The role of financial market infrastructures in supporting a sustainable financial transition

Abstract

This paper aims to describe the role of financial market infrastructures (FMIs), specifically central securities depositories (CSD) and international CSDs (iCSDs), in supporting a sustainable financial transition. It starts by laying out the central role of these FMIs in the centre of the financial value chain, where it plays a critical role in ensuring the smooth and efficient functioning, as well as stability of financial markets. FMIs operate multilateral technology systems and funnel vast amounts of data across multiple markets, including emerging markets and developing economies (EMDEs). The paper then highlights acute challenges in funding sustainability projects in those emerging markets and the need for solutions that help attract private capital and international investors. To help address some of these challenges, a case study is presented of Euroclearability and the establishment of efficient FMIs and secondary markets, drawing lessons from its current impact as a potential solution to bridge EMDE financing gap. A study of the impact of Euroclearability shows an average reduction in sovereign borrowing costs by 28bps, and 14bps for corporate borrowing costs. Additionally, Euroclearability is associated with greater liquidity in domestic sovereign bond markets, leading to higher trading volumes and lower bond yields in secondary markets. Finally, the paper delves briefly into the ways FMIs are well positioned to capture regulatory data flow and sustainability data. With strong track records in managing and quality-assuring data, FMIs can improve the processing of ESG metrics, such as regulatory disclosures, and facilitate the use of these new metrics between market participants.