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UK commentators and media seem to be unaware of the solid rationale (supported by the UK on many ocassions) for the EU to feel it necessary to propose fresh legislation to safeguard its financial stability upon the departure of a major member that is home to the key parts of its financial infrastructure. British commentary views CCP location as little more than a power play to grab tax revenues and jobs.
However, this argument should be about very remote - but nonetheless thinkable - risks that might crystalise in the heat of a huge crisis. After all, the “unthinkable “ happened frequently in 2007/8 so any responsible political system should carry through its commitments to global and national society to ensure its financial stability.
The scale of these markets in almost beyond comprehension: The key euro-denominated interest rate contracts cleared in the UK are more than 50 times UK GDP, and 10 times the Eurozone’s GDP. Any glitch would be dramatically de-stabilising – see my May 4th/8th blogs[1] and January paper[2]. Yet the solemn decisison by the UK people a year ago included demands to cease accepting the ultimate jurisdiction of the ECJ and to question payments felt by the EU27 to be legitimately due.
Can the EU27 now be certain beyond any doubt that – at the most dreadful moment of a crisis – the UK would allow the EU to “induce change” in a UK-based company? If the ECB were asked to provide multi-billions of euros of emergency liquidity for intra-day margin calls, can it be certain beyond any doubt that it would be repaid if the UK subsequently argued that the process was unreasonable or flawed?
Capital Markets Union (CMU) is seen by the EU27 as a vital step to enhance the flow of funds needed to sustain its economic recovery – now in its fifth year. If derivatives clearing through CCPs is as vital to the success of CMU as is generally assumed, then it would be natural for EU27 to wish to ensure the soundness of such a crucial market.
The global processs of exercising public control/oversight over all parts of the financial system started after the Global Financial Crash in 2008. In particular, the London G20 Summit in 2009 – chaired by UK’s then-Prime Minster Gordon Brown – laid out the roadmap and global financial regulators have subsequently filled in the details (see box). Only last year, Prime Minster May signed the call for this process to be completed globally. EU27 now proposes to finish the job in its own backyard.
History: After Lehman Brothers failed, the G20 leaders met for a crisis summit in Washington in November 2008. They agreed that"intensified international co-operation among regulators and strengthening of international standards, where necessary and their consistent implementation is necessary". In April 2009, they met again in London. Under UK leadership, they agreed to build “a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector”. Later that year in Pittsburgh, they called on the FSB for “recommendations to strengthen oversight and supervision, specifically relating to the mandate, capacity and resourcing of supervisors and specific powers that should be adopted to proactively identify and address risks, including early intervention.”
Subsequent G20 summits have re-iterated these commitments and Prime Minister May signed up to the Communique from Hangzhou in September 2016: “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.”
G10 central bank standards:The ECB has a Treaty-mandated task to ensure smooth operation of the payments systems and, in line with G10 central bank standards, applies the following definitions “Oversight of payment and settlement systems is a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change.”
[1]http://www.grahambishop.com/StaticPage.aspx?SAID=203&MenuID=184&m=1&MenuID=191&m=1
[2]http://www.grahambishop.com/ViewArticle.aspx?ID=33509&CAT_ID=64