ECB’s Gertrude Tumpel-Gugerell: Towards a safer financial system
29 June 2010
Speaking at the at the US Financial Services Roundtable, she stressed that it is important to adopt and implement the regulatory requirements for the mandatory central clearing of all eligible products and the reporting of trades to trade repositories in a timely manner.
Speaking at the US Financial Services Roundtable, Gerture Tumpel- Guguerell presented the following priorities as regards financial market infrastructures:
· The first priority relates to the development of financial infrastructures in those markets where they are not yet sufficiently used or available, notably in OTC derivatives markets. The crisis has shown that markets with adequate infrastructures and hence proper risk management and risk provisions have proven to be more resilient than markets without such infrastructures, such as the OTC derivatives markets. Therefore, expanding the use of central counterparties (CCPs) in these increasingly systemically relevant markets is a key measure to reduce counterparty and operational risk. Another important step is the mandatory reporting of all trades to centralised trade registries, so-called trade repositories, in order to enhance market transparency. In her view, if CCPs and trade repositories for credit default swaps had been available before the Lehman default, Lehman’s CDS exposures could have been managed in a much more transparent and resilient way and could have mitigated the negative chain reaction on CDS markets that followed the demise of Lehman.
· The second priority relates to the need for updated and globally consistent requirements to ensure the safety and soundness of financial infrastructures. By nature of their business, financial infrastructures concentrate systemic risk, owing to their large size, their limited degree of substitutability and the strong network of mutual interdependencies across infrastructures, e.g. arising from exposures to the same large participants. Increased reliance on market infrastructures across financial markets further underlines the importance of effectively addressing this risk. Therefore, it is crucial to ensure that CCPs are able to manage these specific risks related to the clearing of OTC derivatives. Furthermore, trade repositories need to be designed, operated and overseen in an adequate manner, given the novelty of these infrastructures and the reliance of other market infrastructures, public authorities and market participants on the accuracy and availability of the respective data.
· The final priority is the need for improving bilateral post-trading processes in line with the requirements for market infrastructures. It is clear that without adequate bilateral risk management and disclosure, a comprehensive mitigation of systemic risk arising in post-trading could not be achieved. Moreover, an uneven regulatory level playing field could create scope for regulatory arbitrage and provide disincentives for the use of market infrastructure.
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