25 October 2008

ESCB and CESR consult on clearing and settlement systems and central counterparties

The consultation paper contains numerous recommendations which deal with Central Securities Depositaries and Central Counterparties. The recommendations should promote pan-European post trading arrangements and limit systemic risk.

The ESCB and CESR consult on their draft recommendations for securities clearing and settlement systems and draft recommendations for central counterparties in the European Union. The recommendations should promote pan-European post trading arrangements and limit systemic risk.

 

The Consultation Paper contains 19 recommendations which deal with Central Securities Depositaries (CSDs). Currently the regulation of the CSDs is not harmonised in Europe. In some countries CSDs are allowed or required to hold a banking licence and therefore may also be allowed to extend credit for their participants within the scope of the banking rules which are harmonised at European level. In other countries they are prevented from undertaking any credit activity. In a third group of countries CSDs may provide credit only when the credit extensions are fully collateralised.

 

In the absence of any EU regulation in this field the ESCB-CESR working group was not able to go beyond the original CPSS-IOSCO Recommendation and decided to follow the invitation of the ECOFIN Council to introduce the original CPSS-IOSCO Recommendation 9 on risk controls in the set of ESCB/CESR recommendations.

 

 

The Consultation Paper also contains 15 recommendations regarding Central Counterparties (CCPs), which aim to increase the safety, soundness and efficiency of securities clearing and settlement systems and CCPs, respectively.

 

Currently the regulation of CCPs is not harmonised in Europe. Market participants in such exchanges cannot effectively manage their counterparty credit and liquidity risks with other participants. The mandatory use of a CCP makes such bilateral risk management unnecessary because the CCP is the counterparty to every trade. In OTC markets in which CCP services have been introduced, the use of such services is typically optional. Counterparties may agree to submit their trades to a CCP, thereby substituting the CCP as counterparty, or they may agree not to do so, in which case they must manage their counterparty risks with each other. Whether it serves an exchange or OTC markets, a CCP typically concentrates risks and risk management responsibilities. Even where the use of a CCP is optional, its services are often used intensively by the largest market participants.

 

The Group has also considered whether the Recommendations and the assessment methodology should be applied to other institutional arrangements that perform similar yet distinct functions to those of a CCP: guarantee arrangements and clearing intermediaries.

 

The ESCB and the CESR welcome contributions from all interested parties, be they clearing and settlement service providers, intermediaries, banks, investment services firms, issuers, institutional investors or industry and trade associations, and especially from retail investors and their organisations.

 

ESCB and CESR will organise an open hearing on 9 December 2008 in the CESR office in Paris.

 

Deadline for comments is 23 January 2009.

 

Press release

Consultation paper

 

© ECB - European Central Bank