European Regulation of Clearing Houses

Jeremy Grant’s article in today’s Financial Times reports on the House of Lords’ view that European clearing houses should not be regulated by a EU authority since the EU would not be able to bail out a clearing house if it collapsed.  The Lords report, which can be found here, concludes that “in the absence of any crossborder fiscal burden-sharing arrangements for failing financial institutions, central counterparties cannot be supervised at an EU level because the EU itself does not have the financial resource within the budget to bail out a large central counterparty”.

This surely confuses two elements of the governance structure for clearing houses – regulation and emergency financial support.  In current governance structures the responsibility for these two elements is quite separate.  The FSA would not provide financial support in the event of the London Clearing House going bust.

The real question is whether a European-level regulatory authority would improve the regulation of clearing houses.

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One comment on “European Regulation of Clearing Houses
  1. Hugh Simpson says:

    In fact there are at least three elements here
    – supervisory responsibility;
    – solvency support, ie bailing out a CCP that goes bust: this requires fiscal powers in order to come up with the money (which may not come back);
    – liquidity support ie lender of last resort: this requires a central bank to lend the money (with the intention that it should come back).

    In a simple world, these three elements would be completely aligned, but financial markets have already moved outside this simple world.

    Of course for the eurozone there is a central bank. This is the reason why the ECB argues for major European CCPs to be located inside the eurozone, so that it can act as LOLR in euros (but of course a CCP may need access to different LOLRs for other currencies).

    But even within the eurozone, the country where a CCP is located determines which government will have responsibility for bailing it out. Thus, during the crisis, it was specifically the Dutch and Belgian governments that supported Fortis – which at that time was the operator of the EMCF CCP (although it was not EMCF that caused their problems) – not some general eurozone fiscal pot.

    I am constantly amazed that governments fight to attract European clearing houses to their country, given the vast bill that may follow if something goes horribly wrong!