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This strengthening is necessary in light of two major trends of the past few years.
First, since EMIR first entered into force there has been a continued growth of central clearing and resulting financial risk concentration in CCPs. This has significantly increased the potential disruptive effects that CCPs can have on the implementation of our monetary policy.
Second, the UK departure from the EU implies that a very large part of euro-denominated clearing activities across all asset classes may be performed from outside the EU in the future. While central clearing is undeniably a global industry, the range of euro-denominated asset cleared outside of its monetary zone is unparalleled for any other major currency around the world. This clearly points to the need to strengthen the EU regime for third country CCPs and to enhance in this context also the role of the relevant central banks of issue.
As distinct from the need to strengthen the role of the central banks of issue serving a monetary policy purpose, it is also fully justified to seek to strengthen the supervisory regime for CCPs Take the case of third country CCPs: until now, the EU’s approach towards third country CCPs, including those that are of systemic importance, has been to rely entirely on the supervision carried out by home authorities. Deference to home authorities should continue to be the norm in those areas where rules are fully equivalent. However, there are certain areas in which EU rules provide more protection than those in other jurisdictions, and in these areas the Commission is right to suggest that reliance on home authorities may not be enough, and that more direct involvement by EU authorities is required. This is the same approach as currently followed by certain other major jurisdictions.
Where the approach proposed by the Commission may differ is that it also foresees that under extreme circumstances, certain systemically important third country CCPs might not be authorised to operate from outside the EU, and would be required to establish themselves within the Union if they wish to continue providing services to EU counterparties and markets. EU authorities acknowledge that such a decision would have important consequences on market structure. However, as I mentioned earlier, for no other major currency are so many systemic asset classes cleared outside of its own monetary area. The requirement, proposed by the Commission, for CCPs to be established within the EU would function as a last resort measure, to be triggered in the event EU authorities cannot control the risks to their mandates through other means. The ECB would be involved in the process in order to share its liquidity considerations as a monetary policy authority, but the final supervisory decision would be within the hands of the Commission and the Union legislators.
Another aspect where the proposals might differ somewhat from the approach taken in certain other major jurisdictions is the larger role given to central banks of issue. In this respect, it should be noted that a comparable role has been given to the US Federal Reserve in respect of systemically important financial market utilities, including CCPs. This is entirely justified: enhancing the role of central banks is absolutely essential considering just how critical CCPs have become for the smooth conduct of monetary policy.
Indeed, disturbances affecting a CCP can cause significant liquidity strains for banks. This can directly affect the central bank’s ability to implement monetary policy and can impact the smooth functioning of payment systems.
In addition, a crisis affecting a repo CCP can disrupt the functioning of the money market, thereby impairing the channels through which central banks conduct monetary policy operations.
Furthermore, disruptive changes to CCP risk management (e.g. sudden collateral haircuts) can generate asset price volatility and affect the central bank’s ability to implement monetary policy.
Finally, a potential decision to allocate liquidity for financial stability purposes outside the currency area would affect the monetary policy stance of the central bank inside the currency area.
This is the reason why, in the event of a severe crisis, emergency financial assistance by euro area national central banks is always subject to a non-objection procedure by the ECB to preserve its monetary policy objective.
This brief overview shows the significant impact the malfunctioning of a major CCP clearing significant amounts of euro could have on the conduct of monetary policy. At the same time, allow me to stress that the Commission proposal does not entail that central banks of issue would duplicate the work of supervisors. On the contrary, the role ascribed to them is a limited and targeted one, centred on the aspects of CCP risk management that are most essential for the fulfilment of their monetary policy mandates. This is also why third country CCPs and their home authorities need not be concerned about potential overlaps between EU supervisors and central banks: each will play a well-defined role in the regulatory framework, under their respective statutory responsibilities.
The withdrawal of the UK from the EU will, needless to say, create legal uncertainty not only for CCPs but, also, for other financial market infrastructures, including payment and securities settlement systems processing euro-denominated transactions. These issues need to be carefully monitored and assessed, and solutions may need to be explored in order to ensure certainty and stability.
The rationale is that a suspension prohibiting a participant (e.g. a credit institution) from making any payments to an FMI will de facto cause that participant to no longer be able to meet its obligations as they fall due. For payment obligations to FMIs, this would place the participant in default. Without an exemption for this type of payment, the moratorium would actually have the potential to amplify systemic risk before the FMI safeguards kick in.