Climate charges, CCP contagion and the post-Libor world

The week on, May 23-29, 2020

7 days montage 290520

European lawmakers urged to prevent CCP contagion risk

Watchdog says carve-out needed in new recovery and resolution rules to avoid cascading default of clearing houses

ECB lays foundations for climate risk capital charge

New guide will influence capital management, but pillar two charges likely to await EBA report

Structured products are lost in translation post-Libor

Benchmark shift would “fundamentally transform” popular rates structures, users fear

COMMENTARY: Polluter pays

There’s a strong argument for delaying all regulatory action while the pandemic continues. Indeed, the long-drawn-out transition away from Libor to other benchmark rates has been delayed still further (alhough this hasn’t calmed fears about its effect on the structured products market).

The problem, though, is that pushing needed changes further into the future is a dangerous habit to get into.

This week, looked at the latest moves in climate regulation – the European Central Bank’s progress toward including climate risk in capital requirements calculations and the spread of an open-source standard on accounting for climate emissions (the Network for Greening the Financial System also published its guide for supervisors, with more detail on how financial regulators could proceed). 

The ECB’s plan is leisurely. At the earliest, incorporating climate risk into Pillar 1 capital requirements won’t happen before the European Banking Authority reports on the issue in June 2025, although incorporating climate risk into stress tests could be considered from next year. It’s probably unrealistic to expect significant changes to be in effect before the late 2020s.

What this means is that the regulatory channel for action on climate change is effectively closed – at least in Europe. Changes to capital rules in 2030 will affect investments in industry and transport infrastructure that will only show an effect in the 2040s, given the time it takes to construct a new factory or railway.

Those pushing for meaningful action on carbon emissions will have to look elsewhere. Fortunately, there’s reason to expect other channels could work faster. Pressure from below for reporting of carbon exposure, conditioning transactions on environmental goals and top-down pressure for emissions cuts from national governments are already having effects. And the pandemic shows, if nothing else, the speed and effectiveness with which a modern state can act, given sufficient motivation and at least moderately competent leadership.


Investment funds made more than €10 billion ($11 billion) in variation margin (VM) payments to derivatives counterparties in the week beginning March 16, up from an average of €2 billion a week throughout the first half of February. The absolute value of VM payments that week was likely far higher, and could have peaked at €40 billion on March 16.


“My dog is one of the most informed canines on the vagaries of the foreign exchange market on the planet right now. If this dog could only talk” – Bruce McCappin, Citi

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