INNOVATION IN THE RELATIONSHIPS BETWEEN CENTRAL BANKS AND CENTRAL COUNTERPARTIES

The following information was released by the Federal Reserve Bank of Dallas:

Sam Schulhofer-Wohl

Remarks delivered by Sam Schulhofer-Wohl at the Federal Reserve Bank of Chicago Financial Markets Group Fall Conference.

Thank you to Cindy [Hull] and the Federal Reserve Bank of Chicago's Financial Markets Group (FMG) for the opportunity to speak today. FMG and this conference have a special place in my heart. It's great to be back here and to see so many distinguished colleagues from around the world.

These are my views and not necessarily those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Central counterparties (CCPs) make markets safer and more efficient by stepping between counterparties to transactions, serving as buyer to every seller and seller to every buyer, and guaranteeing that the transactions will be completed. To fulfill that guarantee, CCPs must mitigate the many risks that could cause a transaction to fail: the credit risk that a participant defaults, the market risk that prices move adversely, the liquidity risk that cash is not available at the required instant, and the operational risk that some necessary element of a tradelike a physical commodity or a securityis not present at the required time and place.

The methods CCPs employ to mitigate these risks are diverse. However, at an extremely high levellet's call it 500,000 feet, near where low Earth orbit beginsI think of CCPs as transforming most risks into liquidity risk. For example, CCPs mitigate credit and market risk through frequent collection and payment of margin, but those margin calls require liquidity from the CCP and its participants. So, CCPs must manage the resulting concentrated liquidity risk extremely carefully.

CCPs also employ multilateral netting to cancel out offsetting transactions. Netting reduces the risk that one failed transaction can ripple across the market. It also makes the market more efficient by greatly decreasing the total amount of cash and collateral that must change hands.

CCPs' role in guaranteeing transactions as well as their method of fulfilling the guarantee by concentrating liquidity risks bring CCPs into close contact with central banks. As innovations in trading and settlement change CCPs' operations, their interactions with central banks may also need to change.

Central banks interact with CCPs in three primary capacities. In order from most generic to most specific to central banking, these roles are: as market participants, as issuers of money and payment system operators, and as lenders of last resort.[1] Innovation has the potential to affect all these roles. I would particularly highlight two effects of innovation. First, by changing how market participants use CCPs, innovation can change which CCPs a central bank needs to interact with. Second, by accelerating the pace of market activity, innovation can change how quickly a central bank needs to interact with CCPs.

As market participants

To implement monetary policy, central banks engage in market transactions such as purchases, sales and repurchase agreements (repos) for government securities. Like other market participants, central banks want these transactions to be safe and efficient and may find, depending on the market, that clearing through a CCP helps achieve those goals. For example, six central banks, most recently the European Central Bank (ECB), have joined Eurex's centrally-cleared repo market; this fall, the Bank of Canada announced its intention to clear repos through the Canadian Derivatives Clearing Corporation.[2]

Although central banks share with private-sector market participants the goals of safety and efficiency, the reasons centrally clearing transactions can help achieve those goals are somewhat different for a central bank than for the private sector.

When a central bank clears through a CCP, the central bank does not simply mitigate risk on its own transactions. The central bank also sets a tone that can encourage other participants to centrally clear, reducing risk marketwide. And for a central bank, the efficiency benefit of multilateral netting does not consist primarily in reducing the amount of cash and collateral the central bank must move for its own transactions. Rather, because a CCP will typically net a participant's transactions with the central bank against that participant's transactions with the broader market, central clearing can reduce the balance sheet cost for the central bank's counterparties of intermediating funding to the broader market. When the central bank's counterparties can intermediate at lower cost, the central bank's operations can be more impactful.

One major current innovation in trading and settlement in the United States is the Securities and Exchange Commission (SEC) mandate for central clearing in Treasury markets. For covered transactions, the mandate takes effect in the cash market at the end of 2026 and in the repo market in mid-2027. Central banks are exempt from the mandate but may centrally clear their Treasury transactions on a voluntary basis. Federal Reserve officials and staff have noted the potential benefits of centrally clearing the Fed's open market operations both to support this innovation and to help funding from Fed operations flow more efficiently through the Fed's counterparties to the broader market.[3]

As issuers of money and payment system operators

Just as central banks may employ the services of CCPs, CCPs may employ the services of central banks. The "Principles for financial market infrastructures" (PFMI), the international standard for regulation of CCPs and other market infrastructure, call for these firms to settle in central bank money when possible.[4] The reason is that central bank money is the safest and most liquid asset in the respective central bank's financial system. It eliminates credit and liquidity risk. Accordingly, settling in central bank money supports CCPs' risk management and can strengthen their ability to fulfill their guarantees to the market.

CCPs' ability to settle in central bank money depends both on whether they have access to the central bank and on the ease of use of central bank money if they do have access. Innovations in trading and settlement could motivate adjustment on both dimensions.

Legal frameworks for CCP access to central bank money vary internationally. In the United States, a CCP can obtain an account at a Federal Reserve Bank and settle in central bank money only if the Financial Stability Oversight Council designates the CCP as a systemically important financial market utility (SIFMU), also known as a designated financial market utility (DFMU). There are eight SIFMUs, all designated in 2012 in the aftermath of the Global Financial Crisis (GFC).[5] Yet innovation has notably reshaped the financial system since then, with the emergence of new instruments such as cryptocurrencies and prediction market contracts, as well as the launch of new CCPs in existing markets.

Another ongoing innovation in financial markets, and indeed the entire economy, is speed. Trading now takes place around the clock, at night and on weekends, reacting to the latest news from around the world. When information travels faster, prices move faster, and risks can rise. Market participants also increasingly trade instruments such as zero-day-to-expiry options whose very goal is to compress the time between placing a trade and realizing the gain or loss. All this acceleration generates risks that CCPs must manage. Conceptually, one way they can do so is to collect margin more frequently, which is easiest when the payment system is open for business. In the United States, the Fedwire Funds service currently operates 22 hours per day, Monday through Friday. The Federal Reserve Board last year announced its intention to add operations on Sundays and weekday holidays by 2028 or 2029.[6] The Board added that it would "monitor industry demand and stand ready to offer an additional expansion" to seven-day-a-week operations in the future.

As lenders of last resort

My former FMG colleagues David Marshall and Robert Steigerwald observed in their seminal paper on "time-critical liquidity" that when CCPs need liquidity, they can need it very fast, potentially in a matter of minutes.[7] The reason liquidity is so time-critical at CCPs goes back to the high-level risk-management approach I began with: CCPs convert most risks into liquidity risk. If a participant defaults, obtaining liquidity in a timely manner can allow a solvent CCP to meet its obligations and continue serving the market, while even a brief delay in obtaining liquidity may produce a more serious crisis.

The first responsibility for managing liquidity risk lies with CCPs themselves. However, markets can experience liquidity stress beyond the capacity of the private sector to manage on its own. One classic role of central banks is to serve as lenders of last resort, providing liquidity to stressed firms or markets when the private sector cannot. Innovations in trading and settlement can change the landscape of potential liquidity stresses by increasing liquidity risks at existing firms or bringing new firms to prominence.

The global effort after the GFC to centrally clear more transactions provides an example. Clearing mandates were an important innovation to make markets safer. At the same time, as I have discussed, greater use of central clearing concentrates more liquidity risk at CCPs.

Central banks' approaches to and authorities for providing liquidity to CCPs vary across jurisdictions. At the Bank of England, central counterparties are eligible for access to the operational standing facilities and discount window facility on the same terms as banks and broker dealers, but CCPs are not eligible for repo operations. The ECB has a distinct overnight credit facility for CCPs.[8] In the United States, the Dodd-Frank Act allows the Federal Reserve Board to authorize a Reserve Bank to lend to a DFMU "only in unusual or exigent circumstances, upon the affirmative vote of the majority of the Board of Governors ... after consultation with the Secretary [of the Treasury], and upon a showing by the [DFMU] that it is unable to secure adequate credit accommodations from other banking institutions."[9]

Because CCPs' liquidity needs can arise very rapidly and with short deadlines, it is helpful for CCPs and their contingent liquidity sources to be operationally prepared in advance to move liquidity when needed. Last year, the ECB converted its CCP credit facility to a permanent and constantly available standing tool. Previously, the facility had been a discretionary tool that required the ECB Governing Council's authorization to activate in each instance. The ECB said the change to a standing tool would ensure the facility would be "immediately available to eligible euro area CCPs if needed."[10] In other contexts, policymakers have encouraged banks to develop operational readiness for discount window borrowing by conducting test transactions.[11] The accelerating speed of markets and the development of new asset classes and institutions may affect both CCPs' need for liquidity and their readiness to access it.

Importantly, the central bank's role as lender of last resort is distinct from its role as a market participant conducting trades to implement monetary policy. CCP rulebooks sometimes require clearing members to provide liquidity to the CCP in stress scenarios.[12] If a central bank became subject to these requirements because it chose to clear its market transactions through a CCP, the roles would be blurred. One innovation that could conceivably solve this problem would be a distinct CCP membership type for the central bank, not subject to the liquidity requirements. Such a distinction would allow the central bank to maintain control of its lending decisions while still clearing trades as a market participant.

Conclusion

The interaction between central banks and CCPs is critical to the functioning and stability of the financial system. In their role as market participants, central banks may use CCPs' services to implement policy. In their role as issuers of money and operators of payments systems, central banks provide services that CCPs may rely on to manage liquidity risk. And, as CCPs transform many risks into time-critical liquidity risk, central banks in their role as lenders of last resort provide the final backstop against severe liquidity stress in financial markets.

All of this has been true for as long as there have been central banks and CCPs, but innovations in markets call for considering whether old ways of interacting remain fit for purpose or whether new ways could better serve the economy and the public going forward. I am sure Tim [Cuddihy] has great ideas on what those new ways might be, and I look forward to hearing them.

Thank you again for the opportunity to speak today.

Notes

I thank Federal Reserve System colleagues for helpful comments.

In some jurisdictions, central banks also regulate and supervise CCPs. Regulators and supervisors will need to consider how to respond to innovation. However, these considerations are not core to central banking, so I will set them aside in the interest of time.

Eurex, "European Central Bank to join Eurex Repo market," Nov. 6, 2025; Toni Gravelle, "Repo markets and monetary policy implementation," remarks at the Bloomberg Canadian Finance Conference, New York, Sept. 29, 2026.

Roberto Perli, "Repo Market Structure and Monetary Policy Implementation," remarks at The Future of Market Liquidity and Functioning Workshop, Federal Reserve Bank of New York, July 9, 2026; Lorie Logan, "Opening remarks for 'Market Liquidity and Leverage in a Digital Age' panel," remarks at The Future of Market Liquidity and Functioning Workshop, Federal Reserve Bank of New York, July 9, 2026; Beth M. Hammack, "The Federal Reserve's Balance Sheet: Some Major League Questions," remarks at the Money Marketeers of New York University, Inc., New York, April 23, 2025.

Bank for International Settlements Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions, "Principles for financial market infrastructures," April 2012, principle 9.

U.S. Department of the Treasury, "Financial Stability Oversight Council Makes First Designations in Effort to Protect Against Future Financial Crises," July 18, 2012.

Board of Governors of the Federal Reserve System, "Federal Reserve Action to Expand Fedwirer Funds Service and National Settlement Service Operating Hours," Federal Register 90(219), 51356-51368.

David Marshall and Robert Steigerwald, 2013, "The role of time-critical liquidity in financial markets," Federal Reserve Bank of Chicago Economic Perspectives 37(2), 30-46.

Governing Council of the European Central Bank, "Guideline (EU) 2025/1889 of European Central Bank of 31 July 2025 amending Guideline (EU) 2022/912 on a new-generation Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET) (ECB/2022/8) (ECB/2025/28)."

12 USC 5465(b).

European Central Bank, "ECB introduces changes to the dedicated credit facility for euro area CCPs," April 30, 2025.

Lorie Logan, "Remarks on liquidity provision and on the economic outlook and monetary policy," remarks to the Texas Bankers Association, San Antonio, May 18, 2023.

Examples include the Fixed Income Clearing Corp.'s Capped Contingency Liquidity Facility (Fixed Income Clearing Corp., "Government Securities Division Rulebook," Aug. 26, 2026, Rule 22A, section 2a) and the Chicago Mercantile Exchange rules on liquidity events (Chicago Mercantile Exchange, "CME Rulebook: Chapter 8: Clearing House and Performance Bonds," rule 822).

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About the speaker

Sam Schulhofer-Wohl is senior vice president and senior advisor to the president of the Federal Reserve Bank of Dallas.

The views expressed are those of the speaker and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.