AFME: Post-Trade Reform Needed
Systemic risk in settlement, harmonisation of tax processes and collateral management are among pain points.
The Association for Financial Markets in Europe said the European Commission needs to develop a strategic plan for comprehensive post-trade reform in the region.
The trade body said in its response to the European Commission that the report by the European Post-Trade Forum (EPTF) and the consultation on post-trade in a capital markets union are an important milestone in much-needed European post-trade reform.
Werner Frey, managing director, post trade at AFME, said in a statement: “As a next step, we are very much in favour of dismantling the narrowly defined EPTF Barriers with a view to promoting the global competitiveness of European capital markets. At the same time, a strategic plan for a comprehensive European post-trade reform should be developed.”
The trade body added in its response that the dismantling of barriers to harmonising post-trade across the EU should start immediately without waiting for the possible development of distributed ledger technologies or the outcome of negotiations over the UK leaving the trade bloc.
The AFME stressed the importance of making progress on removing the EPTF barriers and proposed that the European Commission set up a strategy group to set objectives of a comprehensive European post-trade reform and make recommendations. for achieving the defined objectives. The organisation highlighted the following areas as requiring more in-depth work – systemic risk /risk transmissions in the settlement space, harmonisation of tax processes and collateral management.
The European Association of CCP Clearing Houses (EACH), said in its response that the implementation of the G20 regulatory mandate for central clearing of standard derivatives has not yet been fully completed in the EU.
“The full implementation of the measures included in the G20 mandate will therefore represent a trend in the EU-post-trading industry at least over the next five years,” added EACH. “Trading volumes through electronic trading platforms are also expected to increase in the EU further to the implementation of the related regulations.”
The association also warned of the need to maintain a balance between regulation and market efficiency as potential unintended consequences include the narrowing of profit margins and clearing members leaving the market, making it more difficult for end clients to access services.
EACH added that access to central bank liquidity and central bank deposit could address the potential systemic risk concerns due to the clearing houses being dependent on commercial bank providers and the markets to satisfy their liquidity needs.
“Access to central bank money usually requires a banking license,” added EACH. “Providing all CCPs across the EU with harmonised access to central bank liquidity creates not only a level playing field but also ensures an alternative source of liquidity for the CCP.”
In addition EACH believes that access to central bank liquidity should also be promoted as a global standard for CCPs, irrespective of where they are located. Access to central bank deposits would also allow CCPs to deposit cash they receive as margin requirements and default fund contributions.
“This approach would assist CCPs in limiting their exposure to commercial banks and comply with the EMIR rule under which no more that 5% of cash collateral, calculated over an average period of one calendar month, can be deposited on an unsecured basis,” said the response.
EACH said it would support the creation of a technical working group between the public authorities and the industry to perform the technical reassessment of these provisions.
As the use of clearing has increased, market participants have faced a significant increase in the use of collateral and this should be used as efficiently as possible.
“This could be achieved by targeting one single pool of collateral which allows real time substitution,” added EACH. “Cross-border solutions will allow banks to have one single pool of collateral.”
The association continued that he current system of supervision of EU CCPs generally quite well and any improvements can be achieved without a complete overhaul of the existing supervisory regime.
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