Benoît Coeuré: European CCPs after Brexit
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank, at
the Global Financial Markets Association, Frankfurt am Main, 20 June 2017.
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Thank you for inviting me here today. In my short remarks I would like to say a few words about a
topic that has received much attention lately: central clearing, and its importance for central
banks in the context of Brexit. The extensive coverage of central counterparty (CCP) clearing in
the press and other media these days shows how critical these infrastructures have become
since the financial crisis.
It is easy to see why CCPs have become so important for financial stability. They helped fix a
major defect in our financial system, namely the reliance on, and associated counterparty risk of,
opaque bilateral over-the-counter trading of derivatives. In our highly interconnected markets,
CCPs have thus become effective vehicles for reducing systemic risk in our financial system.
And in doing so, they play a key part in ensuring that central banks are in a position to pursue
their primary objective: price stability.
Our challenge today is to ensure that CCPs do not themselves become a risk to financial stability
and, hence, generate potential impediments to the transmission of monetary policy. CCPs have
grown in scale and scope to the extent that a disruption affecting a major CCP would have a
significant impact on banks, markets and the instruments we rely on to perform our core central
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banking activities.
For example, many of our key monetary policy counterparties in the euro area are participants in
CCPs around the world, and are thus directly exposed to potential strains in centrally cleared
markets. Asset classes such as repos, which play a direct role in our monetary policy
operations, are increasingly being cleared through CCPs. Any closure of certain repo market
segments due to a CCP failure would therefore inevitably limit our ability to align money market
conditions with our monetary policy intentions.
Moreover, financial stress resulting from a struggling CCP could have a knock-on effect on the
smooth operation of payment systems, with obvious and probably serious consequences for the
real economy. In a severe crisis, we might even be expected to extend emergency lending to a
failing CCP or to its participants although this would only be done at our own discretion: an
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automatic right to central bank liquidity could create serious moral hazard concerns. In short,
the safety and soundness of CCPs matters for central banks, and it matters a lot. And this is
why, both at global and European level, the contribution of central banks to CCP supervision has
been fully recognised. The current global standards for CCP risk management were issued
jointly by central banks and capital markets commissions under the auspices of the Committee
on Payments and Market Infrastructures and the International Organization of Securities
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Commissions, CPMI-IOSCO. Furthermore, the European Market Infrastructure Regulation
(EMIR) requires central banks - in their capacity as central banks of issue (CBI) of an EU
currency - to be represented in the CCP supervisory colleges and to endorse supervisory
decisions taken by national authorities. Central banks are key knowledge centres for furthering
the understanding of central clearing and its implications for financial stability.
I believe I speak for many central bankers in saying that, as things stand today, these global
standards and the EU regulatory framework provide us with appropriate tools, on the whole, for
monitoring and addressing potential risks stemming from central clearing. We should not be
reticent about recognising the overall progress made since the financial crisis in increasing the
safety and resilience of financial market infrastructures in general, and CCPs in particular.
Nonetheless, there is no room for complacency. CPMI-IOSCO and other international bodies
have been working tirelessly to address the gaps in the global requirements for CCP risk
management. Certain jurisdictions are more advanced than others in establishing cooperative
oversight arrangements and in inviting relevant authorities from other jurisdictions to participate.
Authorities around the world have also recently started thinking seriously about supervisory
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stress testing for CCPs. But there is still much to understand about the interdependencies
between central counterparties and the broader financial system: international standard setting
bodies will shortly be publishing the results of the global study group on Central Clearing
Interdependencies, which should shed some more light on this topic. This is also an issue we
need to keep in mind when discussing the recovery and resolution of CCPs - a point being
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considered by international fora as we speak , as well as in the context of the forthcoming EU
regulation, for which we will shortly be publishing an ECB opinion.
More fundamentally, of course, the UK's decision to leave the EU is prompting a significant
rethink of the European approach to the supervision of systemically important global CCPs. The
major clearing houses in the UK provide key services to continental banks active in securities
and derivatives markets. According to our estimates, UK CCPs clear approximately 90% of the
euro-denominated interest rate swaps of euro area banks, and 40% of their euro-denominated
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credit default swaps. These figures should give you a sense of how relevant these CCPs are
for the stability of the euro.
Over the years, we have concluded cooperative arrangements with the UK authorities that
ensure we are appropriately involved in monitoring and assessing the risk management
practices of these entities. These arrangements, which are based on both EU law under the
scrutiny of the EU Court of Justice and on a dedicated memorandum of understanding between
the ECB and the Bank of England, give us the confidence that in a serious crisis we would have
timely access to all the information needed to take action.
What concerns us today in the context of Brexit is that the current EU regime regarding
thirdcountry CCPs was never designed to cope with major systemic CCPs operating from outside
the EU. Indeed, this regime relies to a large extent on local supervision, and provides EU
authorities with very limited tools for obtaining information and taking action in the event of a
crisis. Reviewing this regime has therefore become urgent in the current environment. We need
to ensure we can preserve a framework that ensures the safety and stability of the financial
system when the UK is no longer a member of the EU.
In this regard, we think the recent European Commission proposals to amend EMIR are a step in
the right direction. If adopted, they would provide the supervisors and the relevant central banks
of issue with the guarantees they need in order to monitor and address risks to the EU's financial
system. I therefore welcome the fact that the Commission has referred to the role that we should
play as central bank of issue: we certainly need to play a strong role here, using all the
instruments required to exercise our CBI competence.
It is also worth noting that most of the proposals presented by the Commission merely replicate
the approaches already followed by many other major jurisdictions. In that sense, they should
seem familiar to authorities and lawmakers on other continents.
We are aware that Brexit is a cause for concern in the future regulatory treatment of central
clearing. In this regard, we know that there has been significant focus on one aspect of the
recent Commission proposal, namely the ability of the Commission to deny recognition to a CCP
that poses excessive risks to the financial stability of the EU, and to require it to establish itself in
the EU if it wishes to provide clearing services in the Union. This would be just one of the tools
available to EU authorities under the revised EMIR proposal. I believe that such an approach will
be justified in case EU authorities are unable to adequately control risks and fulfil their mandates
through other means. Ultimately, however, it will be up to the Commission and the EU legislators
to decide on the specific conditions for triggering such a requirement, in the context of the
forthcoming legislative discussions. The ECB and other central banks of the EU are, of course,
carefully examining the Commission's proposal and the ECB will issue an opinion on it in the
coming months.
Looking beyond the current political discussions, we have clear objectives, and they are shared
by the entire regulatory community: namely, making sure we continue to improve the safety and
resilience of the global clearing landscape, avoiding market fragmentation, and fostering
cooperation between authorities.
Thank you for your attention.
1
See, e.g., Coeuré, B. (2017), Central clearing: reaping the benefits, controlling the risks, Financial Stability
Review, Banque de France, April 2017.
2
See, e.g., the ESCB report on the access of CCPs to central bank liquidity facilities.
3
See CPMI and IOSCO (2012), Principles for Financial Market Infrastructures (PFMI), April 2012; and CPMI and
IOSCO (2014), Recovery of financial market infrastructures, October 2014.
4
See also the 2016 ESMA stress test.
5
A final CPMI-IOSCO guidance on CCP resilience and recovery will be published in July 2017. For earlier work,
see CPMI and IOSCO (2016), Resilience and recovery of central counterparties (CCPs): Further guidance on the
PFMI - consultative report, August 2016.
6
ECB calculations based on 2016Q4 data from trade repositories.