Financial Market Infrastructure – The Essential Role of Risk Management


Since the 2008 global financial crisis, policymakers have invested in reforming the market to build more effective risk management mechanisms. A perfect example of regulatory interest in risk management was the reform of the over-the-counter (OTC) derivatives markets. In pursuit of resiliency and efficiency, policymakers required the use of financial market infrastructures (FMIs) as specialized risk managers. FMIs are the multilateral systems that allow financial transactions to occur. As such, they play a critical role in each segment of risk management. For example -- to manage systemic risk -- policymakers mandated that FMIs act as market-wide risk managers. Organizational risk mitigation using FMIs includes enhanced rules and requirements to reduce conflicts of interest and agency costs. This has been achieved through corporate governance rules, risk management mechanisms, internal audits, and compliance systems. Transactional risk management by means of FMIs has included shoring up capital and financial defenses and supporting firms’ resilience.

Market risk management can be categorized into three distinct segments: systemic risk management, organizational risk management, and transactional risk management. International and domestic policymakers have acted in all three segments of risk management. This chapter delves into the risk management policies implemented in the aftermath of the 2008 financial crisis, with a particular focus on the systemic role of FMIs and their risk management toolkit. It discusses FMIs’ economics and business; analyzes their regulatory architecture; and examines their role in an international policy context. Finally, it concludes with an evaluation of the political economy of regulating risk management and a critical assessment of such regulation.