[...] many of our key monetary policy counterparties in the euro area are participants in CCPs around the world, and are thus directly exposed to potential strains in centrally cleared markets. Asset classes such as repos, which play a direct role in our monetary policy operations, are increasingly being cleared through CCPs. Any closure of certain repo market segments due to a CCP failure would therefore inevitably limit our ability to align money market conditions with our monetary policy intentions.
Moreover, financial stress resulting from a struggling CCP could have a knock-on effect on the smooth operation of payment systems, with obvious and probably serious consequences for the real economy. In a severe crisis, we might even be expected to extend emergency lending to a failing CCP or to its participants although this would only be done at our own discretion: an automatic right to central bank liquidity could create serious moral hazard concerns.
More fundamentally, of course, the UK’s decision to leave the EU is prompting a significant rethink of the European approach to the supervision of systemically important global CCPs. The major clearing houses in the UK provide key services to continental banks active in securities and derivatives markets. According to our estimates, UK CCPs clear approximately 90% of the euro-denominated interest rate swaps of euro area banks, and 40% of their euro-denominated credit default swaps. These figures should give you a sense of how relevant these CCPs are for the stability of the euro.
Over the years, we have concluded cooperative arrangements with the UK authorities that ensure we are appropriately involved in monitoring and assessing the risk management practices of these entities. These arrangements, which are based on both EU law under the scrutiny of the EU Court of Justice and on a dedicated memorandum of understanding between the ECB and the Bank of England, give us the confidence that in a serious crisis we would have timely access to all the information needed to take action.
What concerns us today in the context of Brexit is that the current EU regime regarding third-country CCPs was never designed to cope with major systemic CCPs operating from outside the EU. Indeed, this regime relies to a large extent on local supervision, and provides EU authorities with very limited tools for obtaining information and taking action in the event of a crisis. Reviewing this regime has therefore become urgent in the current environment. We need to ensure we can preserve a framework that ensures the safety and stability of the financial system when the UK is no longer a member of the EU.
In this regard, we think the recent European Commission proposals to amend EMIR are a step in the right direction. If adopted, they would provide the supervisors and the relevant central banks of issue with the guarantees they need in order to monitor and address risks to the EU’s financial system. I therefore welcome the fact that the Commission has referred to the role that we should play as central bank of issue: we certainly need to play a strong role here, using all the instruments required to exercise our CBI competence.
It is also worth noting that most of the proposals presented by the Commission merely replicate the approaches already followed by many other major jurisdictions. In that sense, they should seem familiar to authorities and lawmakers on other continents.
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