Today the European Commission has released legislation concerning recovery and resolution of Central Counterparties (CCPs).
Following the post-crisis G20 commitment in 2010 by Heads of Government to centrally clear derivative products, this legislation looks to address the systemic risk created by concentrating risk into clearing houses.
The legislation is the result of over 3 years of work on the international level by the Financial Stability Board (FSB) and CPMI-IOSCO.
Kay Swinburne, a conservative MEP and key negotiator on the file, authored a report for the European Parliament on recovery and resolution of non-bank financial institutions which was voted through the Parliament with broad support from all political groups in 2014.
We have been waiting for some time for this legislation to be proposed and I am glad that the Commission has waited for the international work to near completion before coming forwards.
As rapporteur on the pre-legislative report I was clear that CCPs are not national concerns but international concerns. We have created hubs which concentrate risk in the system and we now have a responsibility to ensure that they are as stable as possible.
The Parliament has always worked hard to ensure that end investors who have no say over the risk management of a CCP are not unfairly called upon to bail one out should it get into difficulties. While spreading the burden of failure over a greater number of institutions may be appealing, it should only be used as a very last resort under the control of public authorities.
The key purpose of this legislation should be to ensure every possible measure is in place to prevent tax payers from having to bail out CCPs – either through central bank money or direct public intervention.
The reason CCPs were so attractive to regulators and heads of government in 2010 was because of their mutualisation of risk. We need to ensure that the structure of recovery and resolution plans, that hopefully will never be used, incentivises every day good governance and risk management of CCPs. Ensuring that those with a say in the risk management of CCPs ultimately bear the brunt of the burden should these fail.
I’m looking forward to working closely with my colleagues on the ECON committee to ensure that this legislation stays as close to the internationally agreed principles as possible and addresses the obvious financial stability concerns created by concentrating risk in CCPs.