Financial market infrastructure refers to systems and entities involved in clearing, settlement, and the recording of payments, securities, derivatives, and other financial transactions. 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).
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👉 Financial market infrastructure in the context of Central counterparty clearing
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. An extensive overview of the academic literature can be found in Berndsen (2021).
CCPs "mutualize" (share among their members) counterparty credit risk in the markets in which they operate. A CCP reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (also called "margin deposits"), by providing independent valuation of trades and collateral, by monitoring the creditworthiness of the member firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting member's collateral on deposit. CCPs require a pre-set amount of collateral — referred to as ‘initial margin’ — to be posted to the CCP by each party in a transaction. The first line of defense is collateral provided by the defaulting member. CCPs typically adjust initial margin demands in response to changes in market conditions. For instance, a CCP may increase initial margin requirements in response to high price volatility. Variation margin is the second line of defense against fluctuation in the prices of securities pledged as collateral. If those prices fall, the member must deposit a corresponding amount of cash, and if those prices go up, the member may withdraw a corresponding amount of cash. This is done either on a daily basis or sometimes more frequently. For some financial products, members’ net payment obligations to or from the CCP are settled on a daily basis (or more frequently if there are large movements during the course of the day) to prevent the build-up of large exposures. The advantages of a central counterparty clearing arrangement are greater transparency of the risks, reduced processing costs, and greater certainty in cases of default by a member.Once a trade has been executed by two counterparties, it is submitted to a clearing house, which then steps between the two original traders' clearing firms and assumes the legal counterparty risk for the trade. For example, a trade between member firm A and firm B becomes two trades: A-CCP and CCP-B. This process is called novation.
In this Dossier
- ⭐ Core Definition: Financial market infrastructure
- 👉 Financial market infrastructure in the context of Central counterparty clearing
- Financial market infrastructure in the context of SIX Group
- Financial market infrastructure in the context of T2 (settlement system)
- Financial market infrastructure in the context of Central securities depository
- Financial market infrastructure in the context of TARGET Services
- Financial market infrastructure in the context of Bank of Israel
Financial market infrastructure in the context of SIX Group
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.
Financial market infrastructure in the context of T2 (settlement system)
T2 is a financial market infrastructure that provides real-time gross settlement (RTGS) of payments, mostly in euros. It is operated by the European Central Bank and is the critical payments infrastructure of the euro area. With turnover in the trillions of euros every day, it is one of the largest payment systems in the world. It is one of three so-called TARGET Services, together with TARGET2-Securities (T2S) for securities and TARGET Instant Payment Settlement (TIPS) for fast payments. The acronym TARGET stands for Trans-European Automated Real-time Gross-Settlement Express Transfer.
T2 replaced its predecessor RTGS system, TARGET2 (itself introduced in 2007-2008), on 20 March 2023.
Financial market infrastructure in the context of Central securities depository
A central securities depository (CSD) is a specialized financial market infrastructure organization holding securities such as shares or bonds, either in certificated or uncertificated (dematerialized) form, allowing ownership to be easily transferred through a book entry rather than by a transfer of physical certificates. This allows brokers and financial companies to hold their securities at one location where they can be available for clearing and settlement. In recent decades this has usually been done electronically, making it much faster and easier than was traditionally the case where physical certificates had to be exchanged after a trade had been completed.
In some cases these organizations also carry out centralized comparison and transaction processing such as clearing and settlement of securities transfers, securities pledges, and securities freezes.
Financial market infrastructure in the context of TARGET Services
TARGET Services (for Transeuropean Automated Real-time Gross-settlement Express Transfer) are payment services operated by the Eurosystem for the euro area and beyond on its proprietary financial market infrastructures.
As of late 2024, TARGET Services included T2 for large payments (which replaced TARGET2 in 2023), TARGET2-Securities (T2S) for securities transactions, and TARGET Instant Payment Settlement (TIPS) for instant payments. A fourth service, the Eurosystem Collateral Management System (ECMS), is to complement the TARGET suite in mid-June 2025.
Financial market infrastructure in the context of Bank of Israel
The Bank of Israel (Hebrew: בנק ישראל, Arabic: بنك إسرائيل) is the central bank of Israel. The bank's headquarters is located in Kiryat HaMemshala in Jerusalem with a branch office in Tel Aviv. The current governor is Amir Yaron.
The primary objective of the Bank of Israel is to maintain stability in prices and the financial system in Israel. It also administers and implements monetary policy in Israel, conducts foreign exchange operations, supervises and regulates the banking system, takes care of the foreign reserves and operations of the financial market infrastructure. The Bank of Israel has, under Article 41 and 44 of its Statute, the exclusive right to issue Israeli Shekel banknotes and coins.