PARIS (MNI) – Central clearing of the over-the-counter derivatives
trade must be a key feature of regulatory reform, since lack of
transparency in OTC trading led to the destruction of wealth during the
financial crisis, European Central Bank Executive Board member Gertrude
Tumpel-Gugerell said in an opinion piece published Wednesday in the
Financial Times.

“Those who currently oppose regulation and stricter supervision in
OTC markets, claiming that it will come at the cost of lower profits and
overall growth, should be reminded that in the current crisis, the
opacity of OTC derivatives markets has contributed to significant losses
of household wealth and bank defaults,” Tumpel-Gugerell wrote.

We need to ensure that this will not reoccur in the future,” she
added. “Therefore, central clearing of OTC derivatives is an essential
part of the regulatory reform to make this market sufficiently
transparent and to allow supervisors and overseers to monitor the
build-up of systemic risk effectively.”

She noted that while up to 90 percent of OTC trades could be
centrally cleared, at present the proportion of CDSs centrally cleared
through established central counterparties (CCPs) is in the single
digits, and “only a bit higher” for other derivatives.

Clearing through a CCP would allow institutions to net out
offsetting exposures, thus substantially reducing risk, Tumpel-Gugerell
noted. And CCP would encourage use of “appropriate” collateral, since it
would be required to comply with high standards for risk management, she
said. It would also enhance transparency of OTC derivatives because of
mandatory reporting requirements, she said.

Tumpel-Gugerell said regulators and central banks would have to
“work very closely together” in overseeing such CCPs. “The smooth
functioning of market infrastructures, especially during distressed
financial market conditions, is essential given their pronounced role
for market liquidity, but also for the effective exercise of central
banks’ core mandates in respect of monetary policy and financial
stability,” she wrote.

“This, however, does not necessarily imply granting market
infrastructure automatic access to central bank facilities,” she added.

–Paris newsroom, +331-42-71-55-40; bwolfson

[TOPICS: M$$EC$,M$$CR$,MGX$$$,M$X$$$]