On 22 June 2023, the European Central Bank (ECB) published a speech delivered by Fabio Panetta, member of the executive board of the ECB, given at the fifth joint Deutsche Bundesbank, ECB and Federal Reserve Bank of Chicago conference on central counterparty (CCP) risk management.

In his speech, Mr Panetta highlights the following three areas that require progress to preserve the pivotal role of CCPs in safeguarding stability:

Challenges in cross-border supervision

  • Arrangements for cross-border supervision need to be commensurate with the cross-border systemic risk implication of central clearing.
  • The ECB supports the European Commission’s proposal to enhance EU-level CCP supervision.
  • The risks of EU CCPs mainly affect clearing participants, which are generally located throughout the EU. This needs to be reflected in the supervision of EU CCPs through a greater role for the relevant authorities, including banking supervisors and central banks of issues, as potential providers of liquidity to clearing participants or CCPs.
  • EU authorities have less direct insight into – and ability to control – the risk management of CCPs located outside the EU. Current EU rules seek to reduce these gaps through the European Securities and Markets Authority’s targeted direct supervision of systemically relevant third-country CCPs, known as Tier 2 CCPs. But this framework would be powerless in severe circumstances where the resolution of a Tier 2 CCP may be required.
  • To deal with this vulnerability efforts to develop resolution plans for all major cross-border CCPs should be accelerated. The ECB also supports the European Commission’s proposal that will require EU clearing participants to hold a so-called active account at EU CCPs in market segments that are of substantial systemic importance.

Better preparedness for extreme stress events

  • The second area in which further progress is required is the ECB’s capacity of effectively address low-probability, high impact types of risk.
  • The current guidance on non-default loss risk is much less developed than the guidance on risks related to participant default.
  • Arrangements for assessing and preparing for potential non-default losses are essential, and the ECB supports the CPMI-IOSCO initiative to further explore CCPs’ risk mitigants for non-default losses.
  • There has been insufficient progress in terms of preparedness for events that go beyond what could be considered extreme but still plausible. Progress needs to be made, particularly in conceptualising such scenarios and embedding them in CCP recovery and resolution plans.
  • More needs to be done to identify extreme hypothetical scenarios and more consideration needs to be given to the full range of potential risks, such as financial, conjunctural, geopolitical, cyber and environmental risks.

Reducing the procyclicality of margins

  • Mitigation of margin procyclicality is reflected in both the global standards and the EU rules for CCPs. However, recent periods of extreme market volatility have underlined the need to do more.
  • The Basel Committee, CPMI and IOSCO review on margin practices provides a clear roadmap for action. The ECB is actively contributing to the follow-up work that is under way. Once the results are available, significant efforts will be needed to embed them into the rules of all relevant jurisdictions.