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BoE head warns against "currency nationalism"

Requiring financial instruments to be cleared in a country that uses the same currency would increase costs and potentially "splinter" the existing global infrastructure of central counterparties (CCPs), Bank of England deputy governor Jon Cunliffe has said.24 Feb 2017

CCPs are bodies that operate between the buyers and sellers to a trade, meaning that neither party to the trade itself is exposed to the risk of the other defaulting.

In a speech at the Official Monetary and Financial Institutions Forum, Cunliffe discussed risks facing international finance markets, and cautioned against the view that transactions and trades directed through CCPs in a jurisdiction’s currency should be kept within the borders of that currency.

"There may of course be trade or industrial policy reason to such an approach. And there can also be broader political considerations. We cannot ignore the fact that such incentives may be at play – now or in the future. But a policy of 'currency nationalism' is not a necessary condition for either financial or indeed monetary stability – as is demonstrated by international experience in relation to financial market infrastructure over recent decades," Cunliffe said. 

"Such a policy, if applied by all jurisdictions, is in the end likely to be a road to the splintering of this global infrastructure – and to further fragmentation of the global capital market – rather than the route to the sound and efficient management of risk," he said.

Many financial products are multi-currency by their nature, and a requirement for all instruments to be cleared in the jurisdiction of the currency in which they are denominated would make central clearing of these products impossible, he said.

"In central clearing, in settlement, in payments if we wish to maintain the infrastructure to sustain an open and integrated global capital market, we will need to build upon the arrangements we have developed for supervisory cooperation and co-ordination," Cunliffe said.