DERIVATIVES-ECB takes steps to extend CCP oversight powers

By Helen Bartholomew

LONDON, June 23 (IFR) - The European Central Bank has called for greater legal powers over central counterparty clearinghouses operating from third-country regimes, echoing support for European Commission proposals that could require the most systemically important CCPs to relocate in the EU.

The Governing Council of the ECB has recommended an amendment to Article 22 of the Eurosystem statute, stating that "the ECB and national central banks may provide facilities and ECB may make regulations, to ensure efficient and sound clearing and payment systems, and clearing systems for financial instruments, within the Union and with other countries."

The amendment, which follows proposed changes to the European Market Infrastructure Directive that would enhance third-country oversight and enable ESMA to force CCPs to move some euro clearing activities onshore, is subject to approval by the European Parliament and European Council.

“This is a necessary legal step to give the ECB the powers and jurisdiction that it will need as the EU's institutions assert supervisory authority over third-country CCPs," said Vincent Keaveny, partner and co-chair of financial services at DLA Piper.

Speaking at a meeting of the Global Financial Markets Association in Frankfurt earlier this week, ECB executive board member Benoit Coeure said the UK's decision to leave the European Union had prompted a significant rethink of Europe's CCP supervision approach - currently based on cooperative arrangements with UK authorities and a memorandum of understanding between the ECB and Bank of England. He called recent Commission proposals to enhance third-country CCP oversight "a step in the right direction".

"What concerns us today in the context of Brexit is that the current EU regime regarding third-country CCPs was never designed to cope with major systemic CCPs operating from outside the EU," said Coeure.

"Reviewing this regime has therefore become urgent in the current environment. We need to ensure we can preserve a framework that ensures the safety and stability of the financial system when the UK is no longer a member of the EU."

LCH's SwapClear currently clears more than 90% of euro-denominated interest rate swaps traded by eurozone banks. In credit default swaps, the Intercontinental Exchange (NYSE: ICE - news) 's UK clearing arm is responsible for 40% of cleared activity from eurozone banks.

Coeure expressed support for a framework that allows EU regulators to deny recognition to CCPs posing excessive risk to EU financial stability, ultimately forcing those entities to reestablish activities in the bloc in order to continue providing clearing services there.

"This would be just one of the tools available to EU authorities under the revised EMIR proposal," said Coeure.

"I believe that such an approach will be justified in case EU authorities are unable to adequately control risks and fulfil their mandates through other means. Ultimately, however, it will be up to the Commission and the EU legislators to decide on the specific conditions for triggering such a requirement."

His comments followed criticism of CCP relocation from Bank of England governor, Mark Carney, earlier in the week.

At his Mansion House speech, Carney warned that a "non-recognition approach" would split liquidity into onshore and offshore pools, potentially costing EU-based firms an additional €22bn stemming from a pricing basis that would emerge between the two markets.

“Fragmentation is in no one’s economic interest. Nor is it necessary for financial stability. Indeed it can damage it," Carney said "Fragmenting clearing would lead to smaller liquidity pools in CCPs, reducing the ability to diversify risks and diminishing resilience.”

The ECB's support for a euro clearing location policy is long-standing. The central bank's 2011 Eurosystem Oversight Policy Framework aimed to force CCPs with daily net credit exposure of over €5bn in euro-denominated product categories to be legally incorporated in the eurozone.

Those efforts were thwarted in 2015 by a Luxembourg court, which deemed the proposals a breach of the EU's single market rules.

An enhanced framework providing greater supervisory power over third-country CCPs, which largely replicates approaches already followed by many other major jurisdictions, has been widely anticipated across the industry.

"Most market participants accept that dual supervision by the EU authorities and by the UK regulators, and information sharing amongst those regulators, will be necessary after Brexit. It is still not clear whether that will be enough to satisfy all of the EU regulators," said DLA Piper's Keaveny. (Reporting by Helen Bartholomew)