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The original aim of G20 countries, anxious to make the financial system safer, was a transition at the end of this month. That timetable has slipped after implementation proved more difficult than imagined. But CCPs’ much greater systemic importance raises a host of issues about whether regulators have simply shunted dangers to different parts of the financial system.
Globally, regulators are “alive” to accusations they have simply created a new class of “too big to fail” institutions, says Paul Tucker, deputy governor of the Bank of England, who has responsibility for financial stability issues. But their response remains “work in progress”, he admits. “A lot of things are being done to extend resolution regimes to CCPs and ensure their rules enable effective recovery. This isn’t finished, but there is an urgency to get on with it.”
Last week, the BoE pointed out that many transactions would be insufficiently standardised for central clearing and remain “a source of systemic risk”. Non-standardised contracts might even be used “to evade central clearing mandates”, the BoE’s financial stability report noted.
Another big snag is that, rather than becoming centralised, CCPs are fragmented, covering national markets or product sectors... Another danger is that competition between CCPs lowers standards.
Conscious of all these risks, regulators are keen to put in safeguards – to ensure, for instance, that CCPs have sufficiently large financial cushions and a failure can be handled smoothly. In the case of serious difficulties, central banks have agreed there should be no “technical obstacles” to providing emergency liquidity. But if central banks had to ride to CCPs’ rescue, regulators would have failed in their mission to create a self-supporting financial system.
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