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Central clearing counterparties (CCPs) have a mandate to oversee and reduce risks in the financial markets and act as risk interlocutors for the authorities. With that in mind, it’s no surprise that this function has found itself at the centre of the financial market debate triggered by Brexit. A recent proposal from the European Commission focused on repatriation and oversight, though there is a bigger question of interoperability (i.e. competition) at stake here as well. There is a natural tendency for CCPs to become monopolies, for a netting effect. Of course, the cost of interoperability is fragmented liquidity, but it’s much like resiliency in a computer system – you need to have a back-up centre, even if you don’t use it.
Another issue which has not been brought to the fore in the conversation is the Settlement Finality Directive. This ensures that the collateral the CCP has demanded from a counterparty is bankruptcy remote, with no staying rights or period of contestation. Ensuring mutually recognized, if not harmonised bankruptcy laws will be crucial in the legal negotiations around Brexit.
We must also be ready to discuss asymmetry in how CCPs assess risk towards one another, to ensure fair and consistent collateral demands from counterparties. This is something we have already begun to address by ensuring greater transparency for customers to understand that the collateral we require of them is merely what is being asked of us by other large CCPs in Europe, but there is more to do here. We’re at a real inflection point, and must be prepared to raise, tackle and define the vision for the market structure we want to see in Europe.
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