benoit cœure : risks in central counterparties ( ccps ) speech by mr benoit cœure, member of the executive board of the european central bank, at the policy panel during the conference “ mapping and monitoring the financial system : liquidity, funding, and plumbing ”, organised by the office of financial research and financial stability oversight council, washington dc, 23 january 2014. * * * i would like to thank andreas schonenberger for his contribution. i remain solely responsible for the opinions contained herein. accompanying slides can be found on the european central banks ’ website : http : / / www. ecb. europa. eu / press / key / date / 2014 / html / sp140123 _ 1. en. pdf. ladies and gentlemen, i am delighted to participate in this policy panel today on a topic of high importance to the ecb from the perspective of monetary policy implementation, financial stability, and banking supervision. central counterparties ( ccps ) play a key role in the financial markets by managing and structuring a complex web of counterparty risk. as such, risks in ccps are of interest to ccps themselves, their clearing members and the regulators who supervise them. what i would like to do in my brief introductory remarks is therefore not only to focus on the risks in ccps, but also and importantly on the risk of ccps. the growing importance of ccps certainly brings a number of important benefits that alternative bilateral arrangements could not do to the same extent. however, the rise of central clearing may also be accompanied by some unintended side effects that need to be addressed. the growing importance of central clearing first, however, let me illustrate the growing importance of central clearing on the basis of some figures [ slide 2 ]. the figures show the importance of ccps already today for interest rate and credit derivatives in europe. there are also ccps for cash products and the role these ccps would play for collateral pools of triparty repos is of increasing importance. with the forthcoming implementation of the central clearing requirement for standardised otc derivatives contracts, the volume of transactions cleared by a ccp will rise significantly also in that market segment over the coming years [ slide 3 ]. a recent quantitative impact study run by the working group on margining requirements of the basel committee on banking supervision ( bcbs ) and the international organization of securities commissions ( iosco ) estimated that the global volume of centrally cleared otc derivatives could rise from a

notional value of usd 142. 7 trillion, or around 28 % of otc derivatives traded, to usd 268 trillion after migration to the clearing requirement, or 53 % of otc derivatives traded. all these figures quite forcefully demonstrate the increasing systemic importance of ccps. now, why is there such a push for central clearing and what does that mean from a systemic risk perspective? central clearing : benefits and side effects i see four main benefits that explain the market - driven and regulatory push for central clearing [ slide 4 ]. bis central bankers ’ speeches first, cpps overcome information asymmetries that typically exist in marketplaces, especially markets with a big number of heterogeneous players. ccps allow participants to trade with one a single counterparty ( the ccp ), which greatly facilitates the due diligence efforts and risk management burden that counterparties normally face. second, ccps offer state - of - the - art margining and risk management methods that do not exist to the same extent in the bilateral world, which either relies on standardised margining methods that are not very risk - sensitive or on bank - internal margining models that may not necessarily meet the same high standards that ccps are required to meet. third, by introducing default and clearing funds, ccps are able to mutualise losses in a transparent and predictable way, which makes it easier for financial markets to handle huge losses and liquidity shortfalls that may occur in catastrophic events. by carefully designing their risk management framework, ccps can help to ensure that losses fall predictably on those who are better able to cope with them. more generally, central clearing introduces ex ante transparency and therefore certainty, provided that the rules are clear and well understood by market participants. finally, and most importantly, central clearing allows for the multilateral netting of exposures so that a given level of risk protection can be achieved with a smaller amount of collateral, or vice versa, a given amount of collateral can achieve a higher level of risk protection. notwithstanding the numerous benefits of central clearing, the rise of central clearing may be associated with a number of side effects [ slide 5 ]. first, risk concentration within ccps will grow, both nationally and internationally. ccps are increasingly turning into institutions of unprecedented systemic importance. their failure could lead to very serious systemic disruptions, which is why not only sound risk management, but also an effective recovery and resolution regime for ccps is key. second, a growing number of