New developments and current challenges
The rising importance of CCPs means that their supervisory framework needs to be reformed. Most clearing is now done across borders and is strongly concentrated in a limited number of EU CCPs, which have become systemically important for the EU as a whole.
Two of these CCPs are based in the United Kingdom. Currently, they clear around 95% of euro-denominated interest rate derivatives and around 30% of euro-denominated repos. Thus, a significant disturbance involving a major UK CCP could affect financial stability and market functioning across the EU. On top of this, most of the liquidity provided by central banks tends to be channelled through the repo market.
The United Kingdom’s withdrawal from the EU means the supervisory framework for non-EU countries must be adapted. EU authorities must continue to be able to not only closely monitor UK CCPs but ensure they comply with EU regulations.
The importance of central clearing for central banks and their monetary policy mandate
So precautions have to be taken to ensure that CCPs do not become a weak point for monetary policy and the currencies issued by central banks. CCPs can pose significant risks to the smooth operation of payment systems and to monetary policy transmission in times of market stress. Let me give you some examples.
Market volatility or failures in CCPs’ risk management may affect liquidity within the financial system and that of CCP users, who are typically monetary policy counterparties and key participants in payment systems. In extreme situations, liquidity shortfalls could foster contagion and lead to CCPs and banks becoming distressed. This could mean the ECB needs to provide liquidity to systemic CCPs or to their members to ensure that payment systems continue to function smoothly and that monetary policy can be transmitted effectively. It is clear that, in such cases, liability and control need to be well aligned: the ECB must be able to monitor and control the risks posed by CCPs.
CCPs are also directly relevant for payment systems. Cleared markets represent a significant share of financial markets as a whole, meaning that CCPs are settling large payment volumes. In order to ensure that payment systems continue to function smoothly, the ECB must ensure that CCPs have appropriate arrangements in place for liquidity management and settlement in euro.
Moreover, in the past CCPs have increased margins and collateral haircuts beyond the levels required by prudential standards or their own risk models. But doing so they may cause liquidity strains and increase volatility in bond prices which, in turn, affects the transmission of monetary policy. To be clear, CCPs should of course make sure they remain resilient to liquidity risks. But they should do so in a predictable manner and based on sound risk models that should not undercut monetary policy decisions.
Recent regulatory reforms
These challenges were widely recognised when, in June of last year, the European Commission proposed amending the EMIR framework for the supervision and regulation of CCPs.
The Commission acknowledges the essential role played by central banks of issue (or CBIs) in monitoring and addressing risks posed by CCPs to their currency, and has proposed an enhanced and binding role for CBIs under the EMIR framework.
This would mean that central banks would become non-voting members in the European Securities and Markets Authority (ESMA) structure responsible for CCPs. ESMA aims to improve the functioning of financial markets in Europe by strengthening investor protection and cooperation between national competent authorities.
The enhanced role for central banks would tend to avoid harmful mismatches between prudential decisions and monetary policy. And it would grant central banks a flexible and effective role in determining the conditions under which CCPs that are not located in an EU Member State are allowed to provide services in the EU.
I welcome the proposal to strengthen the role of CBIs. It would reinforce coordinated supervision, while reflecting the responsibilities of the ECB – as a CBI – within the supervisory framework. [...]
Amending Article 22 of the Statute – substance
But what does this mean for the substance of Article 22, which is part of Chapter IV of the Statute, entitled “Monetary functions and operations of the ESCB”?
The Statute grants the ECB flexibility and autonomy over the instruments available for conducting monetary policy. The Treaty drafters provided for various instruments, including the possibility to conduct open market and credit operations, and to make regulations to ensure efficient and sound payment and clearing systems.
This means that the ECB can react effectively to unforeseen circumstances. For example, the ECB was able to take the unconventional monetary policy measures it saw fit to address unprecedented economic developments – and thus to achieve its primary objective of maintaining price stability in the euro area.
This flexibility and autonomy is a clear expression of the principle of central bank independence, and of the Eurosystem’s exclusive competence to define and implement monetary policy.
The simplified amendment procedure does not give us carte blanche to rewrite the Treaties and the principles that underpin the ECB and the Eurosystem. Rather, it allows us to make targeted adjustments to our monetary policy toolkit.
I have three things in mind here.
First, Article 22 should not be changed to contain an inflexible and exhaustive list of measures the ECB can take. This would constrain monetary policy. The ECB needs broad discretion to take the necessary measures and address risks to monetary policy and the smooth operation of payment systems. Extreme market events are impossible to predict and central banks have the unique expertise and exclusive competence to assess and address the risks they pose to monetary policy.
Second, Article 22 cannot subordinate ECB measures to the level of secondary Union law, for example by requiring them to be consistent with secondary legislation. This would create a hierarchy of internal market legislation over monetary policy measures. This cannot happen. We cannot open a Pandora’s box and end up in a situation where monetary policy is no longer shielded against political influence. Moreover, any such subordination would imply that the objective of the Internal Market is superior to the objective of Economic and Monetary Union. This is not the case; these are equal and complementary objectives of the European Union. Moreover, as the ECJ made clear in the Pringle case, “[…] each institution of the Union is to act within the limits of the powers conferred on it in the Treaties, and in conformity with the procedures, conditions and objectives set out in them.”
And third, there is a limitation: Article 22 cannot confer general regulatory competences on the ECB – it can only adjust the ECB’s monetary policy toolkit by clarifying that the competence for clearing and payments covers derivatives. The Treaty drafters made the ECB’s objectives and tasks very clear. As the European Court of Justice said, a measure falls under the responsibility of the ECB when it is intended to pursue an objective such as the consistency of monetary policy or the proper transmission of monetary policy. This objective, in turn, contributes to the primary monetary policy objective of maintaining price stability. The reason why monetary policy needs to cover CCPs’ liquidity is that derivatives clearing has become a cornerstone of the financial system.
We must not forget that ECB measures must also comply with the principle of proportionality. This means that any ECB actions in the field of clearing will have to be appropriate for attaining monetary policy objectives and cannot go beyond what is necessary to achieve those objectives. And it goes without saying that the ECB will not be acting in a legal vacuum – in considering the proportionality of its actions, it will have to take into account existing secondary law and justify any measures it takes. And the Court of Justice would be the ultimate arbiter to determine whether the ECB is respecting the principle of proportionality. [...]
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