May 2005

 

http://www.bis.org/cpmi/publ/d68.pdf

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

No. 422 May 2013

 

https://www.adb.org/sites/default/files/publication/156277/adbi-wp422.pdf

 

 

 

Oversight of payment and settlement systems

2012

 

http://www.dnb.nl/en/binaries/Oversight%20of%20payments%20and%20settlement%20systems%202012_tcm47-286470.pdf?2016122522

 

 

 

Payment & Settelment System in India

 

http://ugcportal.com/raman-files/All%20about%20Payment%20and%20Settlement%20Systems%20in%20India.pdf

 

 

 

Payment and Settlement Systems in India

VISION-2018

 

https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/VISION20181A8972F5582F4B2B8B46C5B669CE396A.PDF

 

 

 

Clearing House Interbank Payments System (“CHIPS®”)

Self-Assessment of Compliance with Standards for Systemically Important Payment Systems

January 2016

 

https://www.theclearinghouse.org/-/media/files/payco%20files/standards%20self%20assessment%202016.pdf?la=en

 

 

 

Supervision of Payment, Clearing and Settlement

 

https://www.skadden.com/newsletters/FSR_Supervision_of_Payment_Clearing_and_Settlement.pdf

 

 

The Continuous Linked Settlement foreign exchange settlement system (CLS)

 

http://www.snb.ch/en/mmr/reference/continuous_linked_settlement/source/continuous_linked_settlement.en.pdf

 

 

Indian Payments Industry: Mobile POS Solutions

http://www.indigoedge.com/IE%20Insight%20-%20India%20Payments%20-%20Mobile%20POS%20Solutions.pdf

 

 

 

Payment systems in Sweden

 

http://www.bis.org/cpmi/paysys/swedencomp.pdf

 

 

 

CIPS and the International Role of the Renminbi

January 27, 2016

By Nicholas Borst

http://www.frbsf.org/banking/asia-program/pacific-exchange-blog/cips-and-the-international-role-of-the-renminbi/

 

 

Chinese Central Bank has introduced CIPS (Cross-Border Interbank Payment System)

 

https://www.db.com/specials/en/docs/chinese-central-bank-cips.pdf

Relational Turn in Economic Geography

Relational Turn in Economic Geography

This is an important topic.  Uneven development using orthodox economic and development theories has led researcher to look for alternative explanations.

  • How to properly integrate Global – Regional – National – Local perspectives?
  • How valuable is relational (network) perspective?
  • What is the role of power relations among Actors?
  • How does Institutional, Cultural, and Social embeddedness of Actors impact development and economy?
  • How does actions and interactions of Actors affect local economic environment?

 

From Toward a relational economic geography

During the 1990s, a controversial debate has emerged in economic geography and other social sciences, such as economics and sociology, focusing on the question of what research program, key focus and methodology a novel economic geography should embody (Perrons, 2001). This was, partially, a reaction to the work of Krugman (1991), Fujita et al. (2001), and others who claimed to have developed a new economic geography. This self-proclaimed new economic geography offers an interesting economic perspective on the conventional problems of spatial distribution and equilibrium, based on an analysis of increasing returns, transportation costs, and other traded interdependencies (Martin and Sunley, 1996; Bathelt, 2001). Yet it fails to develop a comprehensive research program as a basis for economic geography because ‘. . . the new economic geography ignores almost as much of the reality they study as old trade theory did’ (Krugman, 2000, p. 50).1 In following Martin and Sunley’s (1996) suggestion, this approach is better classified as geographical economics. While this literature brings economic geography closer to the core ideas of neoclassical economics, Amin and Thrift (2000) have recently suggested another fundamentally different direction for economic geography, capitalizing on concepts and theories from other social sciences. Amin and Thrift (2000, p. 4) provocatively claim that economic geography is no longer able to ‘fire the imagination’ of researchers. Therefore, they ask for a critical reflection and renewal of this field’s basic goals, concepts, and methods. The reactions to their contribution have stimulated a debate, parts of which have been published in a special issue of Antipode in 2001. This debate has unfortunately been dominated by discipline-political arguments, opinions, and claims. In essence, it focuses on the question of whether economic geography should be closely associated with economics or lean towards the social, political, and cultural sciences. In particular, Thrift (2000) has identified a growing interest in the cultural dimension of economic relations, as well as in economic issues of cultural studies. While Amin and Thrift (2000) propose a cultural turn away from neoclassical economics, their critics emphasize existing linkages with and the importance of economic theories as a foundation of economic geography (Martin and Sunley, 2001; Rodriguez- Pose, 2001). We agree with Martin and Sunley (2001) that this debate is partly based on false dualisms, such as economics vs. sociology and quantitative vs. qualitative methodology. In our view, this discussion is unclear because it mixes normative accounts of the discipline’s policy implications with epistemological and methodological arguments. The debate is also somewhat misdirected for it tries to separate those economic and social aspects that are inseparable. The decisive question cannot be whether economic geography should be economized or culturalized. Rather, the economic and the social are fundamentally intertwined. They are dimensions of the same empirical reality which should be studied in a dialogue of perspectives rather than in mutual exclusion and reductionist prioritization (Stark, 2000).

The second transition is characterized by a reformulation of the core concepts of economic geography. In the following sections, discontinuities between relational economic geography and regional science will be identified according to five dimensions of the research design. These dimensions include the conception of space, object of knowledge, conception of action, epistemological perspective, and research goal. From this, we develop a relational framework for analysis which systematically focuses on economic actors and their action and interaction. The basic propositions of this framework will be developed in the remainder of this section (Table 1).

4.1. Conception of space

A relational view of economic geography is based on a relationship between space and economy which is contrary to that of regional science.10 Specifically, regional science views space as a container which confines and determines economic action. It treats space as a separate entity which can be described and theorized independently from economic action. In contrast, a relational approach assumes that economic action transforms the localized material and institutional conditions of future economic action. Similar to Storper and Walker (1989), this approach emphasizes that the economic actors themselves produce their own regional environments. The way in which spatial categories and regional artifacts have an impact on economic action can only be understood if the particular economic and social context of that action is analysed (Bahrenberg, 1987). Spatial structures and processes have, however, been socially and economically underconceptualized in regional science. We contend that space can neither be used as an explanatory factor for economic action nor be treated as a separate research object in isolation from economic and social structures and relations. Consequently, as space is not an object of causal power to explain social or economic action it cannot be theorized (Sayer, 1985; Saunders, 1989; Hard, 1993).11 Of course, economic processes also have material outcomes (e.g. infrastructure) which are localized in certain places and territories and exist over longer time periods. Such structures clearly have an impact on economic action and interaction in these localities. Nonetheless, economic actors and their action and interaction should be at the core of a theoretical framework of economic geography and not space and spatial categories. Spatial scientists, such as Bunge (1973), treat spatiality as the object of knowledge in economic geography. They aim to detect those spatial laws which govern human action without looking at the actors themselves. Instead of treating space as a container, we suggest a conception of space as perspective (Glu¨ ckler, 1999). In other words, we use space as a basis for asking particular questions about economic phenomena but space is not our primary object of knowledge. It is this conception that we refer to as the geographical lens. As part of this, economic exchange becomes the focus of analysis and not space. Similarly, we do not seek to identify spatial laws but, instead, look for explanations of localized economic processes and their consequences.12 It is particularly through the application of a distinct perspective to the study of an object of knowledge that discipline-specific research problems can be formulated. The spatial perspective or geographical lens leads economic geographers to pose research questions about an economic phenomenon, different from those typically asked by economists or sociologists. We also suggest that the perspective applied helps mobilize a particular terminology and, over time, a set of tacit knowledge which entails an understanding of what it is that is being analysed and how this subject matter can be described and evaluated adequately.

relational2

 

From Rethinking relational economic geography

Since the mid-1990s, the softening of sub-disciplinary boundaries within human geography and the more general call for a ‘relational thinking’ in human geography (Massey et al . 1999; see also Allen et al. 1997; Sack 1997; Lee and Wills 1997) have stimulated the consolidation of what might be termed a ‘relational economic geography’. 1 In this ‘relational turn’, economic geographers tend to place their analytical focus on the complex nexus of relations among actors and structures that effect dynamic changes in the spatial organization of economic activities (see Amin 1998; Dicken and Malmberg 2001; Ettlinger 2001; Bathelt and Glückler 2003; Boggs and Rantisi 2003). This relational economic geography is concerned primarily with the ways in which socio-spatial relations of actors are intertwined with broader structures and processes of economic change at various geographical scales. Despite the claims of novelty among most economic geographers who have taken on such a relational thinking in their geographical analysis, it remains unclear whether this ‘relational turn’ represents merely a modest reworking of earlier work in economic geography that might not be explicitly relational in its conceptualization and analysis. After all, heated debates on the spatial divisions of labour, locality studies and flexible specialization dominated the heyday of economic geography during much of the 1980s and the early 1990s (Scott 2000). With hindsight, these debates have legitimized the analytical concern of economic geography with the social relations of production and the relations between the spatial and the social (Harvey 1982; Thrift 1983; Massey 1984; Smith 1984; Gregory and Urry 1985; Lee 1989). By sidestepping the pitfalls of an earlier brand of quantitative economic geography concerned with spatial geometries and locational analysis, the substantive foci on regions, localities and production processes in these debates have no doubt foregrounded the recent ‘relational turn’ in economic geography. While many recent geographic writings have addressed aspects tangential to the core theoretical categories deployed in a relational economic geography (e.g. Barnett 1998; Thrift 2000; Barnes 2001; Storper 2001), there is surprisingly a lack of systematic evaluation and integration of our knowledge of this growing field. In view of limited space, this paper develops a sympathetic critique and rethinking of the ‘relational turn’ in order to clarify the distinctive contributions of a relational economic geography and to rework some of its conceptual tools. In the next section, I critically examine the nature and emergence of the ‘relational turn’ in economic geography, by revisiting relational thought that existed as an undercurrent before the 1990s and situating the recent ‘relational turn’ in this earlier work in economic geography. Whilst the recent ‘relational turn’ has some of its intellectual antecedents in the earlier debates of the 1980s (particularly the social relations of production framework), its substantive content has been broadened to include social actors and their network relations at different spatial scales. Focusing on recent economicgeographical writings on regional development, embedded networks and geographical scales, I note that much of this large body of recent work is relational only in the thematic sense that relations among actors and structures are an important theme in contemporary economic-geographical enquiry. In particular, the causal nature of relationality and power relations are under-theorized and underspecified. If relational thinking in economic geography is to have a greater impact, we need to rework and deepen its theoretical constructs to go beyond simply a ‘thematic turn’ (Jessop 2001, 1214). The paper moves on to rework some of the most important theoretical insights in the ‘relational turn’ – relationality, power and actors. Dynamic and heterogeneous relations among actors and structures are conceptualized as causal mechanisms of socio-spatial change in economic landscapes. Here, I explore the notion of ‘relational geometries’ constituted through relationality and power . The concept of relational geometries refers to the spatial configurations of heterogeneous relations among actors and structures through which power and identities are played out and become efficacious. These relational geometries are neither actors (e.g. individuals and firms) nor structures (e.g. class, patriarchy and the state), but configurations of relations between and among them – connecting actors and structures through horizontal and vertical power relations. Relational geometries are also not networks per se because the latter refer mainly to horizontal and, mostly, static ties among actors only. Actors in these relational geometries are not static ‘things’ fixed in time and space. They are dynamic and evolving in such relational ways that their differential practices unleash multiple forms of emergent power in relational geometries. Building on the concept of different and emergent forms of causal power as positions in relational geometries and as practice through social action, this relational perspective allows us to avoid the two polarized frameworks in contemporary economic geography – actor networks and institutional structures. This effort to rework relational economic geography thus parallels the recently reinvigorated ‘relational sociology’ that ‘sees relations between terms or units as preeminently dynamic in nature, as unfolding, ongoing processes rather than as static ties among inert substances’ (Emirbayer 1997, 289). To substantiate the relevance of this reworking of conceptual categories, I show how relationality and multiple forms of power can offer vital insights into regional development that go beyond existing relational frameworks in economic geography.

related4relationality5

 

From Geographies of circulation and exchange: Constructions of markets

In the preceding sections we have discussed three heterodox alternatives to the orthodox free market logic.

For socioeconomists, markets are embedded in social structures and are a far cry from the virtual market model celebrated by orthodox economists. It is social relations that underwrite real markets, guaranteeing their functioning in the face of uncertainties. Work un- dertaken in this spirit puts emphasis on social relations and institutions, and analyses how non-economic institutions either enable or constrain efficient market exchange.

Political economists insist that, neoliberal claims to the contrary notwithstanding, capitalism cannot exist without “market imperfections”. In these accounts, the market model is nothing else than a fictitious ideological device to hide from view the underlying dynamics of capitalism. Accordingly, political economic scholars regard it as their task to remove the veil and to lay open the contradictory reality of concrete markets under capitalism.

Cultural economists apply the cultural theoretical concept of performativity towards the market. Rather than reproducing the classical distinction between the abstract market model and real-life markets, protagonists point to the role that the practice of economists widely understood plays in the self-realization of economic thought. It is argued that the model of the perfect market realizes itself in the world in the assembly of far-reaching socio-technical arrangements. Here, markets take on ambivalent form as relational effects of socio-technical networks engaging in the twin processes of framing and overflowing. The latter process includes the proliferation of new social relations, groups and communities which may articulate economic and non-economic alternatives.

In the discipline of economic geography heterodox approaches have managed to break the hegemony of the neoclassical orthodoxy. Unfortunately, the arguments in heterodox debates on the market and on alternative economic geographies more generally are very often taken from entrenched positions, authors apparently finding it very difficult to understand the train of thought followed by the “opposing” camp. While this is true for all positions introduced in this progress report, cultural economy has arguably had a particularly difficult time. With our representation of the performativity approach we hope to have been able to clarify some of the misunderstandings. The strength of the heterodox project lies precisely in the co-existence of competing positions, each challenging the still omnipresent logic of the perfect market in different ways. This is what a vibrant heterodox project should aspire to: A healthy competition of plurivalent and opposing ideas, a competition, however, which at the same time does not prevent conversation across different approaches and is pluralistic enough to gain from the application of different perspectives (see Barnes 2006).

 

 

From  Advancing evolutionary economic geography by engaged pluralism

relational

 

Please see my related post on Relational Sociology.

Boundaries and Relational Sociology

 

 

Key People:

  • Harrison White
  • Henry Wai-chung Yeung
  • H. Bathelt
  • J. Gluckler
  • Jeffrey S. Boggs
  • Norma M. Rantisi
  • Christian Berndt
  • Marc Boeckler
  • Robert Hassink
  • Claudia Klaerding

 

Related Schools of Thoughts:

  • Social Economics
  • Political Economy
  • Cultural Economy
  • Manchester School of Global Production Networks
  • German School of Relational approach

 

Key Terms:

  • Relational Geometries
  • Actor-Networks
  • Relationality
  • Actor-Structure
  • Global – Regional – National – Local
  • Social Embeddedness
  • Economic-Social-Political-Spatial
  • Cultural Economics
  • Critical Realism
  • Causal Relations
  • Boundaries
  • Institutional Economics
  • Political Economics
  • Spatial relations
  • Scale Structure
  • Regionalism
  • Power Relations

 

 

Key Sources of Research:

 

Geographies of circulation and exchange: Constructions of markets

Christian Berndt

Marc Boeckler

 

https://www.uni-frankfurt.de/46314372/3-BerndtBoeckler2009.pdf

 

 

Whither Global Production Networks in Economic Geography? Past, Present and Future

Martin Hess

Henry Wai-chung Yeung

 

https://courses.nus.edu.sg/course/geoywc/publication/2006%20EPA_Hess_Yeung.pdf

 

 

Rethinking relational economic geography

Henry Wai-chung Yeung

2005

 

https://courses.nus.edu.sg/course/geoywc/publication/2005_TIBG.pdf

 

 

Towards a Relational Economic Geography: Old Wine in New Bottles?

 

Journal of Economic Geography 3 (2003) pp. 117–144

https://www.researchgate.net/profile/Johannes_Glueckler/publication/5213254_Toward_a_Relational_Economic_Geography/links/0c96052832bce3e2bf000000.pdf

 

 

Relational and evolutionary economic geography: competing or complementary paradigms?

Robert Hassink and Claudia Klaerding

2009

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.493.3838&rep=rep1&type=pdf

 

 

Towards an integrated Evolutionary and Relational Economic Geography approach

for analysing the evolution of destinations

 

Cinta Sanz‐Ibáñez,

Salvador Anton‐Clavé

 

http://www.globaltur.org/files/Conferences/SanzIbanez_AntonClave2014.pdf

https://www.researchgate.net/profile/Cinta_Sanz-Ibanez/publication/262688026_The_evolution_of_destinations_towards_an_evolutionary_and_relational_economic_geography_approach/links/557194bb08ae7467f72ca317.pdf

 

 

Chains and networks, territories and scales: towards a relational framework for analysing the global economy

PETER DICKEN, PHILIP F. KELLY, KRIS OLDS and HENRY WAI-CHUNG YEUNG

 

https://courses.nus.edu.sg/course/geoywc/publication/DKOY_2001.pdf

 

 

What Really Goes on in Silicon Valley? Spatial Clustering and Dispersal in Modular Production Networks

Timothy J. Sturgeon

2003

 

https://ipc.mit.edu/sites/default/files/documents/03-001.pdf

 

 

Theoretical advancement in economic geography by engaged pluralism

Robert Hassink, Claudia Klaerding

 

https://www.wigeo.uni-kiel.de/en/archiv/12peeg

 

 

EMBEDDEDNESS, ACTOR-NETWORKS AND THE ‘RELATIONAL TURN’ IN GEOGRAPHY

 

http://scholarbank.nus.edu.sg/bitstream/handle/10635/14512/chapter_3.PDF?sequence=5

 

 

The ‘relational turn’ in economic geography

Jeffrey S. Boggs  and Norma M. Rantisi

https://www.researchgate.net/profile/Norma_Rantisi/publication/5213253_The_%27Relational_Turn%27_in_Economic_Geography/links/02e7e528f5e7bd37a5000000/The-Relational-Turn-in-Economic-Geography.pdf

 

 

Manifesto for a Relational Sociology

Mustafa Emirbayer

 

https://edisciplinas.usp.br/pluginfile.php/88938/mod_resource/content/1/Emirbayer%20Manifesto%20for%20a%20Relational%20Sociology.pdf

 

 

Relational Economic Geography: A Partial Understanding
or a New Paradigm?

Peter Sunley

 

https://www.researchgate.net/profile/Peter_Sunley/publication/249475732_Relational_Economic_Geography_A_Partial_Understanding_or_a_New_Paradigm/links/552fb80c0cf2f2a588a8f6c7.pdf

 

 

The Relational Economy : Geographies of Knowing and Learning

Harald Bathelt and Johannes Gluckler

2011

Oxford

 

 

Can we learn anything from economic geography proper?

Yes, we can!

Robert Hassink, Huiwen Gong, Fabian Faller

http://econ.geo.uu.nl/peeg/peeg1622.pdf

 

 

GEOGRAPHIES OF FINANCE: CENTERS, FLOWS, AND RELATIONS

BONGMAN SEO

Accepted March 2011

 

 

Geographies of Production I:
Relationality revisited and the ‘practice shift’ in economic geography

 

Andrew Jones

2013

http://openaccess.city.ac.uk/2603/1/SR%20PiHG%20Geographies%20of%20Production%20Report%201%2024%20Jul13%20FINAL.pdf

 

 

Advancing evolutionary economic geography by engaged pluralism

 

Robert Hassink, Claudia Klaerding, Pedro Marque

2014

https://www.researchgate.net/profile/Robert_Hassink/publication/261070844_Advancing_Evolutionary_Economic_Geography_by_Engaged_Pluralism/links/54200ea90cf241a65a1afcd4.pdf

 

 

Geographies of Production: Growth Regimes in Spatial Perspective 3 – Toward a Relational View of Economic Action and Policy

Harald Bathelt

2006

https://tspace.library.utoronto.ca/bitstream/1807/71378/1/43_Bathelt%202006_PIHG.pdf