At the recent Fifth Joint Deutsche Bundesbank-European Central Bank (ECB)-Federal Reserve Bank of Chicago Conference on CCP Risk Management, ECB executive board member Fabio Panetta took to the stage for his keynote speech. Titled Central Clearing in Turbulent Times: Frontiers in Regulation and Oversight, the speech outlines three areas where improvements could be made to protect CCPs’ ability to safeguard stability: cross-border supervision, preparations for extreme stress events, and actions to limit margin procyclicality.
When it comes to cross-border supervision, Fabio Panetta says that the European Commission’s controversial EMIR 3.0 proposal, which requires EU clearing participants to hold active accounts at EU CCPs, is a reasonable one. “Although establishing an active account will not be without cost… Disrupted access to critical clearing services during a financial crisis would have much greater financial risk implications than gradually moving part of the respective euro-denominated business to EU CCPs.”
Preparations for extreme stress events
Non-default loss risk is an example of a low-probability, high-impact stress event, says Fabio Panetta, but the current guidance on it is underdeveloped. “This is despite the fact that the impact of non-default losses could be particularly significant, especially given that the resources available to cover such losses – mainly CCPs’ own capital – are limited,” he states, citing evidence from an analysis conducted in 2022 by the Committee on Payments and Market Infrastructures (CPMI), Financial Stability Board (FSB), and International Organization of Securities Commissions (IOSCO).
Limiting margin procyclicality
“A certain degree of margin procyclicality is unavoidable,” Fabio Panetta concedes, but “a certain degree of margin stability over the medium term is necessary to reduce the need for sudden, large margin calls in times of stress.” This is particularly true in turbulent periods, such as now. As a roadmap for action, he recommends the Review of Margining Practices published in 2022 by the Basel Committee on Banking Supervision, CPMI, and IOSCO.
To conclude, Fabio Panetta says that “short-term cost considerations… must be balanced against the longer-term benefits of a robust set-up in which CCPs remain a pillar of our financial system”.