04 March 2015

Location of Central Counter Parties (CCPs)

Ultimately, this case is about the independence of the ECB in conducting the monetary policy of the euro area – not about politics, the single market or the convenience of commercial operators. So the risk remains of an end-result that could be the worst possible outcome for political relations between the UK and the euro area: the UK may be out-voted by a bloc vote on a subject that it argues is fundamental to the single market applying to all 28 states. However, is there any need to decide before a Brexit referendum?

Background: The ECB is obliged to conduct monetary policy to achieve price stability in the euro area. The staggering scale of derivatives activity means that in a liquidity crisis, money injected into a CCP may have to be withdrawn from banks elsewhere in the system – perhaps with adverse effects on their clients. The systemic significance of CCPs is so great that international standards – now embodied in EMIR for application in the EU – require them to have access to `adequate liquidity’.

In EMIR, this can be provided by central bank money (via the ECB for euro) or commercial banks - though Art 50 provides that “CCPs shall use central bank money where practical and available”. A crisis of the magnitude that would engulf a CCP is likely to involve its member banks and deposits there – money – may suddenly become unavailable if the bank is put into resolution under the new Bank Recovery and Resolution Directive (BRRD). This would be the moment when the ECB might choose to provide vast amounts of liquidity in euro – at the ultimate risk of the taxpayers of the euro area given the potential for actual losses rather than just illiquidity.

The ECB’s Opinion of Jan 2011 on EMIR was explicitly taken into account in enacting the legislation. The Opinion emphasised that central banks are not designed per se to meet the “business needs of market infrastructures” and it is up to the central banks to decide what facilities they offer as the prerogative is “directly linked to monetary policy”.

The ECJ Judgement: The judgement only covered the very narrow point that the ECB has exceeded its current powers in making its location policy. The ECJ was explicit that the ECB could ask the legislature to amend Article 22 of its Statute and add “an explicit reference to securities clearing systems”. (As a political aside, this judgment illustrates that far from being the un-accountable bureaucracy caricatured by Eurosceptics, Union bodies are governed by the rule of law down to the last word of their actions).

What next? The ECB has a right of appeal on a point of law but it would be well advised to tackle this problem head on and seek a change in its Statute if it wishes to pursue this policy. Such a change requires:

• The unanimous agreement of the Governing Council – the Governors of the euro area central banks. It must be assumed that was given at the time of the original decision, so will be maintained


• The agreement of the European Commission. It is likely to be very wary of any action to undermine the independence of ECB at this delicate juncture of the recovery of the euro area economy and financial system, despite possible sympathies with UK’s arguments about maintaining the single market, and the politics of heightening the risk of Brexit


• A Qualified Majority Vote by Council. Again, the euro members would be very wary of undermining the ECB’s independence. What might be next on the list? If the euro area votes en bloc, it has a QMV in a standard QMV vote as its 19 members are more than 55% of the states and 68% of the population, so above the required 65%. (Rather surprisingly and on a first reading of notoriously complex voting rules, it seems as though even `states with a derogation’ (so including the UK) have a vote on this)


• The assent of the European Parliament is also required. There is no reason to expect the Parliament to try to undermine the ECB

A solution between the ECB and BoE? The Bank of England has published a press release noting “The most efficient ultimate source of this backstop liquidity in the event of major market disruption is provided by the network of central bank swap-lines.  This is already the case for a number of major foreign currencies…. The Bank of England recognises that the ECB has an interest in the safety and soundness of UK CCPs who clear significant amounts of euro-denominated contracts.  The Bank and the ECB will continue to seek a coordinated and shared approach for achieving our common objectives of financial stability and the smooth functioning of financial market infrastructures.”

The BoE did not point out that there are no swap lines agreed with the ECB in euros – though the legal arrangements are in place so that swift activation would be possible.  Presumably, they have both been seeking a “co-ordinated and shared approach” since EMIR came over the horizon many years ago. The ECB press release uses the same language but will the ECB suddenly change and concede on something it clearly regards as impinging on the independence of its monetary policy? Alternatively, will the BoE be allowed to share/concede sovereignty on such a crucial part of the City’s infrastructure – edging close to de facto euro membership in return for the massive commercial opportunities from Capital Market Union?

The risk remains of an end-result that could be the worst possible outcome for political relations between the UK and the euro area: the UK may be be out-voted by a bloc vote on a subject that it argues is fundamental to the single market applying to all 28 states. However, is there any need to decide before a Brexit referendum?

Read the full document below with detailed appendices

© Graham Bishop