Near real-time monitoring in real-time gross settlement systems: A traffic light approach

This paper develops a method to identify quantitative risks in financial market infrastructures (FMIs) that is inspired by the Principles for Financial Market Infrastructures. We convert transaction-level data into indicators that provide information on operational risk, concentration risk and liquidity dependencies. As a proof of concept we use TARGET2 data. The indicators are based on legislation, guidelines and their own history. Indicators that are based on their own history are corrected for cyclical patterns. Our method includes setting up the signaling threshold of relevant changes. For the signaling, we opt for a traffic light approach: a green light, an amber light or a red light for a small, moderate or substantial change in the indicator, respectively. The indicators developed in this paper can be used by overseers/regulators, by the operators of FMIs and by financial stability experts.