VIDEO | The end of the 2007–08 financial crisis was marked by the Pittsburgh summit of 2009, which saw the G20 nations mandate central counterparty clearing for all standardised derivatives contracts. The publication of the Principles for Financial Market Infrastructures (PFMIs) followed in 2012 – igniting a burst of stability-oriented regulation at global scale. Now, 15 years later, a panel at the PostTrade 360° Nordic 2024 conference gave the ultimate temperature check on the effects of these measures in the session titled “Clearing 15 years on from Pittsburgh: Where next?”
Rafael Plata, secretary general of the European Association of CCP Clearing Houses (EACH) and session moderator wasted no time getting to the main question early on in the panel – is the industry actually done with what it set out to do in Pittsburgh?
Gilles Hervé, senior policy officer at the European Commission offered a summary: the PFMIs are done, having been implemented “across the G20 members almost entirely, in all jurisdictions”, while client clearing is currently “a real concern” due to the clearing obligation.
David Murphy, visiting professor in practice at The London School of Economics and Political Science (LSE) made a humorous comparison between the vanilla pastries served at the conference and the policies introduced by the Pittsburgh summit: “That’s what you get, and you won’t find any explanation for them. There was no survey done yesterday to check what type of pastries you wanted, and as far as I am aware, no research on the best pastry available.”
Watch the session video here!
• When logged in, pick up your free access pass for this Nordic conference if you haven’t. Then browse back to this page, and the video will show up in this box.• Don’t have an account here yet? Register here. This is separate from the event platforms where you may have been signed up as a delegate.
• Login
(Confusing? Follow our 2-min video guide here.)
The domino effect
The clearing obligation – and its unintended consequences – was a hot button topic that the panel kept circling back to. “We’ve put so many products under the clearing obligation that we are now facing a situation where we lack clearing members to provide clearing services to clients,” said Hervé.
Murphy believes that some of the “most contested topics in clearing policy right now”, which include margin variation and CCP equity in resolution, “are made worse by the clearing mandate”. “Regulators now own, in some sense, the use of CCPs,” he said. Clearing members should thus be given a bigger say, because they are required to comply. “There needs to be a balance between the interests of CCP owners and users… It (the clearing mandate) might have been a sensible idea, but it has had really difficult knock-on policy consequences.”
Limiting factors
Some of those consquences can be seen in the impact on liquidity and market fragmentation. “The impact on liquidity is a consequence of the regulation that requires collateralisation of every risk,” said Perrine Herrenschmidt, head of Brussels office at the International Swaps and Derivatives Association (ISDA). “The international standard setters are focusing on increasing transparency and responsiveness of initial margin, which is going to be helpful for market participants to better prepare for potentially large margin calls in the cleared market. But in addition to this, liquidity preparedness is also dependent in large part on the capacity of the bank’s balance sheet, and its ability to perform the intermediation function in the core lending and funding market.”
“With that in mind, I think it’s important that regulators also consider the various constraints that the bank’s balance sheet operates within… These constraints will affect the ability to extend funding or make markets during periods of stress.”
As for market fragmentation, EU policymakers have attempted to address the systemic risk presented by third-country CCPs with the active account requirement. However, “given the global nature of derivatives clearing, this would mean that there would be market fragmentation, as market participants will have to split their portfolio. This will come with additional risk, cost, and inefficiencies, and could also create barriers for the EU market participants who want to be active in global markets and offer competitor services to their clients.”
Cooperation is key
To conclude, María José Gómez Yubero, head of resolution, benchmarks and financial stability issues at the National Securities Market Commission of Spain (CNMV) reminded the panel that “collaboration and coordination among authorities and among standard setters is essential”, and that “more guidance and progress on resolution planning is needed”.
Panelists:
María José Gómez Yubero, Head of Resolution, Benchmarks and Financial Stability Issues, National Securities Market Commission of Spain
Perrine Herrenschmidt, Head of Brussels Office, ISDA
Gilles Hervé, Senior Policy Officer, European Commission
David Murphy, Visiting Professor in Practice, LSE
Moderator:
Rafael Plata, Secretary General, EACH
• The consolidated PostTrade 360° Nordic conference, in Stockholm on 4–5 September 2024, came to host 1,200+ delegates and featured 70 sessions.
• Log in and watch the sessions – for free! Links in the grey video boxes on each article will guide you intuitively. Yet, if you still want watch the 2-minute intro to our video offer, click here.
• Our coverage relating to the event is indexed here.
• By the way … are we connected on LinkedIn already? Follow us here.
