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EBF Highlights Concerns About CCPs and Systemic Risk in its Feedback to Commission’s Market Infrastructure Reforms

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There has been a lot of discussion about the pros and cons of mandating clearing for OTC derivatives and the comments received so far by the European Commission on the subject have tended to focus on a proportional, rather than broad brush, approach to the reforms. The European Banking Federation’s (EBF) response, for example, has been to call for a step by step approach to adding the various classes of derivatives to central counterparties (CCPs) in order to bring down counterparty risk without increasing systemic risk overall.

These recommendations to avoid a one size fits all approach to CCP clearing for OTC products is not a new one, as many in the industry have raised similar issues. The fear is that by forcing non-liquid instruments to be cleared, the potential for a CCP to default and thus systemic risk exposure will be increased. Hence the EBF indicates that there is “no single model approach” to this space and that the regulatory community should be engaged in “structured and regular dialogue” with the industry before action is taken. It also adds that a CCP’s risk committee should be heavily involved in the decision making process.

The EBF is also concerned that competition in the CCP market may prove detrimental to the operation of these bodies if it is not monitored carefully. This task of oversight should therefore be the remit of the CCP’s risk committees and regulators. “EBF believes that competition between CCPs should not be at the expense of proper risk management. Being risk takers by definition, CCPs should be single purpose entities which concentrate on their core business and must therefore have capital capable of preserving their stability,” it notes in its response.

It also notes that “unfettered access” to the data held by CCPs should be provided to regulators charged with monitoring their activities. Yet more data for the regulatory community to do something useful with.

The banking sector association is not nearly as prescriptive when it comes to the establishment of trade repositories, however. It notes that the decision to establish these infrastructures should be “market led” but does not prescribe how they should operate. Although it does note that reporting requirements to these repositories should not existing transaction reporting requirements, as determined by the Committee of European Securities Regulators (CESR) under MiFID. “Formats for reporting information to trade repositories should be subject to market driven, regulatory promoted standardisation,” it adds. Yet more ammunition for a regulatory data utility.

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