Ladies and gentlemen,
Today, we are publishing a proposal to strengthen Europe's financial system and ensure that Central Counterparties – or CCPs - can be recovered or resolved should they fall into difficulty. This proposal complements the risk reduction measures we tabled last week as part of the EU Banking Reform package, and the stronger rules we put in place to govern derivative markets in recent years. They close a gap in Europe's financial services regulatory architecture.
This proposal is important because Central Counterparties lie at the heart of our financial systems. They act as intermediaries - counterparties - between the buyers and sellers of millions of securities transactions every day, including bonds, equities and derivatives. They make the financial system safer by helping to shoulder the risk of a trade falling through, increasing transparency and reducing the web of complex bilateral transactions that caused problems during the crisis. They support the risk management activities of thousands of European companies who are exporting and investing.
Today, there is around 500 trillion euros worth of derivative contracts outstanding globally, a significant proportion of which are cleared by the 17 CCPs in Europe. In 2009, with our G20 partners, we committed to requiring more derivative trades to be centrally cleared. Around half of derivatives transactions are now cleared through CCPs: almost double the amount of 2009. We expect central clearing to increase further in the future.
CCPs are already well regulated by the European Market Infrastructure Regulation which has been in place since 2012. But if we are going to rely more on CCPs, we need to be ready for the unexpected. It is an unlikely scenario, but given CCPs' systemic importance, Europe needs a framework to recover and resolve them effectively should the need arise. When a CCP failed in Hong Kong in the 1980s, markets had to be closed for a number of days. So we must have a framework in place to help protect taxpayers and maintain the financial stability we need for growth.
Today's proposal responds to that need. It is focused on prevention and preparation. It would mean CCPs and authorities in Europe could act decisively under pressure. It is based on the principles set out in the Bank Recovery and Resolution Directive and international standards for CCPs. The proposal would require CCPs and national authorities to plan for potential problems; enable the authorities to intervene early to stop things getting out of hand; and give authorities the powers to step in to help manage the process if the CCP should fail. It provides a framework for cross border coordination between national authorities within Europe and globally. Let me say a bit more about each of those areas.
Our proposal would require each member state to designate a resolution authority which could be for example a central bank, the relevant ministry or an existing supervisory authority. We would require CCPs to draw up recovery plans that include measures to overcome financial problems which could lead to the CCP failing. These recovery plans would be reviewed by the CCP's regulator. National resolution authorities would be required to prepare plans for a failing CCP to be restructured and their systemic functions maintained during the crisis: the functions that are key to the smooth functioning of our financial markets. Our framework is designed to limit the use of public funds.
To solve problems early, supervisors would be granted powers to intervene in the operations of CCPs when their viability is threatened, but before they have to be resolved. Supervisors would be given the authority to require specific actions be taken in a CCPs' recovery plan, for it to make changes in its business strategy, or legal and operational structures. Our proposal follows international guidance, including from the International Organisation of Securities Commissions and the Financial Stability Board. It would only require a CCP to be placed in resolution if it were failing or on the verge of failure; when no private sector alternative to resolution could be found; or when financial stability is at risk.
CCPs work across the single market. Their business is inherently international. So we want authorities to cooperate to ensure effective planning and orderly resolution can happen across borders if necessary. That is why we are proposing to establish resolution colleges for each CCP. These would be made up of all the relevant authorities, the European Securities and Markets Authority and the European Banking Authority. The existing colleges, set up by the European Market Infrastructure Regulation, would have an important role for CCP recovery planning. And CCPs would be required to ensure the measures set out in their recovery plans could be applied across jurisdictions.
These are just some of the main elements of the proposal we are tabling today that will help complete Europe's regulatory architecture, reduce risk and maintain stability. It received strong backing from the College. And I will be doing everything I can to encourage colleagues in the European Parliament and the Council to be ambitious, to get this agreed, and to make Europe's financial system stronger.