Issues Related to Central Counterparty Clearing: Concluding Remarks
Trichet, Jean-Claude, Economic Perspectives
I have the pleasure to conclude a very successful conference, a conference that has been special in many respects. First, this conference was jointly organized by the European Central Bank (ECB) and the Federal Reserve Bank of Chicago (Chicago Fed). As such, it marks another fruitful example of cooperation among central banks across the Atlantic. Second, it has featured research on central counterparties (CCPs), a topic that has not yet received a great deal of attention from academic researchers. I hope that this conference has contributed to stimulating more research on this very important subject. Finally, it has brought together market participants, public authorities, and academics. I am in no doubt that discussions involving people from these very different groups are beneficial for all of them. However, I am also aware that it is not always easy to initiate such discussions. This conference has also been very successful in this respect. I wish to thank the organizers of this conference at the Chicago Fed and the ECB for all their hard work.
Central counterparties play an important role in many financial markets. They interpose themselves between the buyer and the seller of financial assets, acting as the buyer to every seller and as the seller to every buyer of a specified set of contracts. This process mitigates counterparty credit risk, which is the risk that one party of a trade suffers losses because the other party cannot fulfill its obligations from the trade. Through multilateral netting, central counterparties enhance liquidity and reduce liquidity costs. Finally, central counterparties ensure post-trade anonymity.
Central banks are interested in the smooth functioning of central counterparties for three reasons:
* Central counterparties can enhance financial stability as long as they function smoothly. The failure of a central counterparty, however, can significantly destabilize financial markets. It is therefore important that central counterparties have appropriate risk-management procedures in place;
* Links between central counterparties operating in different countries can foster financial integration across those countries by allowing the participants to trade in a foreign market and to clear that trade through existing national arrangements. Links between CCPs can take a variety of forms, ranging from the establishment of direct relations between two CCPs to arrangements between central counterparties that allow their participants to mitigate the costs associated with risk control measures (for example, cross-margining); and
* Central counterparties use payment systems and other infrastructures operated by central banks to carry out their activities.
For these reasons, central banks closely follow and contribute to the discussions related to central counterparty clearing. This conference is an important element in this respect.
Let me now outline a few central points of this discussion.
Central counterparties must have adequate risk-management procedures
Central counterparties play a systemically important role in many financial markets. The failure of a central counterparty can severely disrupt financial markets. Central counterparties are highly specialized in managing risks, and failures have been rare. Nevertheless, there is no room for complacency, and any efforts to improve risk-management methods are most welcome. As mentioned already several times in this conference, in November 2004 the Group of Ten (G-10) central banks and the International Organization of Securities Commissions (IOSCO) issued a report that set out 15 comprehensive international recommendations for promoting the safety and efficiency of central counterparties. The European System of Central Banks-Committee of European Securities Regulators (ESCB-CESR) working group is working in close cooperation with European Union CCPs to adapt these recommendations to the European context. …