The group was also encouraged to work with vendors, notably the Depository Trust and Clearing Corporation (DTCC), to implement solutions providing a framework for ongoing processing efficiency and data integrity. The result was the launch, in November 2006, of DTCC’s Trade Information Warehouse. In parallel, the Basel Committee on Payment and Settlement Systems has been investigating developments in the OTC derivatives space more generally, updating work carried out in 1998 to map the landscape and identify risk issues. The Committee published a report in March 2007. The report recognises that the clearing and settlement infrastructure has been strengthened significantly in recent years, noting, in particular, the progress in automating and centralising key posttrade functions. But the report also highlights that there is more to be done. For instance, while processing backlogs in credit derivatives have been reduced substantially, they remain sizeable in other product lines. Recognising that the group convened by the FRBNY has been effective in resolving co-ordination problems, the report argues that momentum from the credit initiative should be carried across to other products. An initiative is already under way in this regard, with the FRBNY group having been expanded to 17 firms and a broader range of products. Firms are working towards targets for backlog reduction. Automation is a key element of this initiative, although it is recognised that there needs to be interoperability between core vendor services if the benefits are to be realised.

For example, in recent years, the UK’s central counterparty for derivatives, London Clearing House (LCH) Limited merged with Clearnet SA, while the Euroclear Group acquired CREST, the securities settlement system for the UK and Ireland. The Euroclear Group currently provides domestic securities settlement services in 5 European countries as well as international settlement services. Such tie-ups are of course an international extension of the microeconomics of infrastructure provision outlined above, exploiting economies of scale and network externalities. But, at the same time, they introduce common business risks and cross-border dependence on core systems, thus providing another channel for problems to spill across borders. Such cross-border linkages consequently add a layer of complexity to supervisory arrangements, making international coordination among the public authorities essential. Linkages arising at the user level are again important here. As banks operate in multiple markets, there is increasing scope for shocks to propagate across borders. That may arise from the increased centralisation of banks’ liquidity risk management. To the extent that banks use the foreign exchange markets to recycle surplus liquidity in one system to meet a shortfall in another, or else take advantage of settlement links between securities settlement systems to transfer collateral across borders, liquidity risk may be reduced. But, to the extent that banks respond to the availability of mechanisms for reallocating liquidity between systems by reducing their aggregate holdings, a bank may be more vulnerable to simultaneous liquidity demands across markets or to operational disruption to such mechanisms.