THE ECB PUBLISHES THE BI-ANNUAL FINANCIAL STABILITY REVIEW HIGHLIGHTING THE ‘ROBUSTNESS OF CENTRAL CLEARING’

As we have seen, the financial markets have taken on a seismic shock which has been unprecedented since the 2008 global financial crisis (GFC). The COVID-19 pandemic has significantly impacted the global markets, prompting regulators and central banks to step in to initiate a steady recovery through policy measures and financial stimulus.

Last week the ECB (European Central Bank) released their May 2020 Financial Stability Review (FSR) – a bi-annual report focused on key topics and issues within the financial markets. The May 2020 FSR provides an in-depth analysis of how the financial system has faired during the COVID-19 pandemic and examines how the shock has proved to be a true test for all market participants across the globe.

The FSR examines several topics highlighting the resilience of European CCPs (Central Counterparties) during the pandemic, notably mentioning: ‘Despite high volatility in financial markets prompting large variation margin calls in both cleared and non-cleared derivatives markets, calls were in general met by market participants. Initial margins increased for some euro area CCPs, although anti-procyclicality measures in the European Market Infrastructure Regulation, such as margin buffers or floors, were able to slow down the increase. The robustness of central clearing, a key area of financial sector reform after 2008, also helped avoid wider dysfunction in derivatives markets.’

Following the highest levels of volatility seen since the GFC and the significant operational disruption inherent with COVID-19, CCPs have proved successfully resilient.

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