A report by the German central bank found that the
close and opaque ties in the over-the-counter derivatives markets are a
potential source of danger to the stability of the financial system. The
antidote to this potential threat to financial stability is the creation of derivatives
central counterparties, who bear the default risks. Thus, the Deutsche Bundesbank
views as a positive development the ever greater use of central counterparties
for clearing under both the Dodd-Frank Act and EMIR. The report
noted that, in the case of new index credit default swaps arranged between
major derivatives traders, more than half are now being cleared through central
counterparties.
However, the central bank cautioned that as central
counterparties assume this systemically important role the need for safety
barriers arises. In this regard, regulators must adopt and ensure strict
requirements globally for risk management at central counterparties. In
addition, suitable recovery and resolution regimes for central counterparties must
be established. Regulators and policy makers must not allow new systemic risks
to build up at central counterparties.
Central counterparties. The
Bundesbank report observed that a primary goal of the regulation of the
derivatives markets is to reduce systemic risk mainly by involving central
counterparties, which act as a contractual counterparty for derivatives buyers
and sellers. They thus assume default risk in the derivatives market, which
will, it is hoped, allow them to dampen the shock waves sent out by the default
of a large market participant by acting as a breakwater. In addition, trade
repositories are to ensure greater transparency with a view to facilitating the
timely identification of risk concentrations.
However,
the report cautioned that the regulation of the OTC derivatives markets is
advancing only slowly. While international standard-setting, national
implementation and the application of the regulations are making definite progress,
acknowledged the central bank, the aim of having the new regulations fully in
place by the end of 2012 has not been achieved.
It
would have been desirable, said the Bundesbank, for the international
agreements to have been implemented close to simultaneously in all countries.
But this did not happen, and there are marked differences in the national
implementation to date.
Requirements
for central counterparties in the various jurisdictions should not be
contradictory, cautioned the central bank, and must not be permitted to trigger
regulatory arbitrage and a concomitant race to lower standards. In addition, as
derivatives central counterparties are assigned a systemically important role,
their risk management should be subject to strict rules at the global level. Indeed,
every central counterparty should have robust
risk management structures in place.
All
that said, the central bank noted that progress is being made in the field of
central clearing of derivatives. The entry into force of various obligations to
use central counterparties in Japan
in November 2012 and in the United
States