Tensions rise as CFTC, BoE, and market participants debate CCP supervision

By Rebekah Tunstead | 5 June 2019

The role of central banks in the supervision of central counterparties (CCPs) was greatly debated on a panel discussion at the FIA’s IDX in London this week.

“It is a great test for a domestic marketplace, or a domestic clearing house when you can ask the question, when is a market regulator alone overseeing a CCP not enough?” said Brian Bussey, director of the division of clearing and risk at the Commodity Futures Trading Commission (CFTC). 

“[The Financial Stability Oversight Council] made a decision under this very nuanced test like the type Europe has adopted in 2.2, that those two clearing houses (CME and ICE) were so significant domestically that they required additional oversight from the Fed,” said Bussey.

However, Jochen Metzger, director general of payments and settlement systems at Deutsche Bundesbank did not share Bussey’s view.

“I do not agree with this. I think it is always good if you have a strong central bank of issue at your side, because the central bank of issue, for better or worse is also the underwriter of the liquidity… This underwriting function does not stop at the border, it stops with the currency. Therefore, I guess you need a central bank of issue both at the domestic level, and the cross border international level.

“Each of the [European] national central banks, is the central bank of issue and of course the ECB is a central bank of issue and we do coordinate this. I am not giving away any secret here when I say the ECB’s view has a special weight in those discussions, and when it comes to representation the US follows. 

Bussey interjected “I think you are disagreeing with me, are you?”

“Only if you push me to it,” replied Metzger.

Bussey remained confused.

“When I look at Emir 2.2 in that result of that determination that a foreign CCP is tier two is not to have the ECB involved, instead they have the market regulator Esma involved… Am I misreading Emir?” he said.

 “I can help you here Brian, it’s quite simple. It is Esma, but Esma must consult the central bank of issue, in the case of Europe this is the ECB. And this is how it should be,” said Metzger.

Important points need to be resolved if the Emir 2.2 framework is going to work, according to David Bailey, executive director of financial market infrastructure at the Bank of England.

“When it comes to Emir 2.2 there are a few areas where I think we need more clarification to make sure that obligations on third countries don’t go beyond the obligations that, for example, the EU is expecting to put on EU CCPs, that they don’t compromise the home supervisors ability to effectively supervise the CCP in its jurisdiction, and it is ultimately accountable for supervision that CCP,” said Bailey.

“There is an ability in Emir 2.2 for the central bank of issue to place requirements directly on third country CCPs in what I understand to be exceptional circumstances. I don’t believe that that ability exists for EU CCPs. The question is, how will that interact with the home supervisor’s supervision. Could that lead to conflicts and overlaps?” he said.

Earlier in the conference CFTC chairman Christopher Giancarlo gave his final speech to the FIA on recalibrating the commission’s cross-border regulation, before he steps down in mid-July.

“To not adopt an approach of regulatory deference would lead us down a very different course, one of overlapping and confounding cross-border regulation and market fragmentation, high regulatory cost and constraints on economic growth.  That course would lead us in the wrong direction, one that hazards systemic risk.  We should avoid that course,” said Giancarlo.

“We must not divide the global market into artificially separate and less resilient liquidity pools based on the nationality of trading participants. That will fragment markets into individual trading pools of liquidity that are shallower, more brittle, and less resilient to market shocks, thereby increasing systemic risk rather than diminishing it,” he said.

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