ESMA: CCPs are next
27 November 2014 Brussels
Image: Shutterstock
European Securities and Markets Authority (ESMA) chief Steven Maijoor has waded into the debate over the chances of a central counterparty (CCP) failing, calling an appropriate recovery and resolution framework the next regulatory challenge.
Addressing attendees of a Chartered Financial Analyst Institute event in Brussels focusing on regulatory measures to prevent another crisis, Maijoor acknowledged that while a CCP failure has a “very low probability”, the possibility “cannot be fully excluded” because “it would have quite severe consequences for the market”.
“While it is difficult to compare CCPs with banks, as their business models are fundamentally different, it is clear that the systemic impact of a failure of a large CCP would equal, or even exceed, the systemic impact of the failure of a large international bank.”
“Defining an appropriate recovery and resolution framework for CCPs is now the main forthcoming regulatory challenge. Proposals are currently being prepared at the global and EU level.”
He said that several key questions remain unanswered, most notably clarifying when recovery and resolution should be triggered, the tools to be used in each situation, and the nature of the resolution authority.
“It is of utmost important that we speed up the process of having a recovery and resolution framework in place as soon as possible. With the move towards central clearing, CCPs are becoming more and more systemically relevant. Not having the recovery and resolution framework in place now is like letting ships leave for their maiden trips without any lifeboats on board.”
US regulators have aired similar concerns, with Jerome Powell, governor of the Federal Reserve, commenting in early November on the possible consequences of CCP members failing.
Powell said: “The failure of a large clearing member that is also a key service provider could disrupt the smooth and efficient operation of one or multiple CCPs, and vice versa.”
“In the event of disorderly CCP failures, the netting benefits and other efficiencies that CCPs offer would be lost at a point when the financial system is already under significant stress. Ultimately, the system as a whole is only as strong as its weakest link.”
Maijoor also reaffirmed his support of the EU’s proposal to require securities finance transactions to be reported to trade repositories, saying that further progress on passing information to regulators is needed.
“These transactions, like repos and securities lending, very much increase the interconnectedness within asset management and with other parts of the financial system. I therefore very much support the European Commission proposal regarding the reporting of these transactions to trade repositories.”
The proposal would require all counterparties doing business within the EU to report to trade repositories.
All UCITS and alternative investment funds would also have to disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation could also change.
Under the proposal, counterparties would have to ask the permission of the giver before putting any collateral received to work. This would apply to any instruments as defined by the Markets in Financial Instruments Directive.
Addressing attendees of a Chartered Financial Analyst Institute event in Brussels focusing on regulatory measures to prevent another crisis, Maijoor acknowledged that while a CCP failure has a “very low probability”, the possibility “cannot be fully excluded” because “it would have quite severe consequences for the market”.
“While it is difficult to compare CCPs with banks, as their business models are fundamentally different, it is clear that the systemic impact of a failure of a large CCP would equal, or even exceed, the systemic impact of the failure of a large international bank.”
“Defining an appropriate recovery and resolution framework for CCPs is now the main forthcoming regulatory challenge. Proposals are currently being prepared at the global and EU level.”
He said that several key questions remain unanswered, most notably clarifying when recovery and resolution should be triggered, the tools to be used in each situation, and the nature of the resolution authority.
“It is of utmost important that we speed up the process of having a recovery and resolution framework in place as soon as possible. With the move towards central clearing, CCPs are becoming more and more systemically relevant. Not having the recovery and resolution framework in place now is like letting ships leave for their maiden trips without any lifeboats on board.”
US regulators have aired similar concerns, with Jerome Powell, governor of the Federal Reserve, commenting in early November on the possible consequences of CCP members failing.
Powell said: “The failure of a large clearing member that is also a key service provider could disrupt the smooth and efficient operation of one or multiple CCPs, and vice versa.”
“In the event of disorderly CCP failures, the netting benefits and other efficiencies that CCPs offer would be lost at a point when the financial system is already under significant stress. Ultimately, the system as a whole is only as strong as its weakest link.”
Maijoor also reaffirmed his support of the EU’s proposal to require securities finance transactions to be reported to trade repositories, saying that further progress on passing information to regulators is needed.
“These transactions, like repos and securities lending, very much increase the interconnectedness within asset management and with other parts of the financial system. I therefore very much support the European Commission proposal regarding the reporting of these transactions to trade repositories.”
The proposal would require all counterparties doing business within the EU to report to trade repositories.
All UCITS and alternative investment funds would also have to disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation could also change.
Under the proposal, counterparties would have to ask the permission of the giver before putting any collateral received to work. This would apply to any instruments as defined by the Markets in Financial Instruments Directive.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
