By settling payments finally and irrevocably, the SIC system provides confidence in the reliability and safety of the Swiss payment infrastructure. With the pace of innovation in the payments arena increasing due to digitalisation, retail transactions are now attracting more attention among central banks. Settling both lowvalue but high-volume retail payments and large-value interbank payments on the same platform is a unique feature of the Swiss system, which has proven effective over the years. From a financial stability perspective, the focus has long been on the safety of large interbank payments, as they make up about 90% of daily turnover in the SIC system. Retail payments, which already account for more than 95% of transactions in the SIC system, are expected to rise further, however. In addition, the emergence of peer-to-peer retail payment initiatives that cut out intermediary payment service providers, such as banks, have the potential to fundamentally change the payments landscape. This is also true for central bank digital currencies, which many central banks are exploring. The SNB has always supported innovation in the payments system. For the Swiss payments infrastructure to remain attractive and reliable over time, it must continuously be enhanced and refined – without compromising on security. The SNB has therefore constantly modernised the SIC system to ensure that it remains technologically state-of-the-art. More recently, the SNB has also broadened access to the SIC system to include licensed fintech companies. This will allow innovative firms to provide new payment technologies efficiently and securely.
At the SNB, we are aware of these benefits and have been using FX EAs for our reserve management. In our view, EAs can be useful execution tools in order to reduce market impact and help minimise our footprint in the FX market. But the increased use of execution algorithms may also change the dynamics of FX markets. EAs make it easier to shift trading activity away from public trading venues to proprietary platforms. And this so-called ‘internalisation’ of FX trading creates new challenges. Too many internalised trades could reduce the trading volume at primary venues to a point where the price discovery process is jeopardised. More research is needed to ascertain whether – and to what extent – the growing use of EAs could trigger or amplify flash events in the markets. These changes complicate market monitoring for central banks, which need to be alert to market dislocation, liquidity issues and volatility – as the market turmoil in March last year once again illustrated. To guard against risks arising from these changing dynamics, central banks must step up their efforts to monitor and analyse these markets. This is no small feat. Besides developing new market functioning indicators, it involves accessing a whole new generation of data – possibly at sub-millisecond frequency. For this, we need to set up a new data architecture, new tools and new expertise. In order to address such challenges the SNB and the BIS Innovation Hub’s Swiss Centre have launched a big data project called ‘Project Rio’.