Leading central banks, including the Bank of England, are working together to make sure they are able to prop up clearing houses in a crisis, says Paul Tucker, deputy governor of the Bank of England – part of a broader effort by the Financial Stability Board (FSB) to enable central counterparties (CCPs) to operate on a global basis.
"Central banks are exploring how they can ensure that there are no technical obstacles to lending [to CCPs in a crisis]. That doesn't mean they have any duty or commitment to lend – just that there are no obstacles to it," he tells Risk in an interview for the magazine's 25th anniversary edition.
These obstacles can be prosaic – as an example, Tucker points to the need for central banks to have account details for CCPs, so funds can be transferred without delay – or they can be more complex. "Because CCPs take collateral, what collateral have they got? Is it stuff the central bank in question understands?" he says.
The aim is to make it possible for CCPs to operate safely on a cross-border basis, creating deeper pools of cleared business – and the netting and collateral efficiencies that result, Tucker says. If that's not possible, clearing may end up fragmented on national lines, resulting in a more complicated clearing market.
"I think we, the international community, want to ensure there is a proper framework for global clearing houses to be able to exist. It would be a nightmare to be at the opposite corner, where very local clearing houses proliferated, and you end up with, say, 25 clearing houses for US dollar swaps, and then get complex interoperability agreements and cross-margining agreements," Tucker says.
I think we, the international community, want to ensure there is a proper framework for global clearing houses to be able to exist
A source close to the FSB confirms the group agrees with that argument and, as a result, is seeking to ensure that global CCPs can operate safely – part of that effort is a putative recovery and resolution framework for clearing houses. Draft proposals were published by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (Iosco) on July 31.
But while global CCPs look good from a systemic point of view, national regulators do not always agree – some Group of 20 members have already decided that systemically important markets will have to be cleared in a domestic clearing house. Meanwhile, the European Central Bank (ECB) has proposed that CCPs should be located in the currency zone of the products they clear - a move that prompted the UK government to file a lawsuit last year.
The rationale behind the ECB policy is that a CCP may need central bank liquidity support, and the best way to guarantee it is to ensure the clearing house and the relevant central bank are based in the same country. That problem could, eventually, be resolved by the work being done behind the scenes by the BoE and other central banks. In the meantime, Tucker notes that the ECB policy does not appear in the influential market infrastructure principles published by CPSS-Iosco in April. For now, though, there is no sign of a softening in the stance of the ECB, or its main supporter, the French central bank – sources at both organisations say there has been no change in the location policy.