The international regulatory agenda on CCP links

Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the ESRB workshop on CCP interoperability arrangements, 
2 November 2015

Ladies and gentlemen,

I would like to thank the European Systemic Risk Board for inviting me to speak on such an important topic. Central counterparty (CCP) interoperability is a relatively new development in the European clearing landscape – the first interoperability arrangements between two European CCPs were only established in the early 2000s, covering transactions on government bonds and equities. Nonetheless, Europe has been at the forefront of the global debate on interoperability arrangements and is beginning to reap the benefits of the knowledge it has built up so far ^[1]. CCP interoperability has undoubtedly improved the efficiency of the EU post-trading infrastructure. However, it is also fair to say that industry participants and regulators are facing a number of ongoing questions regarding the full implications of CCP interoperability in terms of competition, financial innovation and systemic risk.

In this address, I will try to give an overview of the main benefits that CCP interoperability has brought to the EU financial system, and outline why in my view interoperability should be supported and enhanced. I will also discuss some of the challenges CCPs and authorities are currently facing in establishing and managing safe interoperability arrangements. Lastly, I will raise a number of questions, which I believe are important to the implementation of CCP interoperability going forward and which could warrant a place on the international regulatory agenda.

CCP interoperability has improved the efficiency of the EU post-trading landscape, and is one aspect of broader initiatives to reduce fragmentation in financial markets

First of all, I would like to say that it is rather topical to be discussing CCP interoperability, particularly as just a few weeks ago the Commission released its Action Plan on Building a Capital Markets Union. One of the priorities put forward by the Commission for this ambitious project is to step up efforts in removing barriers to the cross-border clearing and settlement of securities. CCP interoperability can play a key role in meeting this objective, as the Giovannini Group highlighted in 2001 already. In fact, it is thanks to the work of this group that some barriers were removed and links started being established. ^[2]

Indeed, supporting CCP interoperability seems particularly relevant in the context of the EU financial system, where securities and funds need to flow across borders, but where clearing and settlement infrastructures have traditionally been largely domestic in nature. On one hand, CCP interoperability allows financial entities to access centrally cleared markets across the EU and to transact with multiple counterparties without bearing the costs of joining multiple CCPs. Thus, it is possible for participants to expand the range of products they can trade while preserving the benefits of using a single clearing venue ^[3].

On the other hand, it can also provide market participants with a choice of multiple CCPs through which to clear products traded on the same venue. Interoperability can reduce demand for collateral assets to meet margin requirements, by allowing participants to concentrate all their clearing activity within a single CCP, and by increasing netting efficiency across CCPs ^[4]. However, we should also keep in mind that covering the exposures resulting from interoperability arrangements may create a need for extra collateral ^[5]. Overall, interoperability has the potential to help reduce the fragmentation in financial markets, spur competition and innovation, and decrease the cost of central clearing.

To sum up, there is a broad consensus among market participants that today’s interoperability arrangements covering cash equities, fixed income products and certain exchange-traded derivatives have improved the liquidity of these markets. I think it is therefore safe to say that the implementation of CCP interoperability has benefited clearing members and their clients alike.

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Courtesy of the European Central Bank