Financial Market Infrastructure (FMI)

Brief Definition and Origin of Financial Market Infrastructure (FMI)

Financial Market Infrastructure (FMI) refers to the institutions, systems, and rules that enable the clearing, settlement, and recording of financial transactions. FMIs are critical for the stability, efficiency, and resilience of financial markets, ensuring that payments, securities, and derivatives transactions are executed safely and reliably.

The concept of FMI emerged in global regulatory discussions after the 2008 Global Financial Crisis, when the systemic importance of post-trade and payment systems became evident. The term was formally defined by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) in the 2012 Principles for Financial Market Infrastructures (PFMI).

Explain Like I’m 5 (ELI5)

Imagine you and your friends trade cards. One friend keeps the list of who gave what to whom. Another friend makes sure everyone pays what they owe. These friends are like financial market infrastructures—they keep track of trades, make sure payments happen, and ensure no one cheats.

Types of Financial Market Infrastructure (FMI)

FMI Type	Function
Payment Systems	Transfer money between institutions (e.g., RTGS systems like Fedwire)
Central Counterparties (CCPs)	Become the middleman in a trade, reducing counterparty risk
Central Securities Depositories (CSDs)	Hold and record ownership of securities (e.g., stocks, bonds)
Securities Settlement Systems (SSSs)	Ensure the delivery of securities against payment
Trade Repositories (TRs)	Collect and store data on derivative transactions

Core Functions of FMIs

Clearing: Determining obligations between counterparties after a trade is executed
Settlement: Actual transfer of cash or securities to fulfill those obligations
Risk Management: Protecting against counterparty default, operational errors, and cyber threats
Record-Keeping: Maintaining accurate, immutable records of transactions
Transparency: Providing data to regulators and market participants for oversight and analysis

Examples of Major Financial Market Infrastructure (FMI) by Region

FMI Name	Type	Country/Region	Function
Fedwire	Payment System	United States	Real-time gross settlement (RTGS) for USD
CHIPS	Payment System	United States	Large-value USD payments
TARGET2	Payment System	Eurozone	Euro RTGS operated by the Eurosystem
DTCC	CCP & CSD	United States	Central clearing and securities depository
CLS Bank	Payment System	Global	FX settlement system reducing settlement risk
LCH	CCP	UK/Europe	Clearing derivatives (rates, FX, swaps)
Euroclear/Clearstream	CSD & SSS	Europe	Securities settlement and custody
NSCC	CCP	United States	Clearing U.S. equity trades
CDSC & CDS	CSD & CCP	Kenya & Canada (respectively)	Local securities depositories and clearing

Importance of FMIs

FMIs are systemically important because they:

Enable market functioning: Without clearing and settlement, markets cannot operate
Reduce counterparty risk: CCPs protect against defaults that could ripple across the market
Improve efficiency: FMIs streamline transactions, reducing cost and friction
Ensure trust: Participants know trades will be honored and recorded properly
Support financial stability: Prevent payment gridlocks and liquidity freezes during crises

Risks Associated with FMIs

While FMIs reduce many risks, they can also concentrate systemic risk due to their central role.

Risk Type	Description
Operational Risk	System outages, cyberattacks, or human errors disrupting services
Liquidity Risk	One participant’s failure to settle affects others in the network
Credit Risk	Risk that a participant defaults on payment or delivery
Legal Risk	Inadequate legal frameworks in cross-border or multi-jurisdictional FMIs
Systemic Risk	Failure of an FMI can trigger cascading failures across the market

Regulatory and Global Standards

FMIs are subject to strict oversight due to their importance to financial stability. The global standard is the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI), which define 24 key principles FMIs must follow, including:

Governance
Credit and liquidity risk management
Settlement finality
Default procedures
Transparency and disclosure
Cyber resilience

Key regulators and standard-setters:

CPMI (BIS) – Committee on Payments and Market Infrastructures
IOSCO – International Organization of Securities Commissions
FSB – Financial Stability Board
Local regulators – (e.g., SEC, CFTC, ECB, FCA)

Innovations and Future Outlook

Trend	Impact on FMIs
Tokenization of assets	FMIs exploring how to support digital securities and tokenized money
Blockchain and DLT integration	Experiments with distributed ledgers for settlement and clearing (e.g., RLNs, BIS projects)
24/7 Real-time settlement	Pushing traditional FMIs to match crypto market speeds
Cybersecurity and resilience	Increased investments in protection against cyber threats
Cross-border harmonization	Projects like ISO 20022 and BIS initiatives improve interoperability

SWIFT: A messaging network, not an FMI, but essential for cross-border payments
RTGS (Real-Time Gross Settlement): A type of payment system used by central banks
CBDCs (Central Bank Digital Currencies): Could eventually integrate with or function as FMIs
Regulated Liability Networks (RLNs): A next-gen concept that may reshape FMI structures using tokenized money