The Bank of England has published a speech given by David Bailey (Director, Financial Markets Infrastructure Supervision). The speech is entitled Central clearing: setting the regulatory bar.
Key points in Mr Bailey’s speech include:
- at the international level, regulatory work on central counterparties (CCPs) is being coordinated by a joint work plan which forms one of the key priorities for the Financial Stability Board, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) through 2016 and beyond;
- the work plan covers four areas: (i) identifying areas where regulatory standards should be enhanced to make CCPs even more resilient; (ii) assessing the adequacy of guidance around CCPs’ recovery plans; (iii) developing a credible resolution framework and ensuring that CCPs are resolvable; and (iv) obtaining a more thorough understanding of the inter-dependencies between CCPs and their users;
- in terms of resilience the CPMI-IOSCO Principles for Financial Market Infrastructure have delivered a material improvement in risk management standards, but implementation has also revealed areas where further guidance may be necessary including in stress testing and margin methodologies;
- on stress testing no two CCPs are exposed to the same sources of risk. Therefore to complement CCPs’ own stress tests it is also important that authorities explore how standardised stress tests could be developed across multiple CCPs both domestically and internationally. Initial steps have been taken via a joint default management exercise run by the UK and German authorities across two major CCPs and the European Securities and Markets Authority has recently published the results of its first EU-wide stress test of CCPs;
- in general margin models are well developed but there remain areas where greater regulatory guidance could be given to ensure international congruence. A particular focus should be to ensure that models provide for sufficiently stable and conservative margins over time and do not lead to rapid changes in stressed conditions because margin levels have been allowed to fall too low in benign times;
- the UK experience of implementing recovery plans has shown that there is no single template for CCPs. Each CCP must develop a recovery plan which takes account of the products it clears, the make-up of its membership and the risk factors it is exposed to, and ensure that its recovery plans do not dis-incentivise proper governance and risk management. It is also important that the tools employed in recovery carefully consider the impact on members and provide clarity and transparency over when additional financial resources will be called from members;
- as part of the international work plan on CCPs, a CPMI-IOSCO consultation paper is due this summer which will tackle many of the questions on CCP resilience and recovery; and
- the Bank of England is a strong supporter of international efforts to establish a coherent and consistent approach to CCP resolution which ensures a level playing field. There are a number of fundamental questions that regulators globally need to tackle to develop a resolution framework. These include: (i) at what point should a resolution authority step in when a CCP is in distress? (ii) what resources should be available to the resolution authority and should these be pre-funded? (iii) and what safeguards need to be put in place for clearing members of CCPs and their direct and indirect clients?
View Central clearing: setting the regulatory bar, 11 May 2016