Brussels, 11/06/2010 (Agence Europe) - A key section of the EU's new legislation to be unveiled by the European Commission will address derivatives and payment for standard derivatives through central counterparty clearing (CCP). Recognising the risk reduction merits of CCPs, the European Banking Federation (EBF) recommends four measures to achieve this objective: - market-driven central counterparty clearing (the Commission is reported to be considering giving the new European Financial Market Supervision Authority -ESMA - the power to decide which deals would have to be paid for through CCPs); - capital incentives for central clearing or OTC contracts; - strengthening the collateralisation in bilateral clearing (through simple cancellation-clearing for example) rather than inflicting penalties through further capital requirements; and -proper corporate governance and effective supervision of CCPs.
Governance. According to the EBF, CCPs should have governance systems robust enough to enable them to properly carry out their work and the EBF calls for CCPs to have Risk Committees and crisis action plans. Risk assessment methodologies used could be submitted to supervisors and market operators upon request. The CCPs should be subject to minimum capital requirements and should set up Risk Committees, membership of which would include users and whose decisions would be binding on the CCPs. European banks believe that CCP supervision should be carried out nationally but authorisation to operate for CCPs should occur at European level.
In order to increase transparency on the interconnection of positions held by derivatives players, the draft legislation suggests the creation of trade repositories covering all derivatives deals. The EBF says that “reported information to trade repositories should refer to all contracts traded in one (or several) segment(s) of the OTC derivatives markets, both centrally and non-centrally cleared. Trade repositories must ensure continuous and timely access to reported information, notably to competent authorities. The decision on the establishment of a trade repository should be market-led. European trade repositories should be authorised and supervised by ESMA.”
The EBF believes that the complexity of the derivatives markets is such that CCPs cannot be made interoperable. If interoperability were, however, required, CCPs would have to demonstrate the existence of strong demand from users for interoperability in advance. The EBF warns of the dangers of the extra costs of interoperability being transferred on to CCP users. (M.B./transl.fl)