Financial market infrastructure refers to systems and entities involved in clearing, settlement, and the recording of payments, securities, derivatives, and other financial transactions. [1] Depending on context, financial market infrastructure may refer to the category in general, or to individual companies or entities (thus also used in plural: financial market infrastructures).
Examples of financial market infrastructure firms include payment systems, securities settlement systems, central securities depositories, central counterparties, and trade repositories. [1] [ non-primary source needed ]
Some financial infrastructures have a global reach, such as financial messaging service SWIFT, foreign-exchange settlement service provider CLS Group, and international central securities depositories Euroclear and Clearstream. [2]
Other major commercial financial infrastructure firms include:
Financial trading venues such as stock exchanges, futures exchanges, commodities exchanges and electronic trading platforms, are not always considered financial market infrastructures where they are subject to competition, but are included in the definition of financial market infrastructures in certain jurisdictions such as Switzerland. [6] Many exchanges are subsidiaries of financial infrastructure groups such as CME Group, Deutsche Börse, Euronext, Hong Kong Exchanges and Clearing, Intercontinental Exchange, Japan Exchange Group, London Stock Exchange Group, Nasdaq, Inc., Singapore Exchange, and SIX Swiss Exchange.
Some financial infrastructures are directly operated by central banks, including a number of Real-time gross settlement (RTGS) systems such as T2 in the euro area, CHAPS in the United Kingdom, and Fedwire in the U.S. Other central bank-operated infrastructures include the China Foreign Exchange Trade System (CFETS) in China. [7]
Financial market infrastructures, many of which are natural monopolies, are typically of critical systemic importance and thus heavily regulated and supervised. At the global level, the applicable standards are the Principles for Financial Market Infrastructures (PFMI) jointly issued by the Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO). [8]
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A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. Futures exchanges provide physical or electronic trading venues, details of standardized contracts, market and price data, clearing houses, exchange self-regulations, margin mechanisms, settlement procedures, delivery times, delivery procedures and other services to foster trading in futures contracts. Futures exchanges can be integrated under the same brand name or organization with other types of exchanges, such as stock markets, options markets, and bond markets. Futures exchanges can be organized as non-profit member-owned organizations or as for-profit organizations. Non-profit, member-owned futures exchanges benefit their members, who earn commissions and revenue acting as brokers or market makers; they are privately owned. For-profit futures exchanges earn most of their revenue from trading and clearing fees, and are often public corporations.
The Depository Trust & Clearing Corporation (DTCC) is an American financial market infrastructure company that provides clearing, settlement and trade reporting services to financial market participants. It performs the exchange of securities on behalf of buyers and sellers and functions as a central securities depository by providing central custody of securities.
In banking and finance, clearing refers to all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment into the actual movement of money from one account to another. Clearing houses were formed to facilitate such transactions among banks.
Settlement risk, also known as delivery risk or counterparty risk, is the risk that a counterparty fails to deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value as per the trade agreement. The term covers factors incidental to the settlement process which may suspend or prevent a trade from completing, even though the parties themselves are in agreement, are acting in good faith, and otherwise competent to perform.
Euroclear is a Belgium-based financial services company that specialises in the clearing and settlement of securities transactions, as well as the safekeeping and asset servicing of these securities. It was founded in 1968 as part of J.P. Morgan & Co. to settle trades on the then developing eurobond market. It is one of two European international central securities depositories.
Options Clearing Corporation (OCC) is a United States clearing house based in Chicago. It specializes in equity derivatives clearing, providing central counterparty (CCP) clearing and settlement services to 16 exchanges. It was started by Wayne Luthringshausen and carried on by Michael Cahill. Its instruments include options, financial and commodity futures, security futures, and securities lending transactions.
A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial market infrastructure organization that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts. CCPs are highly regulated institutions that specialize in managing counterparty credit risk.
LCH is a financial market infrastructure company headquartered in London that provides clearing services to major international exchanges and to a range of OTC markets. The LCH Group includes two main entities: LCH Limited based in London and LCH SA based in Paris.
SIX is a key financial market infrastructure company in Switzerland. The company provides services relating to securities transactions, the processing of financial information, payment transactions and is building a digital infrastructure. The company name SIX is an abbreviation and stands for Swiss Infrastructure and Exchange. SIX is globally active, with its headquarters in Zurich.
The Clearing House Payments Company L.L.C. (PayCo) is a U.S.-based limited liability company formed by Clearing House Association. PayCo is a private sector, payment system infrastructure that operates an electronic check clearing and settlement system (SVPCO), a clearing house, and a wholesale funds transfer system (CHIPS).
The Moscow Exchange is the largest exchange in Russia, operating trading markets in equities, bonds, derivatives, the foreign exchange market, money markets, and precious metals. The Moscow Exchange also operates Russia's central securities depository, the National Settlement Depository (NSD), and the country's largest clearing service provider, the National Clearing Centre. The exchange was formed in 2011 in a merger of the Moscow Interbank Currency Exchange and the Russian Trading System.
CLS Group, or simply CLS, is a specialized financial market infrastructure group whose main entity is the New York-based CLS Bank. It started operations in 2002 and operates a unique and global central multicurrency cash settlement system, known as the CLS System, which plays a critical role in the foreign exchange market. Although the forex market is decentralised and has no central exchange or clearing facility, firms that chose to use CLS to settle their FX transactions can mitigate the settlement risk associated with their trades. CLS achieve this thanks to a central net and gross payment versus payment settlement service directly connected to the real-time gross settlement systems of participating jurisdictions through accounts at each of their respective central banks.
ICE Clear Credit LLC, a Delaware limited liability company, is a Derivatives Clearing Organisation (DCO) previously known as ICE Trust US LLC which was launched in March 2009. ICE offers trade execution and processing for the credit derivatives markets through Creditex and clearing through ICE Trust™. ICE Clear Credit LLC operates as a central counterparty (CCP) and clearinghouse for credit default swap (CDS) transactions conducted by its participants. ICE Clear Credit LLC is a subsidiary of IntercontinentalExchange (ICE). ICE Clear Credit LLC is a wholly owned subsidiary of ICE US Holding Company LP which is "organized under the law of the Cayman Islands but has consented to the jurisdiction of United States courts and government agencies with respect to matters arising out of federal banking laws."
Systemically important financial market utilities (SIFMUs) are entities whose failure or disruption could threaten the stability of the United States financial system. To date eight entities in the U.S. have been officially designated SIFMUs.
Since the late-2000s, the People's Republic of China (PRC) has sought to internationalize its official currency, the Renminbi (RMB). RMB internationalization accelerated in 2009 when China established the dim sum bond market and expanded Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity. The RMB was the 8th-most-traded currency in the world in 2013 and the 7th-most-traded in early 2014.
The National Settlement Depository (NSD), headquartered in Moscow, is a Russian non-bank financial institution and central securities depository (CSD). It provides depository, settlement, and related services to financial market entities. Its services cover both securities listed in Russia's 2011 Federal Law "On the Central Securities Depository", and other Russian and foreign equity and debt securities. NSD is the CSD of the Russian Federation, and was assigned CSD status by the Russian Federal Financial Markets Service in 2012. It is the largest securities depository in Russia by market value of equity and debt securities held in custody, which in June 2022 were 70 trillion roubles. It is a member of the Moscow Exchange Group. In March 2022, in the wake of the 2022 Russian invasion of Ukraine, NSD's accounts were blocked and frozen at international CSDs Euroclear and Clearstream. In addition, the European Union added NSD to its sanctions list, blocking NSD's accounts in euros, and in Euroclear and Clearstream; as a result, NSD could not service forex-denominated bonds issued by Russia and Russian companies. NSD suspended transactions in euros.
Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.
The China Interbank Bond Market (CIBM) is the largest domestic bond market in China and, as of 2022, is the second-largest in the world, only trailing the United States bond market. The CIBM has over US$21.5 trillion in outstanding volume as of the end of 2022. The CIBM was formed in 1997 after the People's Bank of China (PBOC) mandated commercial banks to move their bond trading out of the stock exchanges and into an interbank market operating through an electronic trading system.
The China Foreign Exchange Trade System, also known as National Interbank Funding Center, is a financial market infrastructure and electronic trading platform in China, established in 1994 under the People's Bank of China (PBoC) and established in Shanghai. It provides a major trading platform and pricing center for renminbi and foreign exchange-related products. CFETS is the trading platform of the China Interbank Bond Market and participates in China's policy of internationalization of the renminbi. It is supervised by the PBoC.
The Shanghai Clearing House, formally the Inter-bank Market Clearing House Co., Ltd., is a significant central counterparty and central securities depository in China, established in 2009 in Shanghai.