On Financial Market Infrastructures to Support Financial Innovation

Information

Safe, efficient and open financial market infrastructures lay foundation for RMB internationalization. CDI invited Mr. Patrick Hess, Senior Market Infrastructure Expert, Directorate General Market Infrastructure and Payments, European Central Bank to elaborate on definition and types of financial market infrastructures, Chinese FMIs and aspects of RMB internationalization, relevance of Chinese FMIs for RMB internationalization, and potential cooperation between Europe and China.

Date: September 11, 2018

Venue: Room 101, CDI Mansion, Shenzhen

Host: CDI

Theme: On Financial Market Infrastructures to Support Financial Innovation

Highlights

Definition and types of financial market infrastructures

Financial market infrastructures (FMIs) are a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions and typically consisting of a set of common rules and procedures for all participants, a technical infrastructure, and a specialised risk-management framework appropriate to the risks they incur.

Main types of FMIs include trading venues, central counterparties, central securities depositories, and payment systems.

Chinese FMIs and aspects of RMB internationalization

Chinese FMIs for securities and payments include Shanghai Stock Exchange, Shenzhen Stock Exchange, China Financial Futures Ex., interbank bond market, China-Europe International Exchange (CEINEX), China Securities Depository & Clearing Corporation (CSDC), Shanghai Clearing House (SCH), China Central Depository & Clearing Co., Ltd. (CCDC), High-Value Payment System (HVPS), Bulk Electronic Payment System (BEPS), Cross-Border Interbank Payment System (CIPS), etc.

China’s financial markets and FMIs have rooms for improvement. Stock and bond markets lack liquidity, breadth and sophistication. Investor base could be broadened, in particular institutional investors. Efficiency, interoperability and access, in particular of interbank bond market can be further improved.

Relevance of Chinese FMIs for RMB internationalization

Chinese FMIs lay foundation for international RMB. Safe, efficient and increasingly open Chinese FMIs do help maintain and expand established role of RMB as global settlement currency and also play an important role in supporting RMB as future global reserve and investment currency.

Chinese FMIs can provide basis for financing Belt and Road projects and foster global use of RMB. Safe, efficient and open Chinese FMIs can help meet financing, hedging and settlement needs of BRI projects in RMB and other major currencies.

Technological progress and financial innovation create challenges and opportunities for FMIs and industry. Increasing digitalisation exposes FMIs and entire financial ecosystem to increased cyber risks. Innovations need new regulation, open markets for new entrants and Fintech firms, and enhanced competition. Trend to make retail payments instant and available 24/7 is increasingly offered by payment service providers such as Tenpay and Alipay in China, and supported by dedicated payments systems such as IBPS in China, or enhanced RTGS systems/wholesale payments infrastructure such as TIPS in Europe. FMIs, banks and central banks worldwide also experimenting with distributed ledger technology (DLT) and digital currencies, but risks remain such as monetary policy and wider market implications.

E-payments are a main driver of financial innovation and behind growth in non-cash payment instruments in China. E-commerce, especially of mobile e-commerce, witnessed rapid growth in recent years, because of high smartphone penetration, increasing willingness of consumers to pay by mobile, provision by PBC of Internet Banking Payment System, and promotion by PBC of non-cash payment instruments in rural areas.

Potential cooperation between Europe and China

With regard to upgrading financial market infrastructure, euro area could learn from Asian countries in instant payments. With regard to overseeing FMIs and preventing and mitigating risks, ECB has developed cyber resilience oversight expectations that set out best practices to implement CPMI-IOSCO guidance, which is now being finalised and ECB happy to share them with Chinese regulators.