Cross-border payments  Page 5  are by their nature more complex than purely domestic ones. They involve more, and in some cases numerous, intermediaries, time zones, jurisdictions and regulations. In some instances, a cross-border payment can take several days and can cost up to 10 times more than a domestic payment. That is why enhancing cross-border payments was set as a priority in 2020 by the G20 and the UK has been playing a leading role in the comprehensive work programme led by the FSB[6] and which the CPMI and the BIS more broadly are closely involved in. One of the main frictions in the cross-border space is where the same transaction must be reviewed multiple times to ensure that the parties are not exposing themselves to illicit finance under different national regulations and sanctions lists. The current costs of AML/CFT compliance are significant[7]. Experience with complementary innovations such as digital IDs has already demonstrated the potential for cost savings[8]. There is also a significant time and resource benefit as sanctions alerts have typically been generated on a far greater number of transactions than actually are “true” hits. The mismatch between an alert and identification of a sanctioned transaction creates extra layers of review which extend transaction timelines and add cost – particularly where additional manual controls are needed. The G20/FSB Roadmap on cross-border payments is, amongst other things, focussed on how a more effective use of and greater standardisation of data could help to streamline AML/CFT and sanctions compliance.

Given the higher relative penalty given to holding sovereign bonds under the leverage ratio as opposed to the capital ratio, it is expected to increase the cost of banks’ repo, and reduce incentives for money market arbitrage and market making.2 Reduced incentives for arbitrage and market making in turn affect market liquidity and can lead to greater periods of uncertainty. Furthermore, since European banks are required to report average month-end positions, there are increasing signs of market stress at month-end dates. The leverage ratio contains provisions for netting of offsetting cash positions when they are with the same counterparty and settled through the same system. This has resulted in a much greater use of central counterparties (CCPs). The use of CCPs has been strongly supported by authorities and brings benefits in terms of smooth market functioning, as well as for individual institutions. Eurosystem contacts report a wide difference in the pricing of trades cleared bilaterally and those cleared through CCPs – sometimes in the tens of basis points. CCPs, however, are also important for repo markets for a different reason. The increased volume of derivative trades centrally cleared at CCPs due to new regulations such as EMIR, as well as sporadic bouts of volatility, means that those institutions tend to hold significant quantities of cash. Placing that cash as unsecured deposits would represent wrong-way risk for CCPs as the collapse of a significant financial institution would create significant market volatility at the same time as potentially the loss of some of the unsecured deposits.