Featured Product

    Benoît Cœuré of ECB Speaks at Conference on CCP Risk Management

    February 27, 2019

    At a conference in Frankfurt, Benoît Cœuré of ECB spoke about the management of central counterparty (CCP) risk in EU. He examined the challenges faced in regulating and overseeing global cross-border clearing activities, the contribution of central banks in regulation and supervision of CCPs in the Eurosystem, and the complex issues CCPs face in managing defaults.

    Mr. Cœuré explained the growing concerns resulting from a few global CCPs becoming systemically important for multiple jurisdictions, besides the one in which they are headquartered. Market authorities, prudential supervisors, and central banks rely on home authorities to conduct due diligence and comply with the highest financial and operational CCP risk management standards. He highlights the need and challenges in striking a balance between facilitating market integration through cross-border access and safeguarding the ability of authorities to fulfill their statutory tasks and objectives. In this context, he welcomed the FSB work to address potential regulatory causes of market fragmentation. He also noted that fragmentation is not always caused by overlapping regulations, but often by a failure to cooperate. Thus, mutually acceptable solutions can, and should, be found to meet the legitimate expectations of all the authorities involved.

    He opines that, at the global level, the international framework should be based on the pillars of proportionality and cooperation. With regard to proportionality, where financial stability implications are limited, outcomes-based equivalence and full deference mechanisms, based on compliance with international principles, can allow for cross-border activities that meet minimum standards of safety and soundness. However, where global CCPs are systemically important, each authority should ensure that imported risk is managed as diligently as its own standards would dictate. This is the core purpose of the revisions to the EU recognition framework for third-country CCPs. The success of this framework, however, relies on enhanced cooperation between authorities. ECB has always preferred the approach of cooperation for the oversight of financial market infrastructures but, for several global CCPs, these arrangements do not yet exist or do not involve all relevant authorities, despite the international commitments. He mentioned that such delays are a source of concern and urged all parties involved to accelerate progress in this area.

    Mr. Cœuré added that cooperation is also indispensable for CCP liquidity and the role of the central bank of issue. Next, he highlighted the channels through which central clearing interacts with the core central bank objectives. In particular, he explained that CCPs play a key role in the euro money market and are financial market hubs connecting banks as well as other market infrastructures. Additionally, central banks can act as a liquidity backstop or a lender of last resort. Such action could be needed if a banking default were coupled with severe market stress. In such a scenario, a CCP would certainly hold high-quality collateral, but it may be unable to generate cash in the market in the very short time in which it has to manage a default. Given the systemic importance of CCPs and the scale of their potential funding needs, CCPs must have sound liquidity self-insurance so that a liquidity shortage remains an extreme tail risk and the associated moral hazard is mitigated. Therefore, ECB has a clear interest in ensuring the safety and soundness of euro clearing. To this end, ECB must have a clear legal competence that should cover both EU and third-country CCPs.

    He highlighted that proposals to differentiate between EU and third-country CCPs would leave considerable pockets of euro clearing without appropriate ECB oversight and would raise concerns about an unlevel playing field. He then described the three safeguards to alleviate the concerns in the regulation and supervision of CCPs. The first is adequate information on the operation and risk management of CCP clearing in euro and the capacity to assess how they would fare in times of market stress, including through stress testing. A second is meaningful involvement in the supervisory process, to ascertain that CCPs’ compliance with prudential and operational requirements provides sufficient guarantees from the perspective of a central bank. Third is the adoption of requirements to address the critical central bank concerns. For instance, it would be the prerogative of the central bank to determine when CCPs should hold central bank accounts for deposit and settlement purposes and to require targeted enhancements to CCP liquidity risk management, in exceptional market environments. Finally, with respect to managing the CCP defaults, Mr. Cœuré welcomed the work of CPMI-IOSCO on default management auctions, which could benefit from further convergence toward shared best practices. 

     

    Related Link: Speech

     

    Keywords: Europe, EU, Banking, Securities, CCP, Proportionality, Cross-Border Activities, FMI, Systemic Risk, Stress-Testing, ECB

    Featured Experts
    Related Articles
    News

    APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness

    APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).

    December 02, 2021 WebPage Regulatory News
    News

    EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance

    The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).

    December 01, 2021 WebPage Regulatory News
    News

    FSB Sets Out Good Practices for Crisis Management Groups

    The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.

    November 30, 2021 WebPage Regulatory News
    News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Updates Timeline for Implementation of Certain Basel Rules

    Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.

    November 29, 2021 WebPage Regulatory News
    News

    EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR

    EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.

    November 29, 2021 WebPage Regulatory News
    News

    FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR

    The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Capital Adequacy Standards for Banks

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.

    November 29, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.

    November 29, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7751