557 - Risk indicators for financial market infrastructure: from high frequency transaction data to a traffic light signal

DNB Working Papers
Date 9 June 2017
This paper identifies quantitative risks in financial market infrastructures (FMIs), which are inspired by the Principles for Financial Market Infrastructures. We convert transaction level data into indicators that provide information on operational risk, changes in the network structure and interdependencies.  As a proof of concept we use TARGET2 level 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. We also define a method for setting the signaling threshold of relevant changes. For the signaling, we opt for a traffic light approach: a green, yellow or red light for a small, moderate or substantial change in the indicator, respectively. The indicators developed in this paper can be used by overseers and operators of FMIs and by financial stability experts.
Keywords: risk indicator, central bank, granular data, TARGET2, oversight, financial stability, forecasting.
JEL classifications: E42, E50, E58, E59.