In a report published by the Committee on Payment and Settlement Systems (CPSS), central bankers examine developments in the clearing industry’s market structure, their drivers and the implications for financial stability.
The report, ‘Market Structure Developments in the Clearing Industry: Implications for Financial Stability’, first provides a broad overview of the clearing industry in CPSS countries, covering both traditional markets and over-the-counter (OTC) derivatives markets. Market structures can be classified in two dimensions: vertical versus horizontal structures, and integrated versus fragmented structures.
Second, the report assesses how far these developments have given rise to new risks. It further outlines practical issues that regulators and overseers may wish to consider, either as part of their oversight role or in the context of their broader financial stability remit. The report examines to what extent changes in market structure or ownership might affect the expansion of central clearing services. Finally, the effect of ownership on central counterparties’ (CCPs) incentives to manage counterparty risk is considered.
The report shows that different types of market structure have developed over the last decade. Specific market structures may create specific risks and amplify interdependencies between systems and markets. These warrant careful consideration by both market participants and the authorities. However, there is no evidence that the industry is settling on one particular structure. Nor is evidence found to suggest that one market structure is superior to another, either in terms of CCP risk management or in terms of wider systemic risk. In fact, many risks occur in several types of structures.
Nevertheless, central banks, regulators and overseers may usefully pay attention to specific risks that are more likely to occur in some market structures than in others. These include incentives to weaken the robustness of CCP risk controls that may in turn reduce the CCP’s ability to manage a member default. Although some of the risks considered in the report have yet to materialise, CCPs and their regulators or overseers face significant future challenges, in particular as market structures in many countries continue to evolve. Hence, public authorities will need to continue applying rigorous and consistent oversight. For each type of market structure, the report provides a checklist of questions that central banks, regulators and overseers could use to that end.
The clearing industry’s structure also has a bearing on how far central clearing will be used in different market segments, and hence on the resilience of the financial system as a whole. In fact, the broader risk-mitigating benefits of central clearing may be diluted if changes in market structure affect access to CCPs, raise the cost of central clearing or hamper the process of creating new CCP services.
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