Lord Myners – 2016 Parliamentary Question to the HM Treasury

The below Parliamentary question was asked by Lord Myners on 2016-04-12.

To ask Her Majesty’s Government what actions they have taken, if any, to ensure that the proposed cross-margining arrangements between Eurex and LCH do not subordinate counter-parties in the latter in the event of a failure of Eurex.

Lord O’Neill of Gatley

I refer the noble Lord to the investor relations section of the London Stock Exchange Group website, which contains information about the proposed merger, including some information on the combined group’s proposed structure. I also refer the noble Lord to my previous written answer HL7153.

Once formally notified of the proposed merger, the Bank of England and the Financial Conduct Authority (as supervisors of the London Stock Exchange Group’s UK-authorised subsidiaries) must assess the proposal from a regulatory standpoint.

In addition the proposed merger must be approved by competition authorities and is subject to a range of other assessments including those of overseas regulators and shareholders.

European Regulation No 648/2012 (EMIR) sets out detailed standards on the quality of collateral that a central counterparty (CCP) can accept, and includes a general requirement that the CCP can demonstrate to its supervisor that the form of collateral in question does not present unmanageable risk to the CCP. Furthermore, CCPs are permitted under EMIR to invest their collateral “only in cash or in highly liquid financial instruments with minimal market and credit risk.”

Any proposals for inter-CCP links would need to be assessed against relevant parts of EMIR by the Bank of England, as supervisor of LCH. EMIR requires that models used to set CCP margin requirements (and any changes to them) are validated by the CCP’s supervisor. EMIR also requires that a CCP wishing to extend its business to additional products or services must obtain the authorisation of its supervisor.