23 September 2015

ECB: Standards for the use of central counterparties in Eurosystem foreign reserve management operations

In accordance with Article 3 of the Statute of the European System of Central Banks and of the European Central Bank, one of the tasks entrusted to the European System of Central Banks (ESCB) and the European Central Bank (ECB) is the holding and management of the official foreign reserves of the Member States of the European Union. In the Eurosystem, both the ECB and the national central banks (NCBs) of the euro area hold and manage foreign reserves.

The ECB and Eurosystem NCBs 1 invest in a variety of financial instruments in the context of their foreign reserve management, including certain over-the-counter (OTC) derivatives and, in particular, interest rate swaps (IRSs) denominated in foreign currencies. This market is moving over to central counterparty (CCP) clearing as a consequence of legislative initiatives undertaken recently in various jurisdictions around the world in line with the G20 statement calling for all trading in standardised OTC derivatives to be cleared through a CCP by the end of 2012.

The Eurosystem2 is preparing to potentially use CCPs for IRSs traded in the context of foreign reserve operations. This potential use of CCPs by the Eurosystem stems from possible regulatory requirements relating to counterparties in the jurisdictions in which the Eurosystem trades IRSs. Given their specific legal status and the public function they perform, central banks may be exempted from mandatory clearing. Nevertheless, central banks may also voluntarily decide to make use of CCP services – e.g. in order to benefit from liquidity efficiency where trading is concentrated in market segments served by CCPs, or as further support for the policy objectives pursued as regards systemic risk by moving OTC derivatives over to centralised clearing. In addition, any regulatory requirement could have an extra-jurisdictional effect – i.e. it could also apply to counterparties in another country.

In view of the potential use of CCPs for clearing IRSs denominated in foreign currencies, the Governing Council of the ECB has established standards governing the use of a CCP – whether directly as a direct clearing member of a CCP or indirectly by using a general clearing member of a CCP. These standards will ensure that the selection of providers of clearing services meets two objectives: (i) ensuring safe and efficient use of infrastructure by the Eurosystem; and (ii) ensuring neutrality vis-à-vis the clearing industry. Assessment against these standards is organised in such a way as to ensure that the information required by the Eurosystem is obtained in an efficient manner.

The Eurosystem will use only duly overseen and supervised CCPs. Thus, the following standards are not intended to cover aspects of the oversight or supervision of CCPs, for which standards already apply. These “user standards” are regarded as an addendum to those existing standards and seek to limit the risks to which the Eurosystem is exposed when IRSs denominated in foreign currencies are cleared via a CCP.

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