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2023 | Book

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Introduction to Payments and Financial Market Infrastructures

Authors: Ulrich Bindseil, George Pantelopoulos

Publisher: Springer Nature Switzerland

Book Series : Springer Texts in Business and Economics

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

Payments and financial market infrastructures are vital components of modern economies, yet they have often been overlooked by economists. However, any economic exchange, including financial market transactions, is matched by a payment leg, and the safety, efficiency, and immediacy of the payment, and the problem of linking the two legs of the transaction (“delivery-vs-payment”), remain universal challenges. The consequences of inefficiencies or interruptions in payment and settlement systems have immediate and significant impacts on the real economy. Moreover, payments and financial market infrastructures are also a matter of strategic importance for nation-states, and being excessively dependent on foreign providers has been proven to be a significant risk, as they can be “weaponized."
This book provides a concise yet thorough introduction to payments and financial market infrastructures, exploring various types of risks, retail payments, payment systems, cross-border payments, central counterparties, FX operations, and central securities depositories. The final chapter investigates payment innovations, including unbacked crypto-assets (e.g. Bitcoin), stablecoins, and central bank digital currencies. The text outlines key activities and risk management frameworks, as well as examining the operational mechanics of different payment systems. The book emphasizes the importance of understanding the nature of transfer of financial claims and liabilities through the process of payment and settlement, providing financial account representations of payments wherever useful. The book concludes that the payment and financial market infrastructure space has been shaken by recent innovations, which are expected to lead to seismic shifts in payment technology, practices, and market structures.

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Table of Contents

Frontmatter

1. Introduction

Abstract

In this introductory chapter, some basic principles and definitions relating to financial market infrastructures (FMIs) are provided. Some of the relevant policy issues are outlined, which is followed by a discussion as to why central banks play an important role for FMIs. The chapter then introduces the idea that payments and post-trade operations may be studied through systems of financial accounts, and a simple example is provided. The universal role of financial messaging is explained and finally, the chapter unpacks why the structure of the financial money system is multi-layered.

Ulrich Bindseil, George Pantelopoulos

2. Risks, Regulation and Oversight of FMIs

Abstract

As FMIs are subject to various risks, this chapter begins by describing what can go wrong in payment and settlement, and subsequently defines several key types of risk. The avenues through which FMIs mitigate risk are then discussed, and it is explained why legal certainty and settlement finality are key issues in payments and market infrastructures. The topic of regulation, supervision and oversight of FMIs is introduced, followed by a thorough description of the principles for FMIs.

Ulrich Bindseil, George Pantelopoulos

3. Retail Payments

Abstract

At the outset of this chapter, a number of key definitions and concepts are provided, including the notion of a payment, means of payments and their relevant categories, the recording of positions and the notion of legal tender. A brief history of payments is then outlined. Finally, the concepts of retail payment instruments, schemes and arrangements are explained and illustrated.

Ulrich Bindseil, George Pantelopoulos

4. Payment Systems

Abstract

Prior to presenting a discussion of both real time gross settlement (RTGS), deferred net settlement (DNS), large-value vs retail payment systems, this chapter provides a definition of payment systems. Several examples of large-value and retail payment systems are provided. This is followed by numerous systems of financial accounts that depict the various operational layers in payments, including those with a (i) single, (ii) double and (iii) triple settlement layers.

Ulrich Bindseil, George Pantelopoulos

5. Cross-Border Payments

Abstract

This chapter unpacks the mechanics of cross-border payments. To do so, what constitutes a cross-border payment is defined, and several challenges unique to international transactions are outlined by providing a brief history of cross-border payments and their universal challenges. The avenues by which commercial banks can complete cross-border payments via correspondent banking is then explored. Following this, the chapter divulges as to why correspondent banking is not a viable solution for domestic payments, and outlines how cross-border payments can be executed through Fintechs, stablecoins and through interlinking domestic payment platforms.

Ulrich Bindseil, George Pantelopoulos

6. Central Counterparties

Abstract

This chapter provides a schematic of central counterparties (CCPs). The key activities of CCPs are outlined, and the significance of the novation of contracts – a key aspect of CCPs – is explained. The chapter then describes the risk management practices of CCPs. Finally, the clearing of domestic derivative contracts is shown through a system of financial accounts, in addition to assessing the performance of CCPs during times of market stress.

Ulrich Bindseil, George Pantelopoulos

7. FX Operations and CLS

Abstract

One of the most recent payment infrastructure innovations – the process of Continuous Linked Settlement (CLS) – is explored in this chapter. At the outset, a brief introduction regarding the various ways banks may raise foreign currency deposits via entering into FX trades is provided. The origins and operational framework of CLS are then described. To depict the mechanics of CLS, we then employ systems of financial accounts to demonstrate a FX spot trade both outside and through CLS.

Ulrich Bindseil, George Pantelopoulos

8. Central Securities Depositories

Abstract

Following an initial introduction to central securities depositories (CSDs), this chapter outlines the key activities of CSDs as well as describing the CSD and international CSD landscape. The mechanics of domestic securities settlement in both commercial bank and central bank money are then unpacked. Following this, the complexities of cross-border securities settlement and of international custody chains are explored, and the functionality of the TARGET2 securities system is depicted.

Ulrich Bindseil, George Pantelopoulos

9. Unbacked Crypto-Assets, Stablecoins and CBDC

Abstract

This chapter reviews three innovations in payments: (1) unbacked crypto-assets (i.e. Bitcoin); (2) stablecoins; and (3) central bank digital currencies (CBDC). To begin with, the chapter provides definitions of numerous terms which are often misconstrued. This is followed by a discussion of Bitcoin, DeFi and blockchain/DLT. The chapter then turns its attention to stablecoins, and describes some of the policy and regulatory issues associated with stablecoins. It then introduces CBDC as a to-be-expected modernization of central bank money available to all, and provides a summary of various viewpoints with regard to whether or not CBDC should be issued. The flow of funds mechanics of CBDC creation and transfers are developed, and in addition, the many design challenges of issuing a CBDC are outlined.

Ulrich Bindseil, George Pantelopoulos

Backmatter

Title: Introduction to Payments and Financial Market Infrastructures
Authors: Ulrich Bindseil
George Pantelopoulos
Copyright Year: 2023
Publisher: Springer Nature Switzerland
Electronic ISBN: 978-3-031-39520-8
Print ISBN: 978-3-031-39519-2
DOI: https://doi.org/10.1007/978-3-031-39520-8