EU officials criticize ESMA Clearing Houses regulation proposal

March 18, 2019, | AtoZ Markets European Central Bank (ECB) officials have strongly criticized EU plans for boosting supervision of clearing houses. The officials leave it without crucial powers to keep away crises in the €660 tn market for euro-denominated derivatives and violate its independence. The bank’s concerns focus on a deal reached last week’s conversation between national capitals and the European Parliament on a planned law giving the bloc greater oversight over ESMA clearing houses regulation which was handling euro-denominated trades.

ESMA Clearing Houses regulation

Under the European Securities and Markets Authority ESMA clearing house regulation, regulators will get new powers to monitor clearing houses’ risk management. On the other hand, ESMA and central banks will also be given a role in judging whether non-EU institutions should be pushed to move to the bloc. Since the regulators act as central counterparties between sellers and buyers of shares and derivatives, regulators now see clearing houses as critical financial infrastructure, the focus was to increase supervision of the clearing of euro-denominated swaps contracts.

But according to ECB officials, negotiators can only partially meet their request for a change to the central bank’s statutes that would have given it a clear right to set regulations governing.

Benoit Coeure, the member at ECB’s executive board quoted that:

“We should be able to adopt requirements to address critical central bank concerns”.

On this concern, the ECB argues that the working of clearing houses has a direct impact on banks’ lending ability which will potentially affect the effectiveness of its monetary policy decisions. Also, if it is expected to supply emergency liquidity during the financial crisis, it should have powers to ensure the reliability of euro clearing.

Additionally, powers looked for by the bank included the ability to need clearing houses to hold central bank accounts and to set standards for managing liquidity risk. A lack of ECB oversight for euro clearing has long troubled the bank. The ECB officials also concerned that the status quo presented a possible risk to the entire financial system and the eurozone.

ECB officials said that the new law could be even worse than the existing situation. That’s because a strictly limited list of what the ECB could and could not do would violate the central bank’s freedom and void the flexibility it needed.

ECB plans to boost the struggling eurozone

Europe’s central bank delivered a fresh round of monetary stimulus in a bid to shore up the weakening economy as it cut its growth forecast by the most since the advent of its quantitative-easing programme.

European Central Bank (ECB) president Mario Draghi said the euro-zone economy will now expand only 1.1% this year, a drop of 0.6 percentage point from forecasts just three months ago. A package of help from new loans for banks to a longer pledge on record-low rates is intended to expand existing stimulus. 

Mario Draghi quoted that:

“The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment, the risks surrounding the euro area growth outlook are still tilted to the downside.”

The euro fell for a fifth day, dropping 0.6% to US$1.1234, while government bonds rose, pushing the German 10-year yield to the lowest since 2016. But bank stocks dropped as the new loans will have less favorable terms than the ECB’s previous operation. There may also be concern about the ECB’s gloomy prognosis for the economy and the limited ammunition it has left if things worsen.

Moreover, the ECB is reverting to more monetary support after policymakers decided to end their bond-buying scheme and willing to start managing the euro-area economy off its crisis stimulus. The export-dependent European economy has been buckled under the weight of trade tensions. This results in a slowdown in China and the uncertainties around Brexit.

The ECB’s main move was to bring back its targeted Longer-Term Refinancing Operations with the intention of encouraging banks to provide credit to businesses and customers. The loans must have a maturity of two years, and the interest rate will be indexed to the main refinancing rate. Similar to previous offers, the current scheme will have built-in incentives to keep credit conditions favorable.

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