MNI: New ECB Powers May Limit UK, US Clearer Euro Margin Rules

-New powers will also boost ECB's capacity to tame speculative market attacks

By David Thomas

     LONDON (MNI) - The ECB is set to win extensive and potentially intrusive

new powers to regulate euro clearing services based in post-Brexit UK and third

countries such as the U.S., including the ability to limit changes to margin

requirements, according to a document seen by MNI.

     The document outlines amendments to proposed legislation and will be

considered by EU member state officials next Tuesday prior to political approval

by finance ministers possibly before the end of the year.

     Under the proposals, the ECB would be given more far-reaching powers in

stressed situations to adopt measures to tackle temporary liquidity risks, such

as calling on central counterparties to increase their liquidity buffers,

increase the frequency of intra-day margins, to limit cross-border currency

exposures and change rules for depositing cash with the ECB and settling euro

payments.

     The document notes that "significant developments at both global and

European level are expected to increase the risk to clearing systems and

threaten the smooth operation of payment systems and implementation of the

single monetary policy, ultimately affecting the Eurosystem's primary objective

of maintaining price stability."

     The move is in response to the imminent withdrawal of the UK from the EU

which the text says will mean "a fundamental change in how certain systemically

important euro-denominated clearing activities are regulated, overseen and

supervised".

     Deliberations on the new powers come at a time when market volatility

around Italian government bonds has intensified following the coalition

government's decision to break with EU fiscal pledges.

     --POWERS TO LIMIT MARGIN INCREASES

     One expert on the topic pointed out to MNI that the new proposals would

allow the ECB to effectively prevent a third country clearing house, such as LCH

Clearnet, from raising the intra-day margin on euro zone government bond

contracts, a potentially transformational addition to its capacity for market

fire-fighting.

     The legislation will also grant EU market regulator ESMA and the Commission

the power to withhold recognition of third country clearers of euro financial

instruments, where "these are of ... substantial systemic importance for the

financial stability" of the EU or one or more of its member states". The

document states that the ECB will "contribute" to any such decision.

     The legislation is a response to the March 2015 European Court ruling in

"UK vs ECB", to the effect that the ECB does not have the power to regulate euro

clearing services. That suit was the upshot of a mainly French-led push within

the Eurosystem to impose a so-called location policy which would have limited

clearing of euro financial instruments to clearers based in the single currency

bloc.

     It was sparked partly by London-based LCH Clearnet's decision to raise the

margin on Irish government bond positions in spring of 2011, a step which many

senior euro zone officials saw as gratuitously aggravating the market sell-off

of peripheral country sovereign bonds in 2011-12.

     The new legislation would be a significant addition to the ECB's toolbox

for tackling market crises and any future market speculation against the euro,

given the key role played by CCPs in EU market infrastructure and in the

transmission of ECB monetary policy via money and repo markets.

     Among its new powers, the ECB would be able to impose on third-country CCPs

reporting requirements, to request full cooperation with the ECB to ensure their

activities are "resilient to adverse market conditions." In addition the ECB

will also be able to request that clearing systems open overnight deposit

accounts with the euro area's central bank.

     The legislation could come into force sometime next year following expected

negotiations between finance ministers and the European Parliament.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$U$$$,M$X$$$,MC$$$$,MT$$$$,MX$$$$,M$$FI$,MGB$$$,MGU$$$]