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ATP backs central clearing, warns against disproportionate regulation

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The European Commission must take care that the regulation of the derivatives market does not increase trading costs, which would risk undermining the stated aim of improving financial stability, ATP has warned.

Denmark’s largest pension fund also urged the European executive to clarify its goal of offering better regulation of financial markets, and measure the success of each initiative against five criteria that could form an evaluation “diamond”.

Responding to the Commission’s consultation on regulation agreed in the wake of the 2008 financial crisis, ATP praised the work undertaken to strengthen bank balance sheets for creating an overall stronger financial system.

“At the same time,” it added, “ATP is concerned about the unintended consequences caused by the cumulative effect of the large amount of financial regulation introduced over a short time span.”

It said the Commission’s review of financial regulation should be welcomed, and suggested all initiatives be evaluated based on how they impact the transparency, liquidity, externality, diversity and financial stability of the market – forming what the statutory pension fund regarded as a regulatory diamond.

Based on the above criteria, it said the European Market Infrastructure Regulation (EMIR), which requires the central clearing of a majority of derivatives trades, was a “reasonable initiative”.

It nevertheless warned that the increased reliance on central counterparties (CCPs) brought with it added challenges.

“Diversity will decrease in the financial system as more and more transactions are concentrated on relatively few CCPs, and fewer banks become willing to accept the increasing costs and risks of providing clearing services as CCP members,” it said.

ATP also warned that CCPs could not be relied on to balance out other financial risks remaining within the system, and said they should not be subject to more onerous capital charges than other systemically important financial institutions (SIFIs).

“CCPs should not be required to compensate for lack of financial stability outside the CCP system,” the fund’s submission said, “as this will disproportionately allocate the risk between the financial institutions and potentially lead to unnecessary higher cost that might increase cost and undermine CCPs’ original objectives to increase financial stability.”

A number of submissions to the Commission have focused on central clearing, with the UK’s Pensions and Lifetime Savings Association calling for an exemption for pension funds to be offered until a viable mechanism allowing the industry to clear is developed.

The European Central Bank has previously called for greater regulation of CCPs to avoid significant losses when one of the “super-systemically important” bodies collapses.

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