Financial market infrastructures play a crucial role in helping the economy and financial markets to function.
June 17,2013 :Financial market infrastructures lie at the heart of the financial system. They settle transactions and, by stepping in between buyers and sellers, ensure that financial obligations are met.
Central counterparties (CCPs) – also known as clearing houses – are one type of financial market
infrastructure. Central counterparties: what are they, why do they matter and how does the Bank
supervise them? sets out in simple terms the important role that CCPs play in the financial system.
The context is twofold. First, the Bank of England has new responsibilities for the supervision of securities
settlement systems and CCPs in the United Kingdom, as part of a wider reform of financial regulation that
came into force in April 2013. And second, the systemic importance of CCPs will increase further after G20
leaders mandated in September 2009 – in response to the financial crisis – that standardised
over-the-counter derivatives should be cleared through CCPs.
Compared to a world of bilateral trades, a key benefit of central clearing is that it simplifies the network of
exposures across different trading parties. In addition, since CCPs place themselves between the buyer and
seller of an original trade, they effectively guarantee the obligations under the contract agreed between the
two counterparties. This means that, in the event that one counterparty fails, the other is protected via the
default management procedures and resources of the CCP.
Clearing trades centrally means that CCPs themselves become crucial nodes in the financial network. So it
is essential for CCPs to manage the risks they face since the failure of a CCP can pose a systemic risk to
financial stability. As supervisor of these infrastructures, the Bank seeks to ensure that they are managed
and operated effectively to support its financial stability objective. The last section of the article describes
the Bank’s approach to supervising CCPs as well as some current policy issues.
Source: Bank OF England.