The ECB has proposed that a CCP must be domiciled, and settle, in the location of the transaction currency.
The relevant section of their document (ECB PDF Doc) is this:
“The natural geographical scope for any “domestic” market infrastructure (including central counterparty clearing) for securities and derivatives denominated in euro is the euro area. Given the potential systemic importance of securities clearing and settlement systems, this infrastructure should be located within the euro area.”
The implication is that SwapClear & ICE Clear Europe who are currently domiciled in London and regulated by the FSA should relocate themselves to an on-shore Euro location such as Paris, even though they both clear in a wide range of currencies – not a trivial exercise.
Taking this concept to its conclusion, each country could demand that transactions in its currency should be cleared in a national CCP – leading to the break up of global CCPs and an unmanageable mess for the capital markets.
The real issue at heart is that the capital markets are global, and the banks at the heart of the system regard their operations and risk management as a global playing field, whereas in reality regulation and banking only exist in specific countries and currencies with their respective regulators. This clash is similar to the difficulty of regulating the Internet – it’s a global tool but with national boundaries and implementation.
Regulators in Canada & Australia are considering whether they also need their own national CCP, and with this move by the ECB, could be encouraged along with many more countries to grab clearing as they think it gives them more control of banking activity.
From the perspective of an international participant in the capital markets – the decomposition of clearing across regional boundaries will minimise any risk offsets between portfolios, and maximise the costs of clearing (by having to post the maximum possible margin) to a point where the function of banks may be economically broken.
Quite rightly the UK Treasury is set to challenge this policy via the courts, which in reality will play out a fundamental issue at the heart of the efforts to remove systemic risk from the global capital markets.
