Opinion of the ECB on the introduction of legal framework for the operation of central counterparties

22 May 2012

The European Central Bank received a request from the Marshal of the Polish Parliament (Sejm) for an opinion on a draft law amending the Law on trading in financial instruments and certain other laws.

Article 45e of the Law on trading in financial instruments as amended by the draft law specifies, inter alia, that where a counterparty has designated funds on its account to settle OTC transactions subject to mandatory central clearing, availability of such funds for settlement shall be protected against effects of insolvency of the counterparty providing such funds. The ECB understands that this  provision extends the protection of parties to transactions in financial instruments against the effects of a counterparty’s insolvency in specific cases not covered by the relevant provisions of Polish law, which transpose the Settlement Finality Directive and the Financial Collateral Directive. The ECB further understands that transactions not subject to mandatory central clearing, including repo transactions, would not be covered by this extended protection. In this context, the ECB notes that repo transactions are covered within the scope of ‘title transfer financial collateral arrangements’ protected under the Financial Collateral Directive, and would therefore welcome extending the protection offered by amended Article 45e(1) of the Law on trading in financial instruments to cover repo transactions not subject to mandatory central clearing.

Indeed, broad protection of repo transactions is encouraged as they constitute an effective tool for mitigating counterparty credit risk, while stable repo markets are an important source of funding for the financial sector.

Full opinion

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