The ECB wants the ability to demand changes at a foreign clearinghouse during a future crisis, according to a paper from the central bank that was seen by Bloomberg News. For example, the ECB would be able to require a big clearinghouse in the U.S. or the U.K. after Brexit to collect more collateral from clients and increase its liquidity buffers.
The powers are necessary in “exceptional situations” to ensure that a problem in a foreign clearinghouse doesn’t ripple back to EU markets and hamper the ability of a member state’s central bank to set monetary policy, the ECB said in the document, which was dated April 11.
The EU is now working on legislation that would increase oversight of third-country clearinghouses and could, as a last resort, force the business to move to the continent. Negotiators are still working out details including how powers would be divided between different authorities, such as the ECB and the Paris-based European Securities and Markets Authority.
At present, the biggest market for euro-denominated derivatives outside the EU is the U.S. Activity there is regulated primarily by the Commodity Futures Trading Commission, whose regulatory standards the EU judges as ‘equivalent’ to its own, and vice versa. If the equivalence agreements were to break down, market liquidity would suffer and the EU would probably require much higher capital requirements for EU firms trading through U.S. clearinghouses. That would make the business much more expensive.
The ECB’s proposal acknowledges that “an appropriate balance needs to be struck,” assuring that any measure by the ECB and other EU central banks should focus on “systemic liquidity risk” for the relevant currency and wouldn’t amount to “micro-managing the liquidity risk” of individual firms.
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