BofE wards off 'private interest' CCPs
12 June 2013 London
Image: Shutterstock
The Bank of England has released a new article on central counterparties (CCPs) in light of its new responsibilities for the supervision of securities settlement systems and CCPs in the UK.
The article, entitled Central Counterparties: What Are They, Why Do They Matter and How Does the Bank Supervise Them?, sets out in simple terms the role that CCPs play in the financial system.
The systemic importance of CCPs will increase further, added the central bank in its article, after G20 leaders mandated in September 2009—in response to the financial crisis—that standardised OTC derivatives should be cleared through CCPs.
“Compared to a world of bilateral trades, a key benefit of central clearing is that it simplifies the network of exposures across different trading parties … as supervisor of these infrastructures, the bank seeks to ensure that they are managed and operated effectively to support its financial stability objective.”
The central bank added that, if CCPs are operated only in the private interests of their managers, owners, or even their members, they may underinvest in the mitigation of risks to the wider system.
“The bank’s role as supervisor is to ensure that these infrastructures are managed in a way that is consistent with the public interest, which includes reducing systemic risk. The bank’s aim is to establish a framework that creates incentives for the operators of CCPs and other financial market infrastructures (FMIs) to manage and mitigate systemic risk.”
The full article can be read on the central bank's website.
The article, entitled Central Counterparties: What Are They, Why Do They Matter and How Does the Bank Supervise Them?, sets out in simple terms the role that CCPs play in the financial system.
The systemic importance of CCPs will increase further, added the central bank in its article, after G20 leaders mandated in September 2009—in response to the financial crisis—that standardised OTC derivatives should be cleared through CCPs.
“Compared to a world of bilateral trades, a key benefit of central clearing is that it simplifies the network of exposures across different trading parties … as supervisor of these infrastructures, the bank seeks to ensure that they are managed and operated effectively to support its financial stability objective.”
The central bank added that, if CCPs are operated only in the private interests of their managers, owners, or even their members, they may underinvest in the mitigation of risks to the wider system.
“The bank’s role as supervisor is to ensure that these infrastructures are managed in a way that is consistent with the public interest, which includes reducing systemic risk. The bank’s aim is to establish a framework that creates incentives for the operators of CCPs and other financial market infrastructures (FMIs) to manage and mitigate systemic risk.”
The full article can be read on the central bank's website.
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