The European Commission must work collaboratively with the US to draw up a resolution framework for central clearing counterparties (CCPs), Jonathan Hill has urged.
The commissioner for financial stability’s recommendation came days before the General Court of the European Union, part of the European Court of Justice, ruled that CCPs clearing euro-denominated trades did not need to be based in a country that was part of the single currency.
Speaking at a conference in New York, Hill noted that an estimated $570trn (€509trn) in risk being cleared was “centralised in a handful of global CCPs”.
“If one of these were to fail, the consequences could be devastating, and would be felt worldwide,” he said.
“So Europe and the US need to cooperate at an early stage and decide together how the risks of a failing CCP could be tackled safely.”
Hill said during his confirmation hearings that one of his goals would be to tackle the ‘too big to fail’ risk of CCPs, pledging that a resolution framework would be published in 2015.
Pension investors are currently exempt from central clearing as demanded by the European Market Infrastructure Regulation (EMIR) and were recently offered a further two-year exemption by the European Commission, as the executive decided there were still too many hurdles facing the sector to be able to clear trades.
The commissioner also sought to assuage fears that closer cooperation, as part of the Transatlantic Trade and Investment Partnership (TTIP), would undermine the overhaul of financial regulation implemented by the US with the Dodd-Frank Act.
“But we do think it makes sense to do what we can to make our rules compatible,” Hill said, “so that global businesses can operate more easily, and so that we have a larger and more efficient market, which should allow businesses to finance the rest of the economy more easily, thereby helping create jobs and boost growth.”
Hill’s intervention came days before the general court ruling found in favour of a complaint by the UK and Sweden that argued it was discriminatory to require CCPs clearing euro-denominated trades to be based in a euro-zone member state.
The court said the European Central Bank (ECB) had no right to limit the locations as part of the 2011 Eurosystem Oversight Policy Framework, despite its concerns “malfunctioning” CCPs outside of the euro-zone could destabilise the single currency.
Ruling T-496/11 further found that, under the founding statues governing the ECB’s activities, it only had the ability to adopt regulations on CCPs, “rather than granting it an autonomous regulatory competence in respect of all clearing systems”.
As a result, the court annulled the ECB’s framework in regards to CCPs.