This response represents the views of European CCPs to the FSB, BCBS, CPMI-IOSCO consultation on ‘Incentives to centrally clear over-the-counter (OTC) derivatives’. In summary:
- Central clearing as central pillar of the G20 response to the financial crisis – The central clearing of OTC derivatives is a pillar of the G20 response to the financial crisis. We support the work by the FSB, BCBS and CPMI-IOSCO to regularly assess the implementation of this commitment. It is important to analyse the effects of these reforms and to verify whether market participants have strong incentives to centrally clear OTC derivatives through CCPs. Unintended shortcomings which would weaken the financial stability should be identified and addressed.
- Effect of regulatory reforms on CCP clearing – We welcome the findings of the report which in figure D.3 show that it is clearly the ‘counterparty risk management considerations’ which ranked first amongst the top factors incentivising clients to centrally clear. EACH generally agrees with the report’s characterisation of the effects of the reforms on incentives to centrally clear:
- Clearing mandates – EACH considers these to have been a key and necessary step to broaden the use of CCPs. Mandates are necessary to overcome the collective action problem to build up centrally cleared liquidity, as well as overcome the adverse selection problem that Too-Big-To-Fail or heterogeneous credit risk in the bilateral space may create.
- Bilateral margins – The application of bilateral margins rules has been slow to start, and full application is still outstanding. Regardless of the incentives this may create for using CCPs, bilateral margin is a sensible safeguard to prevent uncollateralised risk and exposure building up between institutions. EACH believes that Uncleared Margin Regulations (UMR) will continue to incentivise market participants to move towards centrally cleared products, however this will only entirely realised once its fully implemented in 2020. EACH believes that margin requirements (MPOR and SIMM) need to be readjusted to give further incentives to market participants to use centrally cleared facilities and rip all benefits offered by CCPs. Only a complete and thorough assessment of the incentives to clear would then be possible.
- Future incentives to clear – EACH agrees that regulators have largely put in place the right incentives to centrally clear OTC derivatives through CCPs. More could however be done though FSB guidance on regulatory priorities, such as:
- Addressing the risk of a continued reduction of clearing service providers, and how to support making it generally attractive for entities to provide Clearing Services, or for CCPs to open for other types and more Clearing Members (CMs)
- Allowing Banks/CMs to offset segregated Client margins posted and forwarded to CCPs from leverage ratio calculations
- Ensuring the completion at global level of the staged introduction of clearing mandates and bilateral margins for the non-cleared space
- Access to client clearing – The example used in the DAT report clearly illustrates that, for a particular market, the number of client clearing services providers has increased and client positions attributable to the five largest clearing members have fallen in recent years. Therefore, the trend for increasing concentration, as noted in the report is not uniform across markets and CCPs. However, where this trend exists, in specific markets, EACH does recognise that this is an issue of concern. EACH is eager to collaborate with the authorities to address the risk of a continued reduction of clearing service providers and to state how to support making it generally attractive for entities to provide Clearing Services, or for CCPs to open for more Members and also to other types of Members.