Payment and settlement systems: The case for mutualised risk mitigation within the Basel II framework

Abstract

The recent stress in financial markets has called into question some fundamental infrastructure systems that are relied upon to mitigate systemic risk. The US Treasury Secretary and the President's Working Group on Financial Markets have called for a review of the regulation of payment and settlement systems that underpin the mitigation of the risk of intertwined financial firms interacting across the global capital, contract and dealer markets. This paper reports on the underlying components of this stress, the fundamental risk methodologies and data requirements that are flawed, and the possible remedies of further mutualised risk mitigation that regulators and financial institutions should consider.