No reason to change regulations on credit for central counterparties, says report

The ESCB produced its report to help the Commission review aspects of EMIR, the regulatory and supervisory framework on OTC derivative transactions, central counterparties and trade repositories, it said.  

CCPs stand between two parties to a trade, aiming to ensure financial performance if one of them defaults.

At present, EMIR does not include any requirements or conditions on the provision of liquidity or other credit facilities to CCPs. Each central bank is allowed to make its own decision on the facilities it chooses to offer, the ESCB said.

Any changes to the regulation would have to respect the principle of the independence of central banks, which is specifically set out in the Treaty on the Functioning of the European Union (TFEU), the ESCB said.

Central banks have to make decisions based on the objectives of the ESCB, including carrying out two "basic tasks": to define and implement monetary policy, and to promote smooth payment systems, the ESCB said.

National competent authorities also need to be aware of the liquidity risks to CCPs, and should try to improve this where they find problems, the ESCB said.

However, the ESCB said it "does not consider that introducing requirements in EMIR regarding CCP access to central bank facilities would be the appropriate means to address potential weaknesses". Central banks need to control risks themselves, it said, and an automatic right to credit from central banks would create "moral hazard on an extraordinary scale", it said.

The current legal framework is therefore adequate, the ESCB said.

Earlier this month the European Securities and Markets Authority (ESMA) said that the EMIR framework should be streamlined to ensure investor protection.

In four reports released simultaneously ESMA recommended changes to EMIR. These include simpler identification of high risk non-financial counterparties (NFCs) and clearer rules and standards.