BoE Paper Examines Cost of Clearing Fragmentation Across Multiple CCPs

By Regulatory News

May 31, 2019

BoE published a working paper that examines and provides direct evidence of the costs associated with fragmentation in clearing across multiple central counterparties (CCPs). With central clearing becoming a key feature of over-the-counter (OTC) derivatives markets after the financial crisis, questions regarding the scope and size of CCPs are becoming increasingly important due to the economic significance of choosing one option versus another. The paper sheds light on an important aspect of these options, namely what happens when clearing in comparable products is fragmented.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

Related Links

Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

The paper concludes that fragmenting clearing across multiple CCPs is costly. Due to the global nature of OTC derivatives markets, major dealers act as liquidity providers across jurisdictions, meaning that their client trades are cleared in multiple CCPs. This is especially true if clients in a particular jurisdiction only tend to access their local CCP. Thus, the netting opportunities for dealers’ overall portfolios are reduced. This reduction in netting opportunities increases dealers’ collateral requirement as they are forced to pledge collateral with each CCP. Thus increasing their collateral costs. These costs are then passed on to their clients through price distortions that take the form of a price differential (basis) when the same products are cleared in different CCPs.

The authors document an economically significant price differential between the same dollar swap contracts cleared in Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) and argue that this is a result of dealers seeking compensation for bearing increased collateral costs when clearing is fragmented. The authors theoretically argue, and empirically document, that fragmentation in clearing gives rise to economically significant price distortions, which become visible when the same contracts are cleared by different CCPs. These distortions reflect dealers’ collateral costs and represent a real cost to market end-users.

Related Links

Keywords: Europe, UK, Banking, Securities, CCPs, OTC Derivatives, Central Clearing, Netting, Collateral Cost, Research, BoE

FSB Publishes User Guide for Overnight Risk-Free Rates

BoE Paper Examines Effects of Regulations on Short-Term Interest Rates


News EBA Report Assesses Regulatory Framework for Fintech Activities EBA published the findings of its analysis on the regulatory framework applicable to fintech firms when accessing the market. July 18, 2019 WebPage Regulatory News
News OSFI Revises Capital Requirements for Operational Risk for Banks OSFI is revising its capital requirements for operational risk, in line with the final Basel III revisions published by BCBS in December 2017. July 18, 2019 WebPage Regulatory News
News OSFI Consults on Revised Principles for Management of Liquidity Risk OSFI proposed revisions to Guideline B-6 on the principles for the management of liquidity risk. July 18, 2019 WebPage Regulatory News
News ESMA Guidance on Disclosures for Credit Rating Sustainability Issues ESMA published the technical advice on sustainability considerations in the credit rating market, along with the final guidelines on disclosure requirements applicable to credit ratings. July 18, 2019 WebPage Regulatory News
News FASB Issues Q&A on Estimation of Expected Credit Losses by Firms FASB issued a second question-and-answer (Q&A) document that addresses more than a dozen frequently asked questions related to the Accounting Standards Update No. 2016-13 titled “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” July 17, 2019 WebPage Regulatory News
News US Agencies Delay Enforcing Volcker Rule Restrictions on Foreign Funds US Agencies (FDIC, FED, and OCC) announced that they will not take action related to restrictions under the Volcker Rule for certain foreign funds for an additional two years. July 17, 2019 WebPage Regulatory News
News SRB Announces SRF Receives Cash Injection, Grows to EUR 33 billion SRB announced that the Single Resolution Fund (SRF or the Fund) received a cash injection of EUR 7.8 billion from 3,186 institutions in 2019, bringing the total amount in the Fund to about EUR 33 billion. July 17, 2019 WebPage Regulatory News
News FASB to Propose to Delay CECL Compliance Deadline for Certain Entities FASB published a summary of the tentative decisions taken at its Board meeting in July 2019. July 17, 2019 WebPage Regulatory News
News IMF Publishes Report on 2019 Article IV Consultation with Vietnam IMF published its staff report in context of the 2019 Article IV consultation with Vietnam. July 16, 2019 WebPage Regulatory News
News European Parliament Elects Next President of European Commission European Parliament elected Ursula von der Leyen from Germany as the first female President of the next European Commission for a five-year term from November 01, 2019. July 16, 2019 WebPage Regulatory News

RESULTS 1 - 10 OF 3476

Solutions

Industries

Moody's Analytics Brands

A-Z Product List

Access Online Products

Moody's Analytics Product Training

Insights

Regulatory News

Webinars-on-Demand

Moody's Analytics Risk Perspectives

Meet Our Experts

Connect With Us

Events Calendar

Training

Inquire About Upcoming Events

Meet Our Experts

About Us

Regions

Office Locations

Partner With Us

Connect With Us

Join Us

BoE Paper Examines Cost of Clearing Fragmentation Across Multiple CCPs

By Regulatory News

Related Articles

EBA Report Assesses Regulatory Framework for Fintech Activities

OSFI Revises Capital Requirements for Operational Risk for Banks

OSFI Consults on Revised Principles for Management of Liquidity Risk

ESMA Guidance on Disclosures for Credit Rating Sustainability Issues

FASB Issues Q&A on Estimation of Expected Credit Losses by Firms

US Agencies Delay Enforcing Volcker Rule Restrictions on Foreign Funds

SRB Announces SRF Receives Cash Injection, Grows to EUR 33 billion

FASB to Propose to Delay CECL Compliance Deadline for Certain Entities

IMF Publishes Report on 2019 Article IV Consultation with Vietnam

European Parliament Elects Next President of European Commission

By Regulatory News

Previous Article

Next Article