Banque de France conference
Paris, 25 May 2018
Speech by François Villeroy de Galhau,
Governor of the Banque de France
"Financial markets: what innovations for the Paris financial centre?"
Press contact: Mark Deen (mark.deen@banque-france.fr).
Ladies and gentlemen,
Welcome to the Banque de France. Talking about innovation in the markets at the Banque
de France may seem surprising given the Bank's 218 years of history. However, even if the
Banque de France's tasks adhere to a long tradition, the current financial environment
compels us to speed up financial innovation. We don't very often speak about these topics as
they are technical and sometimes deemed austere, but they are essential to the smooth
financing of the economy and also to the Paris financial centre. And so it is what we, with
Nathalie Aufauvre, Alain Duchateau and the teams at the DGSO, wish to discuss at this
morning's symposium. I would like to open with some thoughts on why we should speed up
financial innovation and how the Banque de France is contributing.
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I Why we should speed up financial innovation
Three major forces are at work in Europe to enhance the capital markets' ability to finance
innovation:
1/ The needs of businesses
The Capital Markets Union proposed by the European Commission should channel the
savings surplus available in Europe towards equity financing, which is more favourable to
innovation than debt financing. The euro area has an advantage: a EUR 400 billion savings
surplus. But it also faces a challenge: equity financing in France only represents 74% of
GDP, against 125% in the United States.
2/ Brexit
Capital market integration in Europe is even more essential given the prospect of Brexit.
Brexit is, and remains, bad news not only for the United Kingdom, but for Europe as well. It
does, however, represent an opportunity to restructure the European financial system. There
will not be a single City for the continent, but instead an integrated polycentric network, with
specialisations based on area of expertise.
In this respect, the Paris financial centre has numerous advantages to become a major hub
for innovation financing in Europe. We have seen lots of positive signs with regard to the
future hosting of major global banks' market activities. France is already the leading investor
in private-equity funds in continental Europe. France has four of the euro area's eight
systemic banks. France's asset management sector, with EUR 4,000 billion under
management in the country, comprises 11,000 investment funds and 630 asset management
firms, including Europe's leading asset manager. As for post-trade services, a vital cog in the
financial industry, France is also one of the market leaders: one-third of the 55,000 European
funds are controlled by French depositaries, three of which feature among the world's top 10
depositary service providers.
3/ Technological developments, with big data today, and artificial intelligence and
blockchain to come
We are witnessing an unprecedented acceleration in technological innovation with the
capacity to process substantial volumes of data. These developments have a particular
impact on the financial industry, which has always been a pioneer in the use of new
technologies. Obviously, this is not without risk: cybersecurity, ethics and financial stability
are all concerns. And we remain attentive to these risks, but we also need to be watchful that
they never prevent us from striving to progress.
Why is the Banque de France involved in financial innovation? Because we are at the
crossroads of a European choice and a national ambition. The European choice is that of a
federal Eurosystem, with a single monetary policy that is naturally decided centrally but
whose implementation is decentralised at the level of each national central bank. The
national ambition is to be the central bank for markets within the Eurosystem. For the
Banque de France, this is a tradition recognised over the 20 years of the euro, backed by its
high-quality teams, and is the first of our Ambitions 2020 strategic plan commitments. This is
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a win-win situation: for the Eurosystem which will benefit from many of these innovations
but also for the French economy and the Paris financial centre.
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II How the Banque de France contributes to innovation
I would like to illustrate our commitment with five examples of this "central bank for the
markets" that we take pride in, which you will come back to further as the morning
progresses.
1/ First, the reform of short-term securities in June 2016 gave rise to the market for NEU
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CP (Negotiable EUropean Commercial Paper) formerly referred to as certificats de dépôts
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and NEU MTN (Negotiable EUropean Medium Term Note) the old trésorerie.
This market is important to economic players as it gives them access to liquidity in euro in
the euro area. Two years after the reform, we can safely say that it has been a genuine
collective success: with the entry of new issuers, outstandings increased by almost 16% from
around EUR 291 billion in June 2016 to EUR 338 billion at the end of April 2018. The reform
acted as a catalyst for other important innovations.
The NEU CP market has robust infrastructures, a diverse range of players and a high level of
transparency. It should continue to be modernised to reduce costs and improve services.
Therefore, the Banque de France has undertaken a major project to digitalise the service
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offered for access to the market the NEUSGATE project -, which will be carried out in
partnership with the Paris financial centre. And the innovations do not end there: in particular,
platforms are being introduced to smooth the exchanges between intermediaries, issuers
and investors.
2/ For the Banque de France, being the central bank for the markets also means
supporting initiatives to develop a single market for collateral in the euro area
Today, cash can virtually be transferred instantly from Dublin to Rome, but not securities. We
need to work within the Eurosystem to speed up collateral circulation in the euro area and to
bring together a larger number of players; in particular, further opening the collateral market
to asset management players comes to mind.
We also need to see the development of an electronic trading tool with advanced
functionalities; for example to facilitate the exchange of individual securities against
standardised collateral baskets, or even liquidity in dollars against standardised baskets of
euro-denominated securities. Furthermore, we have to be able to execute these exchanges
in a fully automated manner, either applying a tri-party approach, under the legal framework
of the repurchase agreement as is the case at the moment, or directly in a "security against
security lending" mode as employed in bilateral transactions. In order to ensure the security
of transactions, a clearing solution will have to be made available to those participants who
require it.
Such a tool is no longer simply in the project phase but is now a reality. The Elixium platform
launched its operations in the Paris financial centre on 14 May 2018 with an initial trade of
EUR 750 million to which the Banque de France was a counterparty.
With the current support of banks and Euroclear, and the future participation of LCH SA and
asset managers, we are forging ahead with the development of a new collateral
management ecosystem in Paris, which, with EuroGC+, has already had a tri-party repo
clearing solution in place since 2015.
3/ The central bank for the markets, also in terms of the implementation of asset
purchase programmes (more than EUR 2,400 billion of public and private assets acquired
by the Eurosystem)
The Banque de France is innovating in this respect by regularly carrying out reverse
auctions for the purchase of securities issued by supranational bodies and French public
agencies. Thanks to this mechanism, the execution of purchases complies with the principle
of "market neutrality": these auctions have allowed us to meet our purchase targets while
respecting the liquidity of each market segment. The Bundesbank has since used this
reverse auction mechanism to acquire securities issued by German public agencies.
With regard to the repo market, the Banque de France was also the first to put in place, as of
July 2017, a unique daily auction system to lend French government bonds to its market
counterparties against cash collateral. This scheme has done much to help improve the
functioning of the securities lending and borrowing market, particularly at quarter-ends when
the system is particularly called upon. These auctions have just been successfully expanded
to securities lending transactions and we intend to unfurl lending by auction to the entirety of
our portfolio acquired within the framework of the PSPP in the very near future.
4/ A more directly technical type of innovation: IT infrastructures
The Eurosystem has developed its Vision 2020 programme, comprising instant payments
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(TIPS TARGET Instant Payment Settlement), the T2-T2S consolidation, and the ECMS
(Eurosystem Collateral Management System).
The Banque de France, alongside the German, Italian and Spanish central banks ("4 CB"),
plays a key role in the development and operational management of these Eurosystem
platforms. Here too innovation is thriving.
The implementation of the instant payment settlement service is planned for November
2018. It aims to harmonise the different national systems already in operation and facilitate
communication between them.
The T2-T2S consolidation should optimise and enhance liquidity management and cash
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and securities settlement services, using for securities settlement technology developed
by the Banque de France, which allows a maximum number of transactions to be settled with
a minimum amount of securities and liquidity resources.
The ECMS (European Collateral Management System) project will provide a unified platform
developed by the Banque de France and the Banco d'España for the management of
standard monetary policy operations and the associated collateral. It will contribute
significantly to the unification of capital markets within the euro area and the harmonisation of
market practices, over and above monetary policy activities alone (tri-party collateral
management, securities transaction management, etc.) and drives a process of simplification
for monetary policy counterparties with its identical access conditions and streamlined cross-
border collateral management.
5/ From IT to new technologies
In the field of blockchain technology, the Banque de France launched an experiment
involving the example of a relatively simple reference, the SEPA Creditor Identifier (SCI).
After testing a prototype, we approached the French Banking Federation in July 2016 and
proposed that it work on the project and involve other institutions on a voluntary basis.
The Banque de France was the first to go into production on 15 December 2017, and was
joined in April 2018 by two institutions belonging to the Crédit Mutuel group. Other banks will
join this blockchain in 2018, representing in total more than 60% of identifier requests.
Thanks to this technology, identifiers are attributed immediately, online, whereas in the past,
institutions had to wait up to two weeks to receive them, Above all, though, the project
allowed participating banks to better appropriate blockchain technology.
For the Banque de France, this represents a profound shift in its data management methods:
from being the "owner" of the identifier reference, we have evolved towards a governance
model of "co-ownership" with the institutions participating in this interbank blockchain.
As far as I am aware, this project is also the first blockchain to be put into production by a
central bank and we are now investigating which other services could be shared with the
participating banks. Expanding the pilot project is more straightforward.
This morning, you will also discuss the technological revolution in the foreign exchange
market. Ten days ago, on Monday, 14 May 2018, the Banque de France published its
statement of commitment to the Foreign Exchange Global Code of Conduct and invites the
participants in this market to do the same.
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I would like to conclude by drawing your attention to a coincidence of timing: on Tuesday, the
Banque de France inaugurated its new Lab, which aims to combine central bank activities
with new technologies and experiment with new solutions. So welcome to the central bank
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for markets to all of you all stakeholders in financial innovation. We will continue to
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supervise you and monitor you it's our duty but equally, we are and will continue to be
your partner, and even more than that, one of your strengths. I wish you an excellent
morning and thank you for your attention.