Market utilities are being told to absorb losses, not just avoid them

Frank Elderson's speech is dated 14 October. On the same day, the Bank for International Settlements issued a media release saying global standard-setting bodies had published a final report on guidance for financial market infrastructures on general business risks and general business losses. The ECB published the speech under the title Ensuring resilience in the face of uncertainty. The BIS release identifies the Bank for International Settlements' Committee on Payments and Market Infrastructures as involved in the final report.

Resilience becomes a balance-sheet question

The two texts arrive separately, but they point at the same operational point. A financial market infrastructure is not only a set of rules for matching, clearing or settling trades. It is also a business with revenue, capital, technology and counterparties. General business risks and general business losses therefore sit close to the institution's own capacity to keep going.

For banks and market utilities, that moves the conversation beyond the familiar question of member default. Default rules ask what happens when a participant fails. Business-loss guidance asks what happens when the utility itself suffers a shock to earnings, capital or continuity. The difference matters because the first can be mutualised among participants, while the second can press directly on the operator's balance sheet and on the supervisors responsible for it.

The ECB's language reinforces that shift. Ensuring resilience in the face of uncertainty is not a phrase about normal markets. It is a phrase about shocks that are hard to specify in advance. When a supervisor uses that framing, the natural follow-through is stress testing, capital adequacy and recovery planning.

The open question is whether the low VIX or the high long yields better describes the risk environment supervisors now expect FMIs to withstand.

The rate backdrop is not quiet

The market numbers attached to this story are not simple background. On 9 October, the 10-year US Treasury yield was 5.24%. The 2-year yield was 4.80%. The effective federal funds rate was 3.88%, and SOFR was 3.87%.

Those figures create wide gaps. The 2-year yield stood 92 basis points above the effective federal funds rate. The 10-year yield stood 136 basis points above the same policy rate and 44 basis points above the 2-year. SOFR was only one basis point below the effective federal funds rate, which is the sort of alignment one expects in money markets.

The longer-dated gaps are the harder part. A 10-year Treasury at 5.24% raises the hurdle for collateral values, funding costs and discount rates across the financial system. For an FMI, that can matter through the quality and liquidity of collateral posted by participants, through the cost of any credit lines, and through the assumptions used in recovery and wind-down planning. A bank holding long-dated debt or providing liquidity to market utilities feels the same arithmetic in its own portfolio.

Then there is the volatility gauge. The VIX closed at 15.21 on 12 October. That is a low number beside a 10-year yield above 5% and a 2-year yield nearly a full percentage point above the policy rate. The data also come from different dates: the Treasury and policy-rate figures are from 9 October, while the VIX close is from 12 October. That does not resolve the tension. It makes the reader ask which signal is doing the work: the calm in equity volatility, or the demand for compensation in longer-dated government debt.

The figures invite skepticism. A low volatility reading beside high long-dated yields can mean that one market is calm, that the dates matter, or that the signals are not being read from the same risk environment. The figures themselves do not resolve that.

The loss-absorption question becomes explicit

The practical consequence is that supervisors now have a final global reference point for asking how FMIs absorb general business losses. The guidance is aimed at FMIs, but banks are not bystanders. They are members, liquidity providers, custodians and sometimes owners of market utilities. If utilities need more capital, clearer recovery tools or stronger controls against business losses, banks will meet those changes in pricing, documentation and collateral demands.

The sequence also matters. Standard-setting reports do not become law on the day they are published. They become expectations through national rulemaking, supervision and examination. But once global bodies issue final guidance, supervisors can point to it when asking how an institution would survive a business shock rather than a member default alone.

The open question is whether the low VIX or the high long yields better describes the risk environment supervisors now expect FMIs to withstand.