Benoît Coeuré: Towards a macroprudential framework for central
counterparties
Introductory remarks by Mr Benoît Coeuré, Member of the Executive Board of the European
Central Bank, at a policy panel discussion on the progress with new macroprudential
instruments at the ESRB Conference on Macroprudential Margins and Haircuts, Frankfurt am
Main, 6 June 2016.
* * *
Ladies and gentlemen,
I would like to thank the European Systemic Risk Board (ESRB) for organising this event and
inviting me to chair this panel. I will make a few brief remarks before handing over to our
distinguished group of speakers.
I do not intend to talk about the development of new macroprudential instruments - I will
leave this to our panellists. Instead, I will try to set the stage by saying a few words about
central counterparties (CCPs), as they are very much in the spotlight when it comes to
debates about the future of macroprudential policy.
The strong regulatory push towards central clearing in recent years has clearly helped
improve the safety and stability of the financial system. Among the many well-known
advantages of central clearing are the reduction in counterparty credit risk, and the
simplification of the network of exposures through multilateral netting and risk sharing, which
also comes with a more efficient use of collateral. Default risk, no longer being dispersed
thinly across the global financial system1, is better pooled and monitored.
At the same time, the drive towards central clearing has made CCPs key nodes for
propagating risk in the system2. Given the central role CCPs play in the financial system and
the potential effects their risk management can have on the economic cycle, it has become
increasingly important to consider CCPs not only from a microprudential but also from a
macroprudential perspective. Therefore, the discussion about macroprudential policy,
previously almost exclusively referred to in the context of banks, is now being expanded to
include CCPs. Indeed, the Committee on Payments and Market Infrastructures (CPMI) and
the International Organization of Securities Commissions (IOSCO) already considered some
of these aspects when they published in 2012 the Principles for financial market
infrastructures (PFMI)3, for instance by requiring CCPs to adopt stable-through-the-cycle
margin practices and collateral haircuts.
Before turning to the more recent work of the CPMI and IOSCO in this area, allow me to
recall two important general considerations that should be taken into account when
developing macroprudential frameworks for CCPs.
First, we should not try to apply blindly to CCPs the macroprudential tools we have
developed for the banking sector. Unlike banks, whose social function is to transform risk
and maturity, CCPs are not in the business of taking risk directly but of pooling risk.
Therefore, we do not want to regulate them primarily as risk takers. Instead, our aim is to
control the way they propagate risk, including in particular the way they allocate losses in
case of a participant's default. Second, while the microprudential and macroprudential
approaches have different perspectives, they may in practice rely on some of the same tools
to reach their objectives. A macroprudential approach to CCPs should also involve elements
of sound microprudential risk management, as both can be tightly interlinked.
Bearing this in mind, allow me to lay out five elements of the macroprudential approach to
CCPs which are being developed and implemented at CPMI-IOSCO level.
First, we are currently working towards establishing a set of criteria to identify CCPs that are
systemically relevant in more than one jurisdiction. This is an important issue given that the
PFMI require CCPs with cross-border relevance or with a more complex risk profile to apply
more stringent risk mitigation standards - in particular a "cover 2" requirement for calibrating
their stress testing and for sizing their financial resources. Providing authorities with a
consistent framework for assessing systemic relevance is the starting point of any
macroprudential approach.
Second, we want to ensure that the financial buffers built up by CCPs in good times are
highly robust, thereby reducing the need to take sudden and abrupt measures in more
stressed situations. In this context, we are focusing on making CCPs fully resilient by
ensuring they are rigorously applying the PFMI, and have adopted appropriate arrangements
for recovery planning in line with the guidance issued by CPMI-IOSCO in 2014. In this
regard, CPMI-IOSCO will publish this summer two reports that assess the way international
requirements are being implemented, drawing on surveys carried out with a significant
number of CCPs worldwide. Additional guidance will be proposed in some areas, such as on
stress testing. In other areas, such as recovery planning, we will ensure the existing
guidance is properly and fully implemented.4
This work is fully consistent with the forthcoming guidance by the Financial Stability Board
(FSB) on CCP resolution.
The third area where the forthcoming reports will propose further guidance is in the
identification and mitigation of potential procyclical behaviour. Building on the requirements
for margining and haircut-setting practices in the PFMI, we will now go further by requiring
CCPs to take a holistic approach to addressing the issue within their risk management
frameworks. The guidance will also point out that a CCP is expected to measure
procyclicality by using quantitative metrics, and to include considerations related to
procyclicality in its model validation process. One open question is whether we should raise
the bar even further by establishing minimum, binding margin floors, as is now the case for
non-centrally cleared securities financing transactions.5 I trust our panellists will share their
insights on this issue.
As a fourth step, I believe it would be helpful to enhance our capacity to identify and address
financial vulnerabilities in CCPs at an early stage by complementing CCP in-house stress
testing with a framework for supervisory CCP stress testing that can be conducted across
jurisdictions. Supervisory stress testing can be a key building block of the macroprudential
framework for CCPs if it accounts for the propagation of risk across CCPs as well as the
spillover to, and spillback from, their clearing members. The recent European Union-wide
stress test led by the European Securities and Markets Authority (ESMA) is a promising first
step in this direction6. While this is an ambitious project and will take some time, I hope we
can propose a way forward at the G20 summit in September.
Finally, we will need to make substantial progress in understanding and assessing
interdependencies between CCPs and their participants, across the multiple relationships
they have with each other. Mapping the complex network of these interlinked exposures is
crucial from a macroprudential standpoint. This work is currently being carried out by the
FSB, and its success will depend on the full and timely availability of data from all
jurisdictions involved in the exercise. The information- sharing framework and the
methodology being developed for this analysis is a precondition for future work, such as
supervisory stress testing.
Pooling risk in CCPs brings benefits for market participants and generates positive
externalities for the broader economy - provided that the propagation of risk is well
understood and well regulated. As Mark Twain once said: "Put all your eggs in the one
basket and - watch that basket!"7. The macroprudential framework for CCPs is about making
sure that we're watching that basket.
I will now hand over to our panellists.