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by Judy Inosanto

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The DTCC-CSFI Post-Trade Fellowship

At an event hosted by DTCC and the Centre for the Study of Financial Innovation (CSFI) in London in June, Paul Tucker, deputy governor, Financial Stability, Bank of England, called for public policy to apply minimum standards to ensure that central counterparties (CCPs) do not fail.

Tucker also outlined the framework for handling CCP failure though resolution in his remarks. “As with banks, public policy has to have two components,” he said. “First, minimum standards to ensure that CCPs do not fail, and IOSCO/CPSS are currently consulting on updated standards. But second, a clear ex ante framework is needed for limiting disorder if, nevertheless, a CCP does in fact fail.”

The Bank of England official spoke before an audience comprising more than 200 members of the financial community, financial journalists and European legislative and regulatory bodies. His keynote address, “Clearing Houses as System Risk Managers,” focused on the fundamental role CCPs play in protecting global financial markets. He described these institutions as systemic risk managers.

“Central counterparties need to adopt prudent collateral policies, but also to monitor the robustness of their clearing members and risks from the business that they are bringing to the CCP,” Tucker said.

Paul Tucker, deputy governor, Financial Stability, Bank of England

Raising risk awareness

The DTCC/CSFI financial industry event covered regulation of Europe’s post-trade infrastructure as supervisory authorities and governing bodies on both sides of the Atlantic approach a crucial juncture in the legislative and rulemaking process of the financial markets. Tucker’s address was followed by a panel discussion that debated the question, “Will current regulatory initiatives damage or improve European post-trade infrastructure?”

Diana Chan, CEO of EuroCCP, who spoke on the panel, said, “Creating links between CCPs through interoperability will dilute one aspect of concentration risk, in addition to delivering benefits to the market. In the event that one CCP becomes insolvent, having multiple CCPs connected to a trading venue will mean that the venue can continue to trade using the remaining CCPs to clear its transactions. Central counterparties active in achieving interoperability have all committed to disclose how inter-CCP risks are managed. This has raised the risk awareness among the trading firms using them and caused them to consider more robust approaches to risk management, thus strengthening the stability of Europe’s financial markets.”

Other panelists included Alan Cameron, head of Client Segment Broker-dealers and Investment Banks, BNP Paribas Securities Services; Dan Cohen, DTCC managing director, Government Relations; and Paul Symons, head of Public Affairs, Euroclear. The discussion was moderated by Andrew Hilton, director, CSFI.

Getting it right

“As markets become more global in nature, regulators and lawmakers need to work towards regulatory harmony, but that harmony must not come at the expense of regulatory quality,” said DTCC’s Cohen. “There is a legitimate concern that in the effort to avoid regulatory arbitrage, policymakers may not take the necessary steps to modify existing proposals – both in the U.S. and in Europe – to ensure stability of financial markets. The key component of the emerging global regulatory scheme is getting the right policies, not quickly adopting new policies.” @