controlling the risks
Committee on Payments
and Market Infrastructures
(Bank for International Settlements)
As a result of structural changes in financial markets and the introduction of mandatory
central clearing obligations for standardised over-the-counter (OTC) derivatives, central
clearing has expanded significantly in recent years. In parallel, public authorities have devoted
greater attention to strengthening the global safeguards for central clearing, notably with
the adoption of the CPMI-IOSCO Principles for Financial Market Infrastructures in 2012,
a complementary CPMI-IOSCO report on recovery of financial market infrastructures in
2014, and dedicated Financial Stability Board guidance on how to apply the "Key Attributes
of Effective Resolution Regimes for Financial Institutions" to financial market infrastructures
in 2014. In 2015 global standard-setting bodies launched a comprehensive work plan on
central counterparty (CCP) resilience, recovery, resolution and clearing interdependencies
to further enhance this framework.
This article takes stock of the latest achievements in this area and outlines future priorities,
concerning the finalisation of the CCP work plan, interactions between requirements for
NB: All views expressed
here are the author's own
central counterparties and those for banks, greater granularity of central counterparty
and do not necessarily reflect
supervision and oversight, cross-border cooperation between authorities as well as those of the ECB, the CPMI
or CPMI-IOSCO.
macroprudential safeguards for central clearing.
C1 Share of centrally cleared transactions in OTC derivatives markets
entral clearing has expanded significantly in
(%)
recent years as a result of both market-driven
60
and regulatory factors. The clearing
industry had already started to undergo structural
C
50
changes before the financial crisis in 2007-2009
against the backdrop of globalised financial markets,
40
regulatory harmonisation, the removal of trade
30
barriers, and technological process reducing the
cost of services provided by CCPs (CPSS, 2010).
20
10
The financial crisis subsequently underscored the
benefits of central clearing in terms of systemic
0
risk reduction through robust counterparty risk S2 S1 S2 S1 S2 S1 S2 S1 S2 S1
2011 2012 2012 2013 2013 2014 2014 2015 2015 2016
management, greater transparency and more efficient
use of collateral through multilateral netting. Particular
Interest rates swaps
Credit default swaps
concerns regarding bilateral clearing were identified
Source: FSB data, ECB calculations.
with regard to OTC derivatives markets, as the
opacity of the underlying exposures, together with
uncertainty regarding counterparty creditworthiness fundamentally different from banks, whose social
and the inherent leverage and complexity of OTC function is to transform risk and maturity. In
derivatives, had been a major factor, if not in triggering addition, the financial resources included in the
the collapse of Lehman Brothers and the near-default CCP recovery waterfall provide for "built-in bail-in"
of AIG, at least in amplifying market disruptions of their shareholders and clearing members.
in their aftermath. At the Pittsburgh summit in
September 2009, G20 leaders committed themselves Nevertheless, in order to ensure that this is the case
to increasing the resilience and transparency of OTC and that CCPs can withstand not only tail events
derivatives markets, including through mandatory but "tail of tail" events involving the default of
central clearing of standardised OTC derivatives. As a multiple clearing members, policymakers have in
result, the share of OTC derivatives cleared centrally recent years embarked on an ambitious agenda to
has increased markedly, especially in the OTC interest enhance their robustness. The adoption by the CPMI
rate and credit derivatives segments (see Chart 1). As and the Board of the International Organization of
evidenced by the Financial Stability Board (FSB), there Securities Commissions (IOSCO) of the Principles
also seems to be scope for substantial further growth for Financial Market Infrastructures (PFMI)
in central clearing, especially for interest rate swaps (CPMI-IOSCO, 2012), related guidance on financial
(IRS) and credit default swaps (CDS) (FSB, 2016). market infrastructure recovery (CPMI-IOSCO, 2014)
and the FMI annex to the FSB's Key Attributes of
Inevitably, the increased share of central clearing Effective Resolution Regimes for Financial Institutions
has been associated with further risk concentration (FSB, 2014) were important milestones of this work.
in CCPs. This in itself is not a concern. As long as
CCPs are superior risk managers and act as pillars In 2015, at the request of G20 finance ministers
of strength rather than sources of contagion during and governors, relevant global standard-setting
potential crisis situations, they act as risk poolers, bodies agreed to further strengthen the safeguards
not risk takers, and they therefore reduce the overall for central clearing with the adoption of the
level of risk in the global financial system (not to "CCP work plan" (FSB SRC/FSB ReSG/BCBS/
mention other benefits such as a more efficient CPMI/IOSCO 2015). The CCP work plan
use of scarce collateral). In this respect, they are focuses on assessing whether existing international
1| Recent progress in the global
requirements for CCP resilience, recovery and
policy framework for central
resolution are adequately implemented and whether
counterparties
additional guidance should be provided. It also
provides for further exploring the interdependencies
1|1 Resilience
between CCPs and their participants to better
understand respective contagion channels and
potential vulnerabilities. Significant progress has CCPs are exposed to various types of risks, notably
been made in the CCP work plan in the meantime, credit and liquidity risk, custody and investment
with most deliverables expected to be finalised by risk, operational risk and general business risk.
mid-2017. Meanwhile, at the European Union Robust credit and liquidity risk management is
level, the European Commission has proposed CCPs' first and foremost line of defence against
new rules for the recovery and resolution of CCPs potential financial threats to their viability. CCPs
(European Commission, 2016). should be resilient in the sense that their financial
resources allow them to withstand potential failures
This article takes stock of recent progress in the of major clearing members as well as any other
global policy framework for CCPs (Section 1) extreme but plausible stress events ("non-default"
and outlines future priorities (Section 2). scenarios, e.g. related to custody investment losses,
Section 3 concludes. operational and legal risk and cyber threats).
Box 1
CPMI-IOSCO additional guidance on PFMI requirements
In April 2017, based on public consultation, CPMI-IOSCO expects to propose clearer and more granular guidance on the implementation
of certain PFMI requirements, including on:
• explicit board responsibilities and disclosure mechanisms regarding CCPs' financial risk governance to promote both closer senior
level scrutiny and involvement of relevant stakeholders;
• rigorous stress-testing on the basis of more detailed guidance for identifying relevant risks, developing extreme but plausible scenarios
and treating client exposures, as well as for calculating and aggregating stress test results;
• distinguishing between credit and liquidity risks in identifying stress scenarios and determining the necessary loss-absorbing resources
as well as duly considering affiliates of clearing members when gauging the largest potential exposures arising from member default;
• deeper analysis to determine whether, in view of a CCP's specific risk profile, there could be a need to go beyond the minimum
coverage requirements for credit and liquidity risk set out in the PFMI;
• robust margining practices through a more granular approach reflecting the specific risks of each product, portfolio and market served;
prudent assumptions regarding the assumed margin period of risk, other margin model parameters and pricing data; measures to
pre-empt a potential intraday erosion of initial margin and further safeguards for portfolio margining;
• further developing the toolkit to measure and address procyclicality with respect to margin and collateral haircut policies;
• determining and exposing an appropriate amount of CCPs' own financial resources to absorb losses related to participant default,
custody and investment of participants' assets and ensuring that such resources are of high quality and sufficiently liquid.
Against this backdrop and in the context of the in place that address both default and non-default
CCP work plan, CPMI-IOSCO assessed CCPs' scenarios. These need to include arrangements for
loss absorption capacity and liquidity coverage comprehensively allocating potential credit losses
against the related PFMI requirements. and liquidity shortfalls as well as for replenishing
mutualised default resources and capital after
In a report issued in August 2016, CPMI-IOSCO financial buffers for extreme but plausible conditions
(2016b) reviewed the financial risk management have been exhausted (see Coeuré, 2015a for a
and recovery practices at a sample of ten CCPs broader discussion of the loss-absorbing capacity of
- including a mix of globally active and more CCPs and its impact on stakeholders' incentives).
regionally focused ones - that provide clearing
services for derivatives in nine jurisdictions. The In addition, CPMI-IOSCO are currently working
report underlined that while CCPs have made on guidance to further facilitate CCPs' preparation
progress in developing frameworks in line with of recovery plans by elaborating on some aspects
the PFMI, there are a number of shortcomings of their 2014 report (see section 2.1).
that should be addressed, notably in the areas
1|3 Resolution
of recovery planning and credit and liquidity
risk management. Taking into account the
stakeholder feedback received, CPMI-IOSCO Recovery arrangements are in principle designed
issued initial proposals for guidance ex ante and should be comprehensive. However,
(CPMIIOSCO, 2016a), which is expected to be finalised since extreme - and by definition implausible -
in April 2017 (Box 1). market conditions are difficult to predict, there
is a remote possibility that even a very carefully
1|2 Recovery
designed recovery plan may ex post turn out not
to be effective in returning the CCP to viability
Notwithstanding the substantial work on CCP or that its implementation may give rise to
resilience including under extreme but plausible unexpected risks to financial stability. Besides,
stress conditions, it cannot be excluded that CCPs expectation of a possible public bail-out would
may face even more extreme market events where weaken risk management practices in CCPs and
their existing safeguards and financial buffers may encourage a race to the bottom in margining and
not be fully sufficient. To address such tail-of-tail haircutting practices. A framework enabling orderly
risks, the PFMI require CCPs to draw up recovery intervention by a resolution authority must therefore
plans to ensure continuity of their critical functions also be in place, especially to ensure the continuity
without intervention or support from public of critical functions of the CCPs, minimise risks
authorities. CPMI-IOSCO have also provided to financial stability and set the right incentives
specific additional guidance on the development for CCP shareholders and clearing members so
of recovery plans (CPMI-IOSCO 2014). as to avoid potential reliance on public bail-out
funds and related risks for taxpayers.
While CCP resilience requirements have been
in place for several years (CPSS-IOSCO 2004), It should be underlined that the resolution of a
recovery planning is still a fairly new area. When CCP would not necessarily imply winding it down.
monitoring the implementation of the PFMI, There could be cases where a CCP in resolution
CPMI-IOSCO (2016b) found that a number may cease to exist as a legal entity, for example
of CCPs had not yet put in place recovery plans where the resolution authority may choose to sell
fully in line with the PFMI. Against this backdrop, or transfer its business. However, the economics
CPMI-IOSCO (2016a, 2017) recently reiterated of clearing favour economies of scale and the
the requirement for CCPs to have recovery plans emergence of local monopolies, making such a
Box 2
solution in many cases difficult to implement.
Interoperability between CCPs may facilitate
FSB draft guidance on CCP resolution
the transferability of portfolios, but it may also
have unwelcome financial stability consequences
Key elements underlined in the draft guidance include the following:
(Coeuré, 2015b, and ESRB, 2016). The continuity
of the CCP's critical functions should be ensured
• CCP resolution should pursue the objective of financial stability, ensure the
in all cases.
continuity of critical functions and avoid exposing taxpayers to losses in
all jurisdictions where those functions are critical. It should also maintain
As noted in the introduction, the FSB Key Attributes
appropriate incentives for effective default management and recovery.
of Effective Resolution Regimes for Financial
Institutions and the respective FMI Annex have
• Resolution should to the extent possible, be predictable and ensure that no
already set out a framework for CCP resolution.
creditors are "worse off" in resolution than they would have been under CCP
Under the CCP work plan, the FSB has considered
insolvency proceedings. Resolution authorities should therefore follow the
the need for additional guidance on implementation
steps under the CCP recovery plan unless a departure is deemed necessary
in order to assist authorities in resolution planning
to achieve the resolution objectives and safeguard financial stability. Resolution
and promote consistency in approaches across
authorities should also have the power to award compensation to clearing
countries. Following up on an earlier consultation
members contributing resources in excess of their obligations under CCP
(FSB, 2016), in February 2017 the FSB published
rules in the form of equity or other types of ownership.
draft granular guidance on central counterparty
resolution and resolution planning for comments
• In defining the timing of entry into resolution, there is a need to balance
(FSB, 2017, see Box 2). Related work has been
predictability for stakeholders with flexibility for resolution authorities. To
led by the European Commission (2016) at the
this end, the draft guidance sets out potential indicators for default and
European level.
non-default-related losses that may inform the decision on whether to place
the CCP in resolution. In addition, relevant authorities should cooperate closely
1|4 Interdependencies
in the lead-up to resolution.
In order to ensure the robustness of the central
• Resolution authorities should pursue prudent and consistent approaches when
clearing landscape as a whole, measures calibrated
assessing CCPs' resolution funding. To this end, the draft guidance sets out
to individual CCPs may not be fully sufficient. In
some common minimum criteria that should be considered. Temporary public
particular, CCPs all rely heavily on contributions,
funding should only be used as a last resort and coupled with very robust
financial resources and liquidity provided by the
ex post recovery mechanisms.
same major banks (as clearing members and/or
financial service providers), which creates
• When conducting resolution planning, authorities should carefully differentiate
significant interdependencies between CCPs.
between potential default and/or non-default resolution scenarios and related
These interdependencies may affect the robustness
arrangements for allocating financial losses and replenishing CCPs' financial
of CCPs especially in the case of distressed market
resources.
conditions that could trigger default management,
recovery and/or resolution actions in more than
• Oversight, supervisory or resolution authorities should be able to address
one CCP at a time. Recent supervisory stress test
material impediments to resolvability that may be identified by the resolution
exercises in the EU and in the United States have
authority.
started lifting the veil on such interdependencies
(ESMA, 2016, and CFTC staff, 2016).
• To assist in the establishment of crisis management groups for CCPs that
are systemically important in more than one jurisdiction, further guidance is
Against this backdrop, the Basel Committee
provided on identifying the relevant CCPs and the composition of these groups.
on Banking Supervision (BCBS), the CPMI,
the FSB and IOSCO established a joint study
CCP
group in July 2015 to identify, quantify and Concerning recovery, one important area still
analyse interdependencies between CCPs and under discussion relates to safeguards for effective
clearing members and any resulting systemic interaction between CCP recovery and resolution.
interdependencies. As a first step, the study group
collected data from around 25 CCPs globally There are at least three reasons why recovery
in order to identify CCPs' exposures to banks and resolution plans have to be consistent. First,
as direct members, clients and financial service recovery planning provides the presumed starting
providers. This work was complemented by an point for resolution and may therefore limit the
assessment of existing information on banks' options available to the resolution authority. Second,
counterparty and funding exposures to CCPs recovery takes place in the shadow of resolution,
compiled by the International Data Hub at the implying that resolution plans shape stakeholders'
Bank for International Settlements. incentives in recovery. Third, resolution should
obey the "no creditor worse off" principle, for
which recovery provides a relevant benchmark.
2| Future priorities
Since different types of authorities are involved,
2|1 Completing the CCP work plan
with supervisors and overseeers reviewing CCPs'
recovery plans and resolution authorities conducting
The CCP work plan is currently being finalised. CCP resolution planning, good coordination is
of the essence.
CCP
While, as regards resilience, final guidance
on CCPs' risk management practices is expected Potential risks for effective CCP resolution arising
to be issued in April 2017, CPMI-IOSCO have from the interplay with CCP recovery plans are not
in the meantime also begun exploring the scope a remote theoretical possibility. CCP recovery plan
for supervisory stress-testing as a complement to provisions regarding requirements for participants
CCPs' in-house stress testing. The rationale for to make additional contributions in cash to CCPs
supervisory stress-testing is twofold, namely in the event of financial shortfalls ("cash calls")
to (i) support authorities' review of individual are an important case in point.
CCPs' stress tests and to (ii) make it possible
to test the collective response of CCPs to Cash calls are recognised as an essential element of
shocks affecting them simultaneously. Given resolution authorities' toolkit for allocating financial
the latter rationale, supervisory stress-testing losses, notably in view of their measurability.
of CCPs has an inherently macroprudential Indeed, while clearing participants can fully prepare
dimension. The development of supervisory for cash calls if they are contractually defined
stress-testing is a project with a longer-term and capped ex ante (e.g. in relation to clearing
horizon, given the related data requirements members' guaranty fund contributions), potential
and analytical challenges in terms of building exposures arising from alternative measures, such
relevant scenarios and identifying contagion as gains-based haircutting of variation margins
channels across CCPs and (from and to) (VMGH) or partial tear-up may be difficult to
their clearing members. However, CPMI and predict and prepare for as they depend on open
IOSCO, also building on existing experience positions and market movements at an uncertain
(as noted above), have recently taken a major point in the future. The ability of clearing members
step forward by launching the development to measure and manage their potential exposures
of a basic conceptual framework to guide in CCP resolution is an important aspect not only
authorities in the construction and execution from a bank supervisory perspective but also from
of multi-CCP supervisory stress tests. a broader financial stability angle, as it clearly
102 Banque de France Financial Stability Review No. 21 - April 2017 - The impact of financial reforms
has an impact on the credibility of resolution market environment. Second, potential losses
funding. However, based on a stocktake of public will depend on the type of risk to which a CCP
information on the rules of ten major global may be exposed. For instance, while losses arising
CCPs for allocating participant-default-related from a small operational outage would be limited,
losses, the ECB found that half of those CCPs substantial investment losses could arise in case
provide for only one cash call in their recovery of sharp and sudden market movements. Against
plans. Therefore, if resolution authorities of those this backdrop, consideration should be given to
CCPs were to favour the use of cash calls over examining whether CCPs should be explicitly
alternative loss allocation tools such as VMGH, required to pursue an appropriately differentiated
they would be restricted in their ability to act and prudent approach when calibrating their
accordingly: they could either be stripped of this capital defences for non-default recovery scenarios.
tool (if they intervene after CCPs have already
used the call) or, in order to make use of the cash When it comes to covering investment risk, the
call embedded in the CCP's rulebook, they would size of the initial margin could be an important
need to intervene immediately after the exhaustion metric to determine the size of losses that may
of the prefunded waterfall, thereby entirely crystallise. As set out in Chart 2 below, an internal
shortcutting recovery, which could also be unwarranted. ECB stocktake of the capital held by eight major
Unless applicable statutory regimes provide the EU CCPs, based on publicly available information,
concerned resolution authorities with a dedicated showed that capital amounts to less than 2% of
resolution cash call on CCP participants, they may initial margin holdings. This appears rather low in
have to require amendments to the recovery plan view of the prospectively very significant market
to ensure adequate flexibility for their actions. movements during a CCP recovery situation
and also considering the highly demanding
CPMI-IOSCO are also considering potential requirements for taking into account large-scale
additional guidance for non-default-related recovery market movements when calibrating CCPs' financial
events, notably regarding loss allocation. As set out resources for default-related losses.
in the 2014 recovery guidance, losses arising from
non-default risk are first and foremost the responsibility
of CCPs and their owners, especially with regard to
general business and operational risk. However, CCPs
may provide for the involvement of participants in
C2 Initial margins and capital at selected EU CCPs
the allocation of custody and investment losses in a
(x-axis: total initial margins in EUR billions,
manner proportionate to participants' involvement
y-axis: total CCP capital/total initial margins in %)
in the respective risk governance.
2.0
1.8
An issue that may warrant further consideration
1.6
in the medium term is the calibration of CCPs'
1.4
own defences against non-default losses. Under the
1.2
PFMI, CCPs are required to hold liquid net assets
1.0
funded by equity equal to at least six months of
0.8
current operating expenses to absorb general
0.6
business losses. It must be underlined that this is
0.4
a minimum requirement only. First, given that 0.2
capital is calibrated in relation to normal operating 0.0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140
conditions, it may not be sufficient for large-scale
Source: CPMI-IOSCO public disclosures ; financial statements.
or recurring business losses in a highly distressed
CCP
With respect to resolution, the FSB is definition, more severe than extreme but plausible
currently considering stakeholder feedback on its market conditions.
draft guidance issued in February 2017, with the
objective of issuing final guidance by mid-2017. Balancing these different considerations will
As set out in the draft guidance, one issue that will require further analytical support. The work on
continue to be assessed with a longer-term horizon CCP interdependencies, multi-CCP stress-testing
is CCP resolution funding. Robust requirements to as well as practical experience in actual CCP
ensure the availability of adequate funds to allocate resolution planning under the forthcoming FSB
financial losses in resolution and to replenish CCPs' guidance are expected to provide significant input
financial resources are critical given that a key in this regard. Against this background, the FSB
objective of CCP resolution is to avoid exposing intends to determine by the end of 2018 whether
taxpayers to losses. However, the determination additional guidance for CCP resolution funding
of appropriate funding arrangements raises some may be needed.
complex issues.
2|2 Addressing interactions between CCP
and banking rules
On the one hand, there is a burden of proof on
CCPs that the available funding credibly ensures
the continuity of their critical functions, including CCPs and major financial institutions are highly
in the event of very severe market conditions going interdependent. Global banks account for the bulk
beyond the scenarios covered under CCP of centrally cleared business and provide critical
stresstesting. In such circumstances, resolution funding services to CCPs, e.g. as investment agents, settlement
that relies entirely on ad hoc funding could raise banks, custodians and liquidity providers. The
challenges as funds would need to be increased at robustness of CCPs therefore depends on the ability
the height of market stress, which could in itself of their participants and critical service providers
further exacerbate market disturbances and may to meet all ongoing obligations under CCPs' rules
simply not work. Temporary public funding could and arrangements (e.g. margin calls, contributions
be difficult to recover from the private sector in a to default management and recovery, liquidity
comprehensive and timely manner. Especially in the arrangements) in an effective and timely manner.
case of global CCPs with members dispersed across
multiple jurisdictions, there could be challenges Robust CCPs are equally important for banks.
in enforcing purely contractual obligations on a Given the large share of banks' counterparty
cross-border basis over a longer-term horizon, exposures concentrated in CCPs, any CCP failure
including in view of potential changes in the or delay in its payment and delivery obligations
CCP landscape following the resolution of a CCP. to its members will imply significant risks for its
members. Banks also entrust CCPs with large
On the other hand, funding arrangements should amounts of high-quality collateral and depend
be proportionate to the "tail-of-tail" nature of CCP on CCPs for services ancillary to central clearing,
resolution risks and should not weaken incentives such as securities lending and settlement facilities.
for CCPs and their members to contribute to
effective ongoing risk management and recovery. Given that the safety of banks and that of CCPs
Funding arrangements should not become so are closely interrelated, respective regulatory
costly so as to call into question the business case requirements are, in principle, mutually reinforcing.
for CCPs, thereby thwarting the central clearing For example, progress on bank capital, liquidity
objective or adversely impacting market liquidity. and resolution significantly reduces the risk that
Finally, it is difficult to accurately predict funding CCPs will face the potential default of one of their
needs for extremely unlikely events that are, by largest members. Similarly, progress in reducing
the inherent procyclicality of CCPs' margin and Similar problems could be associated with the
collateral policies makes it less likely that banks potential inclusion of banks' exposures to CCPs
may be exposed to sudden and steep increases in under the large exposure framework. The large
collateral requirements and related liquidity strains exposure regime, which applies quantitative limits
in tightened market conditions. However, given to banks' exposures to individual counterparties, is
that banks and CCPs are quite dissimilar in terms in principle difficult to reconcile with the nature
of their risk profile, risk controls and balance sheets, of the CCP industry. Even high hard limits may
the regulatory tools applied to them are different. not be workable for products where only one
For instance, while banks mitigate credit risk in CCP provides relevant services, and could conflict
their banking books with capital calibrated in directly with mandatory central clearing obligations.
relation to their risk-weighted assets, CCPs always Banks could also be forced to move to a greater
maintain balanced positions and rely on mutualised extent into bilateral clearing, which would also
default resources to absorb potential losses in be undesirable in view of the recognised greater
case of member default. As already mentioned, safety of central clearing.
assuming that they are properly managed under
the PFMI, CCPs are fundamentally risk poolers, Such cross-sectoral frictions should be addressed in
not risk takers. In addition, central clearing is by a manner that appropriately balances the prudential
nature a more concentrated business than banking. objectives of banking supervisors, the concerns of
These differences need to be taken fully into CCP supervisors and overseers, and the shared
account when designing CCP and banking rules interest in an overall safe and efficient clearing
to avoid unwarranted cross-sectoral externalities. landscape. The FSB as coordinator of the CCP
work plan could play an important role in this
A case in point is the treatment of clients' cleared regard, notably by supporting joint ex ante and
derivatives transactions under the Basel III leverage ex post impact assessments of prudential changes
ratio framework, which provides that clearing by the affected standard-setting bodies. In this
members are not able to offset the initial margin context, it would be important to also consider
posted by their clients against their potential future possible qualitative changes in market structures
exposure to that client. This treatment could that could give rise to new systemic vulnerabilities
weaken the business case for providing client and that may be difficult to subsequently control
clearing services, thereby limiting the scope for or reverse.
indirect access to CCPs and ultimately reducing
2|3 Making CCP supervision and oversight
hedging opportunities for end users. It could
more granular
also give rise to disincentives for using CCPs and
increased recourse to bilateral clearing, which
would be associated with greater systemic risk, Increased central clearing and improved safeguards
including for banks. In addition, the prospective for CCPs contribute not only to the safety but
further concentration of client clearing business also to the efficiency of the financial system, given
in a smaller number of clearing members would the benefits of central clearing in terms of greater
further increase the respective financial risk collateral efficiency and market transparency.
concentration and could limit the ability to port However, more stringent CCP rules come at a
client positions and collateral in case of member cost to CCPs, clearing members and the financial
default, heightening potential systemic spill-over system as a whole. It is also true that while CCPs
risks. The consequences of the Basel III framework are, in principle, systemically relevant in the
for the incentives to clear OTC derivatives and markets served, each CCP is different in terms
other products centrally therefore need to be of its cross-jurisdictional risk implic