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Free AccessMNI: 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$$$,MGU$$$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.