Regulatory Competition and the Increasing Fragility of CCPs

Topic & Objectives

This project’s goal was to understand the regulatory dynamics within the EU regarding the regulation of central counterparties (CCPs). A European supervision was deemed desirable to avoid regulatory competition and the increasing fragility of CCPs due to the effect of “predatory margining” (Krahnen and Pelizzon 2016).Which effects hindered the Europeanization of the supervision of CCPs in the wake of the financial crisis in 2008 and Brexit?
We observed the element of “regulatory cascading”, a multiplicity of different regulatory initiatives, which would have to be resolved for European Supervision to become a reality.

Key Findings

• We note in our papers that there is already a de facto Europeanization of these costs, in particular, considering the position of the ECB that CCPs will not be allowed to fail and hence resolved, but instead will always be recovered. The mutualization of recovery and resolution costs on the European level proved to be the most difficult point.
• In this context, we found based on documents and interviews that Germany was the most prominent veto player, actively opposing European supervision of CCPs by ESMA, because it wanted to prevent a general expansion of ESMA’s capabilities.

Policy Implications

• If European supervision is to be achieved, the issue of the Resolution Fund at the EU level needs to be resolved. We argue that by acknowledging the stance of the ECB not to let any resolution of systemically important CCPs to occur, might be a first step in this direction.
• A mutualization of European costs in the interest of Germany and the EU as a whole, as a national resolution regime, if activated, risks short-sighted decision making in the national interest, ignoring the potential spill-over effects on European banks for the case of resolution.