Operational Risks in Payment and Securities Settlement Systems: A Challenge for Operators and Regulators
Daniela Russo and Pietro Stecconi
This chapter discusses operational risks in clearing and settlement systems from a regulatory, economic, and policy perspective. It provides an overview of the regulatory approaches to operational risk and explains the implications of operational risk for the good functioning of payment and settlement systems. In particular, disruption to a nonsubstitutable system reintroduces trading frictions, with potentially severe implications for the markets supported by the stricken system; the costs might be expected to be most significant and widespread in the case of large-value systems supporting activity in financial markets. For instance, Klee (2007) shows in an empirical paper that operational incidents at the member level in Fedwire can affect trading conditions in the Fed Funds market. Given the interdependencies among the different actors of the financial system, the containment of operational risks in settlement systems is an important component of the overall financial stability enhancement action. In this vein, the authors also examine a range of policy actions that can be considered by the relevant authorities to contain these risks, such as increasing coordination between overseers and supervisors, potential specific regulatory requirements (e.g., use of stress tests), and appropriate governance arrangements of ...