In mid-February, the Bundestag passed a new law designed to preserve financial stability and minimise costs for taxpayers should a central counterparty (CCP) fail. One purpose of recovery and resolution work is to prevent moral hazards arising that then increase the probability of a crisis. As such, this legislation is primarily aimed at increasing the resilience of the private sector and the CCP ecosystem. The Act can thus be seen as a sensible and consistent continuation of EMIR and as the final piece of the puzzle in the implementation of the G20 reforms of 2009. After all, one of the great lessons of the financial crisis was to place CCPs at the centre of financial market regulation in order to increase financial market stability. CCPs are the risk managers in the market because, on the one hand, they eliminate counterparty risk and, on the other, they ensure that, in the event of a crisis, the costs remain within the CCP system and are not passed on to the taxpayer. 

What does this new law, which is expected to pass the Bundesrat in March and will probably come into force in April, mean for Eurex Clearing and its customers? We spoke with Viktoria Hackenberg and Marco Winteroll from Regulatory Analysis.

This law is to be adopted in anticipation of an EU-wide regulation. Why does Germany have to come forward now?

It is good that the German legislator has become active and is taking into account the important role of CCPs for financial stability. The national process has been initiated in parallel to the EU debate – which has been repeatedly delayed – with a view to creating a sound legal basis for German authorities to take effective measures in a CCP Recovery and Resolution scenario. In important aspects, the German law reflects the ongoing discussions at a European level on the regulation for the recovery and resolution of CCPs and will be superseded by them once finalised. The Croatian EU Presidency has set itself the goal of concluding the EU regulation before the end of the first half of 2020. However, it will still take time before the details are finalised and the new EU rules are then applied. In other words, by the time the EU rules are implemented, we in Germany will already have a stable framework that will give us and our customers more security.

What exactly has the Bundestag decided, how will it create more security?

The new German law will complement the existing rules for CCPs and address extreme, albeit possible, crisis scenarios that could lead to the failure of a CCP. This is a very important decision for us, as it serves financial market stability in general and considers the particular importance of CCPs as anchors of stability and risk managers in the financial architecture. Recovery and resolution rules for CCPs already existed, but they only applied to Eurex Clearing via the banking regulation (BRRD), because Eurex Clearing is a credit institution, i.e. it has a license as a bank. However, these regulations are not specifically tailored to CCPs. The legislator has recognised this problem and, as we see it, has solved it well with the new law. We are very satisfied with the new rules and expressly support the legislator's intention.

This is due to the fact that the legislation provides that the private sector – market participants and CCPs – cannot expect public sector bail-outs. It thus ensures that the existing CCP incentive structures are maintained. As a way to achieve this, the law for example requires CCPs to develop and maintain recovery plans that must cover potential crisis scenarios, such as defaults of clearing members. The second important point, in our view, is that the competent resolution authority has a flexible and comprehensive set of tools at its disposal in order to react appropriately to the respective crisis situation and decide flexibly which instruments it has to use. As such, the German act very much adheres to international guidance – importantly, also when it comes to requirements in relation to additional CCP equity (skin-in-the-game) or the compensation of clearing members based on the no-creditor-worse-off principle.

What does the planned law mean for our customers?

Customers also benefit from the legal certainty created by the law. In the future, there will be clarity about potential crisis scenarios and which recovery and resolution instruments can be used to deal with them. As mentioned before, in the event of a crisis, our clearing members and we ourselves will bear the costs arising from a default. This creates the right incentive for all players to limit losses. The no-creditor-worse-off principle is also particularly important for our clients, as it states that no clearing member may be placed in a worse position than if a CCP had gone bankrupt by the intervention of the competent resolution authority. This is an important security plus for the clearing member. Last but not least, the consistency of the new German requirements with international standards was welcomed by the ECB due to the fact that it will ensure comparability and facilitate coordination across CCPs that our members use in other jurisdictions.

Does Eurex Clearing have to take new measures based on the new legislation?

The German law provides for a six-month implementation period. Eurex Clearing holds a banking license and has thus already implemented a recovery and resolution plan under BRRD. For this purpose, certain instruments have been defined in the CCP’s rulebook in coordination with customers and authorities in order to be able to react adequately to different crisis scenarios. This provides a good starting point for the new CCP regulations to relatively easily adapt the existing arrangements to the new rules. We are therefore well prepared and already in the process of implementing the new requirements. As part of Deutsche Börse Group, we also operate European Commodity Clearing (ECC), the leading CCP for energy and commodity products in Europe. Though ECC does not have a BRRD plan to use as a starting point, it is also in the process of implementing the new German requirements for recovery and resolution with a view to having them in place well before the end of the transition period.