The systemic effects of central clearing are numerous and, although the overall balance is undoubtedly positive, some of them are ambiguous and should be addressed carefully.
On the one hand, mandatory clearing reduces systemic risk very significantly as it leads to
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the collateralisation of trades that might have remained uncollateralised otherwise,
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enhances risk management by means of sophisticated margining methods,
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allows for mutualisation of risk, which promotes the resilience of the financial system, especially in the event of catastrophic scenarios,
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offers multilateral netting so that less collateral is needed to manage risks, and facilitates risk management as it helps to overcome information asymmetries that participants in non-centrally cleared markets face.
On the other hand, some consequences of central clearing may increase systemic risk:
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as a result of growing risk concentration in CCPs and in a limited number of large global dealers, which act as general clearing members as a gateway for other financial institutions to CCPs,
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as a consequence of mutualisation, risks may spread among participants and markets more widely and the distribution of losses is more difficult to predict,
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in order to avoid mandatory clearing, we might see migration of risk outside of the regulated universe through the artificial creation of bespoke (and hence risky) products that are not suitable for central clearing.
Moreover, the systemic effect of clearing depends on whether risk is redistributed to those who are more able to deal with it, which is difficult to determine. Finally, the overall systemic effect depends on the incentives for risk-taking and central clearing that accompany risk redistribution.
To promote central clearing and avoid regulatory arbitrage, a number of reforms have been adopted including: (i) mandatory clearing, (ii) margin requirements for non-centrally cleared trades, and (iii) higher capital requirements for non-centrally cleared trades. This highlights the crucial complementarity between the regulation of banks and the regulation of financial market infrastructures (FMIs), with the overall objective that regulation reduces overall risk, and does not shift it around the financial system. Cooperation between the Committee on Payments and Settlement Systems and the International Organisation of Securities Commissions (CPSS-IOSCO) on the one hand, and the Basel Committee on Banking Supervision (BCBS) on the other hand, is key in this respect.
Ultimately, it seems to me that the success of central clearing as a tool for promoting financial stability critically depends on two factors: (i) the ability of CCPs to handle the risks they are concentrating and thus the design of their corporate governance, risk management and recovery frameworks and (ii) the ability of the official sector to address effectively any unintended side effects and "new" risks that may result from the push towards more central clearing.
A second issue that I should like to highlight today concerns the relationship between recovery and resolution of CCPs. As central clearing involves risk concentration in what we may see as "super systemically relevant" institutions, it is crucial that such institutions can recover from severe shocks or be resolved if necessary.
The recovery of CCPs in order to maintain service continuation is much more important for CCPs than for other financial institutions. That's why the PFMIs require CCPs to be able to allocate any losses that are not already covered by regular risk management.
The resolution authorities have the responsibility (and are in a better position than CCPs) to do what is systemically needed in a crisis situation, which may mean in extreme cases that the application of resolution procedures is preferable to the activation of a recovery plan.
In the field of recovery, we are entering new territory, which is why the authorities have wisely taken a very cautious approach to giving guidance to FMIs on the design of their recovery plans. Ideally, recovery tools should be comprehensive, effective and controllable; they should create appropriate incentives for risk management and minimise any negative impacts. However, the challenge is that no individual tool can equally meet all of these criteria. The optimal choice of recovery tools is still evolving and remains a controversial issue. The regulatory approach by CPSS-IOSCO is therefore non-prescriptive and aims to provide guidance that should help FMIs to choose the appropriate (mix of) recovery tools. This approach, however, might need to be adapted over time.
Full speech
Accompanying slides
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