The European Commission on Monday (Nov. 28) proposed new rules designed to ensure systemic market infrastructures within the financial system can be handled effectively when something goes wrong.
According to a press release, the European Commission said the systemic market infrastructures in the financial systems, known as Central Counterparties (CCPs), act as the intermediary to both sides of a transaction in a financial instrument, such as bonds, equities, derivatives and commodities. The CCPs are critical to help reduce risks and interconnections through the financial systems, and the importance of them in Europe and around the world has close to doubled since the post-crisis G20 commitment to create standardized OTC derivatives via CCPs. What’s more, a sizable portion of the €500 trillion of derivatives contracts that are outstanding globally are cleared by 17 CCPs across Europe.
As a result of the importance of CCPs, the European Commission is aiming to create a recovery and resolution framework for CCPs to ensure that the critical functions of the CCPs are intact, while maintaining financial stability and helping to avoid costs associated with restructuring and the resolution of failing CCPs from landing on taxpayers.
"This proposal will strengthen Europe's financial system further and aims at protecting taxpayers by ensuring we can deal with a Central Counterparty if it falls into difficulty. That's important because Central Counterparties are a critical part our financial system, helping businesses manage their risks. It will complement the stronger regulation of derivatives markets that we put in place after the crisis,” said Valdis Dombrovskis, vice president responsible for financial stability, financial services and capital markets union, in the press release.
The proposed rules for CCPs set out provisions comparable to those in the recovery and resolution rules for banks and are based on international standards but also contain CCP-specific tools that better align with CCPs' default management procedures and operating rules, especially to determine how losses would be shared. The proposed rules require CCPs and authorities to prepare for problems occurring, intervene early to avert a problem and step in when things have gone wrong, the European Commission said.