About Financial Market Infrastructure
Financial Market Infrastructures (FMIs) are key components of the financial system, delivering services critical to the smooth functioning of financial markets. Well-designed and reliable FMIs can be a source of both financial stability and operational efficiency. FMIs act as a coordinating device, bringing a network of counterparties together to support trading liquidity and the netting of exposures and settlement obligations. They also establish secure arrangements for the timely clearing and settlement of obligations between counterparties; assist institutions in the management of counterparty credit risks; and help to coordinate actions in the event of a market participant's default. The Bank’s regulatory interest is primarily in respect of three types of FMIs:
- Systemically important payment systems. This type of FMI provides for the settlement of wholesale interbank payments.
- Central counterparties (CCPs). A CCP acts as the buyer to every seller, and the seller to every buyer in a market. It does so by interposing itself as the legal counterparty to all purchases and sales typically via a process known as novation.
- Securities settlement facilities (SSFs). SSFs provide for the final settlement of securities transactions. Settlement involves transfer of the title to the security and transfer of cash. These functions are linked via appropriate delivery-versus-payment arrangements incorporated within the settlement process.
Given their typically large size, lack of substitutability in the markets they serve, and strong connections with banks and other financial institutions, FMIs are generally systemically important. This means they require sound design, and high standards of operational and financial resilience.