European-based CCPs without banking licenses may be able to gain access to the European Central Bank (ECB) services following a possible shift to open up account facilities.
Unencumbered access to the ECB would enable European CCPs without banking licenses to increase risk management and have even more stability as systemically important nodes in the financial ecosystem. Several discussions took place at the Eurex Derivatives Forum in Frankfurt on the 27th March 2020, which touched upon these matters, shedding light on the advantages of such access to the ECB facilities.
The IMF recently highlighted the need for CCPs to have this access within their Euro Area Policies Financial System Stability Assessment report which was released in June 2018. The discussion has been prevalent within conferences and literature for some time, stating that the growing importance of CCPs would necessitate their wider Eurosystem access to central bank facilities. A CCPs dependence on commercial banks and the Repo markets for liquidity is not always a guaranteed ‘liquidity-lifeline’ and therefore during periods of market stress, it would be critical for CCPs to deposit funds and exchange high-quality collateral for rapid liquidity access to increase their financial stability.
With only two CCPs in the European Union currently holding a banking license (Eurex Clearing and LCH SA), the advantages and disadvantages have become apparent to clearing houses looking to gain access. One valuable advantage of the license is that it permits the CCP to very quickly exchange collateral to cash which would prove important during a potential default of a clearing member where the CCP would need cash quickly to pay variation margin to other members.
However, with open access to the ECB’s facilities comes additional banking regulation for the CCP if a banking license is required. This may be somewhat burdensome to CCPs who do not have the capacity to adhere to such regulatory landscapes when they are already occupied with clearing house regulations.
At present, there is no formal indication of the ECBs intention to relax access requirements. However, it is notable that the dialogue will continue and CCPs may indeed have access in the future considering their increasing systemic importance in the markets.
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