Organisational structure
Some years ago, there was a debate about whether the authorities should favour “horizontal integration” or “vertical integration” of trading, clearing and settlement infrastructure. Events have taken their course, and vertically integrated groups – concretely, of exchanges owning clearing houses – have become commonplace.
The authorities need policies to address this. One dimension is competition. The Commission is focused on that. In terms of financial stability – my own focus – it is vital that the risk manager in the CCP, which means the heart of the CCP, should have a clear and independent line to the group board, so that they cannot be leant on by the affiliated exchange to reduce or shade initial margin requirements or collateral terms or portfolio investment policies in order to generate more turnover. This will matter more than ever during a period in which there is likely to be more than one CCP clearing some markets. Regulators have been slow to embrace this. But I am glad to say that it does get some recognition in the EMIR text, perhaps not as unambiguously as is warranted in my view.
Global CCPs and access
The efficiencies and risk management advantages of multilateral netting across a variety of products make it likely that the world will have a few global CCPs. There must be broad access to these CCPs, provided always that that can be made consistent with maintaining the integrity of risk management (including default procedures). The benefits of putting over the counter (OTC) derivatives trading through CCPs cannot be confined to a few currencies or markets. That is not what the G20 mandated; and, in any case, it would not be in the interests of global stability.
Related to all this, the EU must ensure that requirements to clear through CCPs apply also to exchange-traded derivatives and to vital cash markets, not just to “standardised” OTC derivatives. Whatever anyone says, there is really no excuse for where things currently stand on this in Europe. The MiFID II package provides an opportunity to correct it next year.
CCP default and resolution
We need effective resolution regimes for CCPs (and other financial market infrastructure). The Financial Stability Board will drive this forward as part of our work on the resolution of SIFIs. (A comprehensive package on the resolution of banks and dealers will go to the G20 Leaders Summit shortly. If endorsed, and Finance Ministers have already given their endorsement, it will become a Standard to which countries/jurisdictions pledge to abide.) The EU’s own work on resolution regimes has been a hugely positive input to this global process.
Full speech
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