The European Commission is considering drawing up a framework for ensuring the stability of central counterparties (CCPs) over and above requirements recently imposed by new swaps regulation.
In a consultation that looks at resolution and recovery of non-bank financial market infrastructure – covering central securities depositories (CSDs) and insurance companies, as well as CCPs – the Commission questions whether measures to protect investors in the event of a CCP or CSD failure should also be implemented at the EU level.
The potential rules would go over and above organisational and asset segregation rules for CCPs that are included in the European market infrastructure regulation, Europe’s blueprint for OTC derivatives reform.
“CCPs play a central role in managing systemic risk but they also concentrate a significant level of financial risk,” stated the paper. “Assessing the adequacy of existing and forthcoming measures in mitigating the likelihood of failure is not the purpose of this paper. As indicated, failure is not fully precluded, for example when the management of risks goes badly wrong. What is at stake here is whether possible extraordinary measures should be foreseen to mitigate the systemic and public consequences of a failure of a CCP or a CSD, ensure continuity of their essential services, and minimise costs for taxpayers.”
For CCPs and CSDs, the paper seeks feedback on the types of scenarios authorities should be prepared for that would require resolution or recovery situations. It also looks at whether an all-encompassing regime could work for governing financial market infrastructure or whether each entity should have its own regime and the extent to which users and regulators can intervene in the event of default.
“Without the in-built safeguards against systemic risk and the spread of contagion which it provides, national authorities may pursue ad hoc stabilisation measures which, while not necessarily designed as such, may force cross-border institutions to withdraw from other markets or to set aside nationally ring-fenced shock absorbers,” read the paper.
The consultation will run until 28 December and the Commission has said final proposals could be adopted as early as next year.