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“Clearing” of financial transactions has suddenly become a political hot potato. Chancellor Hammond told the House of Lords - in his first appearance before a Parliamentary Committee – that you cannot make “clearing” go where it does not want to go. The implication was that if it left the UK, it might well not go elsewhere in the EU. In contrast, former Bank of England Deputy Governor Sir Charlie Bean told another House of Lords Committee that he had “absolutely no doubt at all” that euro-denominated clearing will be taken back into the European Union.
Drawing on his regulatory experience, he made the strong point that regulators want to know exactly what arrangements exist in the event of an institution failing. This approach can hardly be a surprise when the pursuit of `financial stability’ is still seen as the number one public good by everyone connected with the financial system. That is exactly why Prime Minister May signed up to the G20’s Communiqué from Hangzhou “We encourage members to close the gap in the implementation of the Principles for Financial Market Infrastructures (PFMI) and welcome the reports by the Committee on Payments and Market Infrastructures (CPMI), International Organization of Securities Commissions (IOSCO) and FSB on enhancing central counterparty resilience, recovery planning and resolvability.”
Such a statement may sound rather technocratic for the Heads of Government, especially when applied to the very specific example of clearing derivatives but it underlines the importance of the issue – identified so powerfully at the early G20 Summits several years ago and still unresolved. The timeline to the start of the G20 Summit probably explains why a key consultation Note[1] was released by the FSB in the middle of the holiday season when the chances of it attracting public attention were particularly limited.
The issue of Central Counter Parties (CCPs) clearing vast volumes of derivative transactions within the EU is made particularly complex by the number of currencies involved and that the City of London – the key player – is not part of the Eurozone. In a post-Brexit world, it will not even be part of the EU. The nub of the problem flows from the FSB’s statement that “For CCPs that are systemically important in more than one jurisdiction, resolution planning and resolvability assessments should be conducted by the home resolution authority [so Bank of England for UK –based entities] and coordinated within cross-border Crisis Management Groups (CMGs) or equivalent arrangements.” [...]
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