Report of the Committee on Interbank Netting Schemes of the central banks of the Group of Ten countries (Lamfalussy Report)

November 1990

Introduction

In February 1989 the Report on Netting Schemes prepared by the Group of Experts on Payment Systems of the central banks of the Group of Ten countries (the Angell Report) was published by the BIS. At that time the G-10 Governors agreed to establish a high-level, ad hoc committee to analyse further the policy implications of cross-border and multi-currency netting arrangements identified by the Angell Report as being of particular concern to central banks collectively. Promoters of interbank netting schemes had been requesting the views of central banks individually on projects which appeared to have implications for a number of countries and it was hoped that the collective consideration of the issues raised by these schemes might provide a basis for common responses by the G-10 central banks. This Report contains the analysis of netting conducted by the Committee on Interbank Netting Schemes together with the Committee's policy recommendations.

The Angell Report presented an analysis of the credit and liquidity risks experienced by participants in bilateral and multilateral netting arrangements for both interbank payment orders and forward-value contractual commitments, such as foreign exchange contracts. The Report also identified a number of broader policy issues. These included the effects of netting on the integrity of interbank settlement arrangements, on the conduct of monetary policy, and on trading behaviour in interbank markets. Particular concern was expressed for the complications posed for the allocation of supervisory responsibilities and the effective oversight of cross-border netting systems.

The Committee's work has confirmed the general analysis of the credit and liquidity risks associated with netting schemes that is contained in the Angell Report as well as the main policy concerns for central banks which the Report identified. In general terms, the Committee has recognised various advantages that netting can have in terms of improving both the efficiency and the stability of interbank settlements, by reducing costs and risks, provided that certain conditions are met. However, the relative lack of experience with different types of netting arrangements - particularly proposed systems for multilateral netting of foreign exchange contracts - has made it difficult for the Committee to analyse all of their likely consequences. Nevertheless, the Committee has concluded that the shared policy objectives of central banks do provide a sufficient basis for common policy responses to the development of cross-border and multi-currency netting systems.

The Committee's analysis and policy recommendations are summarised in this Part A of the Report. Part B describes the policy objectives that central banks have in common with respect to these netting systems, presents the Committee's analysis of the impact of netting on credit and liquidity risks and on the level of systemic risk and describes the broader implications of netting arrangements for central banks and supervisory authorities. Part C presents the Committee's recommended minimum standards for the design and operation of cross-border and multi-currency netting and settlement schemes. Part D presents principles for cooperative central bank oversight of these schemes. A list of the members of the Committee is contained in an annex.