March 4, 2015

European Court of Justice Ruling on ECB CCP Policy

The outcome of a long running legal battle over an ECB policy to require CCPs clearing EUR to locate themselves within the Eurozone is announced.

The European Court of Justice announced their ruling on a case brought by Her Majestys Treasury in the UK and the European Central Bank, regarding the ECB policy summarised thus:

In the Policy Framework, the ECB explained that securities settlement systems and central counterparty clearing houses (central counterparties; ‘CCPs’) 1 are key components of the financial system. A financial, legal or operational problem affecting them can be a source of systemic disturbance for the financial system. That is particularly true of CCPs in that they are a focal point for credit and liquidity risk. It was further stated in the Policy Framework that malfunctioning on the part of infrastructures located outside the euro area could have adverse effects on payment systems located in the euro area, whilst the Eurosystem has no direct influence on such infrastructures. The ECB drew the conclusion that infrastructures that settle euro-denominated transactions should be legally incorporated in the euro area with full managerial and operational control and responsibility, over all core functions, exercised from within that area. The ECB stated that this location policy applies to CCPs which, on average, have a daily net credit exposure of more than €5 billion in one of the main euro-denominated product categories.

The ECJ judged that the supervisory powers granted to the ECB apply specifically to payment systems, but not CCPs in the broader sense, and as a result have 'annuled' the European Oversight Policy Framework published by the ECB in so far as it sets a requirement for CCPs involved in the clearing of securities to be located within the Eurozone.

Had the reverse outcome been true, it is possible that CCPs in the UK would need to relocate themselves both legally and operationally to a Eurozone location to then be under direct oversight of the ECB, but this is not the case. The ECJ allow an appeal within 2 months of this ruling, which has taken around three years to arrive at this point.

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