ECB: Towards a macroprudential framework for central counterparties

06 June 2016

Introductory remarks by ECB's Benoît Cœuré, at a policy panel discussion on the progress with new macroprudential instruments at the ESRB international conference on macroprudential margins and haircuts, focusing on CCPs.

The strong regulatory push towards central clearing in recent years has clearly helped improve the safety and stability of the financial system. Among the many well-known advantages of central clearing are the reduction in counterparty credit risk, and the simplification of the network of exposures through multilateral netting and risk sharing, which also comes with a more efficient use of collateral. Default risk, no longer being dispersed thinly across the global financial system, is better pooled and monitored.

At the same time, the drive towards central clearing has made central counterparties (CCPs) key nodes for propagating risk in the system. Given the central role CCPs play in the financial system and the potential effects their risk management can have on the economic cycle, it has become increasingly important to consider CCPs not only from a microprudential but also from a macroprudential perspective. Therefore, the discussion about macroprudential policy, previously almost exclusively referred to in the context of banks, is now being expanded to include CCPs. Indeed, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) already considered some of these aspects when they published in 2012 the Principles for financial market infrastructures (PFMI), for instance by requiring CCPs to adopt stable-through-the-cycle margin practices and collateral haircuts.

Mr. Cœuré lays out five elements of the macroprudential approach to CCPs which are being developed and implemented at CPMI-IOSCO level:

• „First, we are currently working towards establishing a set of criteria to identify CCPs that are systemically relevant in more than one jurisdiction.“
• „Second, we want to ensure that the financial buffers built up by CCPs in good times are highly robust, thereby reducing the need to take sudden and abrupt measures in more stressed situations. In this context, we are focusing on making CCPs fully resilient by ensuring they are rigorously applying the PFMI, and have adopted appropriate arrangements for recovery planning in line with the guidance issued by CPMI-IOSCO in 2014.“
• „The third area where the forthcoming reports will propose further guidance is in the identification and mitigation of potential procyclical behaviour. Building on the requirements for margining and haircut-setting practices in the PFMI, we will now go further by requiring CCPs to take a holistic approach to addressing the issue within their risk management frameworks. The guidance will also point out that a CCP is expected to measure procyclicality by using quantitative metrics, and to include considerations related to procyclicality in its model validation process.“
• „As a fourth step, I believe it would be helpful to enhance our capacity to identify and address financial vulnerabilities in CCPs at an early stage by complementing CCP in-house stress testing with a framework for supervisory CCP stress testing that can be conducted across jurisdictions.“
• „Finally, we will need to make substantial progress in understanding and assessing interdependencies between CCPs and their participants, across the multiple relationships they have with each other.“

Full speech

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