I Told You So

There is a clear sense amongst policymakers and regulators that the credit crisis revealed weaknesses in Europes post trading infrastructures. Now we have hard evidence. Just a few weeks ago, a new clearing and settlement study was published by the European Parliaments IPOL unit, which concluded that in the interests of financial stability, there are some gaps in Europes post trade system which should be closed. Overall, the report delivered some very clear findings and certainly alluded to a preference of European home grown infrastructure. In particular, the four key recommendations were: In the interest of reducing industry risks, costs and capital requirements, there should be the establishment of a single, pan-European CCP or at the very least, network links should be developed to enable netting across existing multi-market European CCPs. Once again, this alludes to the possibility of a super CCP being run by the ECB, or being supervised by the central bank. Registration and enhanced capital requirements should be introduced for non-standardised instruments. This is an issue which we expect to be highlighted in next weeks EC Communication on derivatives. A securities equivalent to CLS Bank should be established along with a harmonised method for DvP in securities settlement for EU settlement facilities. Common principles for the creation, perfection and protection of collateral interests in securities should be introduced.While at this stage, these are simply the findings of an initial report, this week the decision will be made as to whether further action should be taken on the study. Indeed, if the Commission decides to legislate in this area, in the first instance via proposals on derivatives, a follow-up to this work will be required. Either way, the key findings of this report reflect some of the key themes currently being recommended to improve the safety and transparency of Europes derivatives markets. As such, the report will go some way to providing further ammunition to those advocating the strengthening of the post trade infrastructure in the derivatives markets.

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