François Villeroy de Galhau: Recovery and resolution of CCPs
Opening speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the
Policy conference "Recovery and resolution of CCPs", Paris, 24 June 2016.
* * *
I will not comment now on the results of the British referendum. Be only assured that we are mobilised and
determined.
France has already quite a long history with CCPs. La Caisse de liquidation, based in Le
Havre, was the first to provide, in 1882, an insurance against counterparty risk on
commodities markets. This history explains why we have a longstanding role as CCP
overseer; it gives us also a special interest and commitment to contribute to this policy issue,
on which I would like to share a few thoughts. Considering the growing importance for
financial markets and financial stability of CCPs, it is our collective responsibility
shared among the financial industry and regulators- to maintain a robust network of
CCPs. As we strongly believe in the key role of CCPs we must ensure that they never
become the next "too big to fail" institutions.
The growing importance of CCPs is linked to regulatory changes, but not only. It is
also linked to financial disintermediation and changes in the behaviour of market
participants, which in both cases are most welcome evolutions.
Regulatory changes and the Pittsburgh agenda have been obviously major factors
contributing to the systemic importance of CCPs. However, the clearing obligation for OTC
derivatives is not the end of the story.
Another potent factor is indeed the movement towards disintermediation, which should
further amplify the role of CCPs. This disintermediation trend is fostered by public initiatives,
such as the Capital Markets Union promoted by the European Commission in the EU. This
movement is also related to market initiatives, notably in our financial centre here in Paris, to
promote market financing as a complement for bank credit: for instance, the ESNI (Euro
Secured Note Issuer) allows for the securitisation of high quality credit claims to improve
SME financing.
We also see a growing appetite of market participants for central clearing to further
secure their transactions. Repos are increasingly cleared in CCPs in the EU, and this has
stood as a key factor in the resilience of the European repo market over the latest years.
However, with greater systemic importance come greater responsibilities.
Greater responsibilities lie first with the industry.
The clearing industry must have a coherent and resilient organization. We must not
yield to the temptation to maximize netting effects.
We all agree that the primary objective of central clearing is to reduce systemic risk.
CCPS cannot be considered primarily as vehicles for improving operational and capital
efficiency. They should be as well financial stability enhancers. The proposed merger of the
London Stock Exchange Group and Deutsche Börse might be a relevant illustration of the
risk of a trade-off between these two objectives. So we will closely look at it from a financial
stability perspective, as I already said.
It is also industry's responsibility to locate CCPs in the appropriate currency area, to enhance
the management of liquidity risk, which is essential for CCPs' resilience.
Clearing members are also responsible for steering CCP risk management towards best
practices. Their participation in the governance of CCPs is key in this regard. This should be
materialised by regular feedback on CCPs' methodology and stress test results, which
should be disclosed to participants.
When considering regulators and overseers, the priority must be to constantly improve
CCP resilience, building on the CPMI-IOSCO Principles for Financial Market Infrastructures.
We must avoid regulatory arbitrage and competition through the reduction of prudential
requirements. This means tighter international harmonization of CCP requirements. In this
regard, I salute the important work currently carried out by CPMI-IOSCO to promote more
granular guidance and steer CCPs towards best practices. This includes the alignment of
incentives among market stakeholders to improve risk management. This can be illustrated
with the promotion of the "skin in the game" for CCPs in the default waterfall, which aligns the
incentives of CCP shareholders with those of clearing members. This should also include the
conduct of frequent supervisory stress tests for CCPs, to bring more comfort with regard
to their resilience. It would create an objective external metric to ensure the adequacy and
the consistency of their risk practices. This needs to be developed to assess the
management of credit risk but also of liquidity risk, which is too often ignored.
Finally, let me say a last few words to introduce the precise topic of this conference. As you
know, regulations require CCPs to consider all extreme but plausible scenarios in their daily
risk management. However, we cannot ignore tail risk. The remote possibility that CCP
resources would be exhausted in a crisis must be dealt with appropriately. This is why we
need robust recovery and resolution arrangements for CCPs, to preserve financial
stability in all circumstances.
Before I leave you to discuss this complex issue, I would like to offer a few thoughts:
- The cornerstone principle of resolution is always financial stability: this should
be achieved through the continuity of CCP services when possible, but not at the
expense of the financial survival of CCP members and clients.
- The permanent cost of such a regime should be assessed carefully in order to
preserve incentives in favor of central clearing. CCPs already have properly
sized financial resources and a sound business model that must be preserved.
- Resolution arrangements should balance predictability for CCP participants and
flexibility for the resolution authorities, whose task to preserve financial stability
in the most extreme circumstances should not be hampered.
- And lastly, cooperation between authorities and consistency at the
international level are key to ensure efficient resolution planning and resolution
actions, and to avoid regulatory loopholes and arbitrage. This conference is indeed
illustrative of the spirit for further international cooperation in this field.
Thank you for your attention. I wish you a very fruitful conference.