To meet the challenge of ensuring that this global network of individual payments systems is reliable, resilient and efficient requires a more integrated and comprehensive approach. This is true for the participants that are most exposed to the diversity of risks in this network of systems. And it is true for the official entities as well, because the growing number of cross-border payments systems require an effective framework of cooperation if we are to provide effective oversight. One important challenge faced by banks that operate across many different financial centers is how to meet their global liquidity needs. To meet the rising expectations of their customers, and simultaneously fulfill their own internal needs, the largest and most active banks in the payments business would prefer to mobilize their liquidity globally. But the reality is that the total liquidity available to a global bank is fragmented. Surplus liquidity in one currency at one location cannot always be readily converted into liquidity in another currency or in another market. An institution’s liquidity at a specific location is dependent, to a  4  BIS Review 59/2004  large extent, on the size of its payment flows, its capital, and the volume of marketable securities and other eligible collateral that is housed in that location. These factors often determine what is available either to gain access to daylight liquidity from a central bank, or to meet a clearinghouse’s margin or collateral requirements, or to borrow overnight in an emergency.

Adoption of the Hague Securities Convention by countries around the world will improve legal certainty for cross-border collateral arrangements, which is important for bilateral counterparties, clearing and settlement systems. And there are new market-led initiatives underway to bring some utility-type clearing services to the present bilateral arrangements for OTC derivatives. These efforts to improve the clearing and settlement infrastructure for the OTC derivatives market are important because they help make it easier for firms to understand and manage their bilateral risk exposures. Markets work better, particularly in times of stress, when firms are able to operate with greater certainty about their direct counterparty exposures. In this context, it is worth reflecting on whether it makes sense to build on these efforts by developing and utilizing central counterparty clearing arrangements in the more standardized part of the OTC derivative market. To be sure, poorly designed central counterparties can increase risk, and they necessarily concentrate operational risk. But well designed central counterparties can play an important role in reducing systemic risk in markets. This is a complicated challenge for instruments that are inherently complex and constantly evolving, and for which calculating exposures can be difficult. And attracting a critical mass of strong participants can be daunting. But it makes sense to think about whether use of a centralized clearing utility could provide significant advantages over the present bilateral arrangements by increasing transparency, enabling multilateral netting, and providing centralized risk controls, collateral management, and margin requirements.