Baroness Kramer
Main Page: Baroness Kramer (Liberal Democrat - Life peer)Department Debates - View all Baroness Kramer's debates with the HM Treasury
(11 years, 10 months ago)
Lords ChamberMy Lords, I have not been sure whether to speak to this group of amendments or the following group, or how to organise comments on the clearing houses. I therefore apologise, but given the conversation that has just taken place, I would like to raise a couple of issues. As this process is going forward in terms of supervision, has attention also been paid to Dodd-Frank? Obviously some of the extraterritorial powers that are being sought by the United States on these issues have a very significant impact on the matters that he is dealing with in this and the next group of amendments.
The Minister also said that Europe was being very slow to come to conclusions on how to apply resolution for the clearing houses, but he did not mention that they are also very slow—and appear to have done nothing—to recognise or mitigate the procyclicality impact of the changes he is describing in this move towards centralised clearing houses. We all recognise that the changes stamp down on counterparty risk, but they amplify market risk. Procyclicality is a significant part of that. I think that we have to understand that context if we are to understand the particular measures.
The noble Lord, Lord Flight, raised the issue of co-ordination with other supervisors, but none of these measures seems to address in any way the issue of access to euros for the CCPs, should they require it in another crisis such as the one we saw in 2008. Where are we in the process of negotiating a mechanism that ensures that offshore euro CCPs, such as those in the UK, will be able to access euro liquidity should they need it?
One last issue—and I will try to hold things for the next round of amendments—is that I am unclear as to how these resolutions tie in with banking resolutions or living wills for banks, because the two obviously tie together. If CCPs are placing large amounts of cash and non-cash collateral in banks in the UK as a result of their margin positions, what happens if the bank holding such collateral fails? Is the CCP just one more unsecured creditor? It would be helpful to have some sense of on what side of the ring-fence such accounts would fall for us to understand whether there is a significant risk or a relatively minor one. As I said, I shall hold all comments on the actual resolution mechanism until the next round of amendments.
My Lords, my noble friend asks a lot of important questions but there is a danger of overinterpreting what the clauses achieve. They are to cover circumstances that we do not envisage—although we did not envisage any of the circumstances that occurred in 2007-08, but there is no reason to believe that there is a problem here. As my noble friend says, the clearing houses already have a critical role in the financial architecture; that role is getting even more important as more trading is done on exchange and securities are cleared through the clearing houses.
We are trying here to put in place some mechanisms by which the authorities can step in where voluntary arrangements or insolvency are live. I do not believe that in drawing up the proposals or in consultation on them any difficulty has been identified in relation to the Dodd-Frank rules. Of course the question of procyclicality must be dealt with, but the provisions enabling the authorities to intervene in winding-up, administration or insolvency recognise the importance of clearing houses as they are now. As clearing houses are asked to do more, of course other provisions may be needed, but the provisions are not intended to anticipate some future development of the clearing houses’ role, merely to reflect the situation that we are in already and their structural importance.
Is the Minister saying that the provisions are completely apart from EMIR and the ESMA rules derived from EMIR and that we will have another round, as it were, at some point encompassing those rules?
Yes, I am essentially saying that. This is about clearing houses and recognised investment exchanges that get into trouble, whatever the cause of the trouble. EMIR and related issues raise a whole separate series of questions—including, for example, the question of access to euro liquidity, on which, as I am sure my noble friend knows, we last year started an action against the European Central Bank, which, we believe, is attempting to draw lines across the single market in financial services depending on whether a country is in or out of the eurozone around where clearing houses can operate in the euro. We as a Government firmly believe that the single market requirements are such that a clearing house can operate in the euro wherever it is located in the European Union and that access to euro liquidity and everything else should flow from that.
As to the relationship with the banks, that is not directly relevant to these clauses. An exception to this is where a bank has an important relationship with a clearing house. These new powers mean that the authorities can step in if there are questions of financial stability. We have additional tools in the authority’s kit-bag to deal with a situation which might include the knock-on effect on the banks of their relationship with the clearing houses or vice versa. So it does increase the toolkit.
My Lords, as ever, these things are discussed and agreed through the usual channels. I certainly take my side of the usual channels extremely seriously. The noble Lord can discuss it with his side, but I believe that is where we are headed. I thought we might have got through the previous group of amendments rather more quickly, so I do not know what time we will finish, but in only a moment I have been able to move on to Amendment 176D.
Amendments 176D and 182ZA build on the existing powers of direction that the Financial Services Authority has under the Financial Services and Markets Act 2000, or FiSMA. This group of amendments gives the Bank of England additional powers to direct UK clearing houses to address risks to their solvency, or indeed any other matter. Specifically, the direction could require a clearing house to make changes to its rules or introduce emergency rules, or require rules to be activated. The existing powers of direction provided for in FiSMA can be used only to direct a clearing house to ensure that it complies with the recognition requirements or its obligations under FiSMA. Here, in answer to a point that the noble Lord, Lord Peston, raised, we are talking about powers that go with the previous group of amendments, which were all to do with clearing up a mess when we got there. We are now talking about additional powers to make sure, specifically, that we minimise the chances of getting into trouble.
Providing the Bank with additional powers of direction over UK clearing houses is essential to allow the Bank to manage the considerable risks that may be posed by actions of a clearing house that is nevertheless not in breach of its recognition requirements or obligations under FiSMA. Put simply, the powers will enable the Bank to intervene as required to help to ensure that clearing houses act in a way that is consistent with the maintenance of financial stability and wider market confidence. For example, these provisions allow the Bank to issue a direction requiring a UK clearing house to refuse to accept certain investments as collateral, or to require all collateral in relation to specified types of financial transaction to be provided in cash. They also allow the Bank to require a UK clearing house to alter the rules concerning its operation in order to ensure that certain matters do not constitute events on which specified rights become available—for example, early termination rights—or to require a UK clearing house to take action or to refrain from taking action under its default rules.
Although these powers are wide-ranging, building in essential flexibility to manage new and unusual risks, they may be exercised only where the Bank is satisfied that it is desirable to do so, having regard to various clearly defined public interest tests. With one exception, the Bank of England cannot use this power to require shareholders, members or clients to recapitalise or otherwise fund a failing recognised clearing house. The power of direction relates only to the recognised clearing house itself. The exception is where the UK clearing house already has recapitalisation arrangements and agreements in place with its shareholders. In this instance, the Bank of England could use this power to direct the UK clearing house to enforce those arrangements, provided that the necessary conditions and safeguards are met. This is to ensure that the clearing house acts in a way that is consistent with the maintenance of financial stability and wider market confidence. I beg to move.
My Lords, I hope that these amendments will be consistent with EMIR and ESMA rules. It is not as though those are not available to the Treasury, and the last thing the industry needs is continual revision. Can the Minister clarify whether the amendments give the Bank of England a fairly free hand in resolution procedures? As he said earlier, the steps to resolution are, first, to use the collateral margin; and, secondly, to go into, presumably, the clearing house default fund and exhaust that. I am not clear what the next step and fallback is at the end of that process.
To what extent is there the capacity to go back to members or, as implied by EMIR, for the Bank of England to direct or permit clearing houses in effect to tear up their trades where a financial stability issue has been raised? If those are the kinds of powers that are being transferred to the Bank of England as a consequence of this, when will we get some clarity on exactly what the rules are—by whom, how and when those steps might be applied? Will they be comprehensive when we see them, as well as clear? Will they be credible, in the sense that they are the kind of rules that could be implemented in a crisis? There is a lot of concern about all that, because EMIR creates a possibility but has not created the rules. Can the Minister tell us when we will get those rules and be able to look at all this again? I understand that EMIR is to be implemented by the middle of next year. That does not give us much time if we are going to use this legislation, so I remain very confused.
I draw attention to some difficulties raised by Amendment 176D. In doing so, I need to declare my interest as a non-executive director of the London Stock Exchange, and in that respect as the owner of a clearing house in Italy, and, I hope, subject to all the regulatory requirements, the owner of a majority share in the London Clearing House, and therefore very directly concerned.
These new powers extend the existing powers of direction over clearing houses that the Bank will already have under Section 296 of FiSMA. The amendments are being brought forward following many consultations with the Treasury this summer. I have two problems with the new clauses; I am not certain that the Minister has not just solved the first one, but I will say all this in order to make quite sure that we have got the answer right.
Will the Minister please confirm that the new powers under Amendment 176D cannot and will not be used to direct owners and members of a clearing house to recapitalise or re-fund the default arrangements? I hope that I am pushing at an open door here. I think the Minister said that the direction would not compel unless the default or refunding arrangements were already agreed and an already agreed arrangement were simply being activated. If so, that is splendid, and I would be grateful if he could kindly confirm it again. It is obviously important for owners and members of a clearing house to understand their maximum possible liabilities and to finance accordingly.
My Lords, I shall try to deal with a number of those points. First, on the general question of “may” and “must”, I have quite a lot of sympathy with the noble Lord, Lord Barnett. I thought that we were going to have a more extensive discussion about “may”s and “must”s in our previous session, but unfortunately and regrettably the noble Lord was not able to be here, so we did not spend as much time discussing it as we could have done. There were some instances last week where I thought that on a first reading he and the noble Lord, Lord Peston, had spotted some rather good examples where those terms should be reversed, although they had spotted one or two others where I did not agree with them. However, it provoked quite a long discussion with the Treasury lawyers and drafting experts. As a general matter, I have asked them to reassure me on all the “may”s and “must”s in the Bill, as I am a bit confused sometimes. However, a general defence of this is that, even though some of us as laymen may think that a “may” should be a “must”, it gives rise to all sorts of difficult potential legal challenges. As noble Lords will know, this is a common feature of a lot of legislation that we discuss. I have asked the draftsmen to reassure me that there are no instances where we could change the language in the Bill. I am grateful to the noble Lord, Lord Barnett, for that.
In answer to my noble friend Lady Kramer, as the Committee will know, EMIR will, in the main, force mandatory clearing of OTC derivatives. That will increase the role of, and risk concentrated in, clearing houses and is part of the driver behind introducing these new powers now. I reassure my noble friend that these provisions are entirely consistent with and complementary to EMIR. The intention is that the EMIR regime will be agreed in full by 1 January 2013, with 12 months thereafter to comply. I believe that that gives enough time to explain to all concerned how these various powers are going to be operated. However, I will take back my noble friend’s specific concern that all relevant guidance, particularly in the area that we are discussing this afternoon, goes out in good time. I will discuss that with the authorities.
On the specific questions that arise from the London Stock Exchange, I confirm to the noble Baroness, Lady Cohen of Pimlico, that I answered the question on the first point directly. On the second point, we need to recognise that there are two rather different sets of trigger conditions. The power of direction is designed to avert situations where resolution is necessary. The special resolution regime itself is to be implemented where there is no realistic prospect of the clearing house continuing to function. While I am happy to debate and take away the noble Baroness’s point—I will read carefully what she said on the record—I believe that there is a fundamental mis-read-across between the appropriate trigger conditions for a power of direction as opposed to a special resolution regime. Of course, if there is anything more I can add on that, I will write to all those on the copy list.
For clarification, I had understood the statement of the noble Baroness, Lady Cohen, to be that she was reassured because, under these rules, there was no expectation that the members of a clearing house could be required to top up a default fund unless there were some pre-agreed arrangement or mechanism in place; they would presumably be able to scope out their liabilities. What are the consequences of that for those who are trading and clearing through for the counterparties on the various transactions where the clearing house then has no resource to margin or to a default fund because it is exhausted and whose trades remain open with the clearing platform as the counterparty that should have fulfilled that side of the trade? What are the implications for people who initiate the various derivatives contracts? As my noble friend knows, these contracts often can be open for quite a few years. Are they at risk or is there some other mechanism that provides them with protection, or will they have to very carefully evaluate what they consider to be the financial safety of the clearing houses? If that is the case, will we have credit-rated clearing houses? What mechanism will be used to have some sort of assurance that this is an appropriate platform for them to use to clear trades?
My Lords, these are professional markets. We are putting in place additional protections and provisions, which does not mean that you could not put in place in a theoretical world all sorts of other protections. We are going further than the current situation. Currently, all sorts of rules and oversights are in place. We are going further but we do not believe it is appropriate—that is the point on which I was able to reassure the noble Baroness—that the Bank of England should be in a position to order shareholders of these businesses any more than it can order shareholders of banks that fail to put more money in, save only in the prescribed circumstances where there is a pre-existing agreement and where the clearing house itself can trigger it.
I am sure we can all think of all sorts of provisions that we could put in place to make the world a lot safer, but rather sterile, place. We are going further than the current protections. Of course, theoretically, various things could be put in place but we do not intend to do that.