Liquidity risk in securities settlement

This paper studies the potential impact on securities settlement systems (SSSs) of a major market disruption, caused by the default of the largest player. A multiperiod, multisecurity model with intraday credit is used to simulate direct and second-round settlement failures triggered by the default, as well as the dynamics of settlement failures, arising from a lag in settlement relative to the date of trades. The effects of the defaulter's net trade position, the numbers of securities and participants in the market, and participants' trading behavior are also analyzed. We show that in SSSs - contrary to payment systems - large and persistent settlement failures are possible even when ample liquidity is provided. Central bank liquidity support to SSSs thus cannot eliminate settlement failures due to major market disruptions. This is due to the fact that securities transactions involve a cash leg and a securities leg, and liquidity can affect only the cash side of a transaction. Whereas a broad program of securities borrowing and lending might help, it is precisely during periods of market disruption that participants will be least willing to lend securities. Settlement failures can continue to occur beyond the period corresponding to the lag in settlement. This is due to the fact that, upon observation of a default, market participants must form expectations about the impact of the default, and these expectations affect current trading behavior. If, ex post, fewer of the previous trades settle than expected, new settlement failures will occur. This result has interesting implications for financial stability. On the one hand, conservative reactions by market participants to a default - for example by limiting the volume of trades - can result in a more rapid return of the settlement system to a normal level of efficiency. On the other hand, limitation of trading by market participants can reduce market liquidity, which may have a negative impact on financial stability.Securities settlement, liquity risk, contagion

Modular, Fully-abstract Compilation by Approximate Back-translation

A compiler is fully-abstract if the compilation from source language programs to target language programs reflects and preserves behavioural equivalence. Such compilers have important security benefits, as they limit the power of an attacker interacting with the program in the target language to that of an attacker interacting with the program in the source language. Proving compiler full-abstraction is, however, rather complicated. A common proof technique is based on the back-translation of target-level program contexts to behaviourally-equivalent source-level contexts. However, constructing such a back- translation is problematic when the source language is not strong enough to embed an encoding of the target language. For instance, when compiling from STLC to ULC, the lack of recursive types in the former prevents such a back-translation. We propose a general and elegant solution for this problem. The key insight is that it suffices to construct an approximate back-translation. The approximation is only accurate up to a certain number of steps and conservative beyond that, in the sense that the context generated by the back-translation may diverge when the original would not, but not vice versa. Based on this insight, we describe a general technique for proving compiler full-abstraction and demonstrate it on a compiler from STLC to ULC. The proof uses asymmetric cross-language logical relations and makes innovative use of step-indexing to express the relation between a context and its approximate back-translation. The proof extends easily to common compiler patterns such as modular compilation and it, to the best of our knowledge, it is the first compiler full abstraction proof to have been fully mechanised in Coq. We believe this proof technique can scale to challenging settings and enable simpler, more scalable proofs of compiler full-abstraction

Techno-economic analysis of residential thermal flexibility for demand side management

The continuing rise in solar and wind production leads to an increasing demand of flexibility to stabilize the electricity grid. Furthermore, we can assume a gradual but intensive rise in the use of electrical heatpumps for household spatial heating, for different reasons. Therefore, this paper investigates the feasibility and viability of entering the flexibility market by aggregating residential thermal loads. For this research, a dataset of 200 dwellings in the Netherlands, equipped with a heatpump and smart metering infrastructure, is analysed. By means of a greybox modeling approach, a thermal model and control framework have been set up for every house, in order to identify the load shift potential and the accompanying cost of providing flexibility for the houses. We find that thermal flexibility is asymmetric: downwards flexibility is, apart from much more dependent on outdoor temperature than upwards flexibility, strictly lower than upwards flexibility. The cost for downwards flexibility is strictly negative in terms of the prosumer. Concerning upwards flexibility, the cost is most of the time positive. Moreover, it can be concluded that there is a potentially viable business case for the flexibility aggregator