ANNUAL REPORT 2008 - Polymer Bank Notes of the World

for Clearing and Settlement, and the dismantlingof the Giovannini barriers.REDUCING COUNTERPARTY RISK IN CREDITDEFAULT SWAPSAccording to BIS figures, the outstandingnotional amount of credit default swaps stoodat USD 57 trillion in June 2008, accounting foraround 8% of all OTC derivatives. The needfor a more resilient operational frameworkto support the orderly processing of OTCderivatives trades, which had been identifiedin the CPSS’s March 2007 report entitled“New developments in clearing and settlementarrangements for OTC derivatives”, becamemore urgent as a result of the financial marketturmoil in 2008. The ECB hosted a meeting on3 November 2008 with European stakeholdersconcerning the establishment of centralcounterparties (CCPs) for credit default swaps.Participants included the potential providersof such CCPs, dealers, users and regulators.The meeting complemented initiatives by theFederal Reserve Bank of New York and theEuropean Commission in this field. The ECBalso participated in a working group set up bythe European Commission addressing bothshort-term and long-term supervisory, regulatoryand competition issues in the derivatives marketwith the aim of promoting financial stability.Stakeholders have underlined the merits ofhaving multiple solutions, and at least oneEuropean solution. On 18 December 2008 theGoverning Council recalled the importanceof strengthening the infrastructure for OTCderivatives, and the need for at least oneEuropean CCP for credit derivatives. Given itspotentially systemic importance, this EuropeanCCP should be located within the euro area.The Eurosystem shares the views of the FinancialStability Forum and the European Commissionon the importance of reducing counterpartyrisk and of enhancing transparency in OTCderivatives markets, in particular in areas ofsystemic importance (e.g. credit derivatives).The introduction of CCPs for OTC derivativesis considered an appropriate solution becauseCCPs, by virtue of concentrating outstandingpositions in one place, i) reduce the counterpartyrisk to which market participants are exposedand render risk management more efficient,ii) increase market integrity, transparency andthe availability of information, iii) standardisethe criteria for evaluating exposure, andiv) free up collateral. The Eurosystem announcedits intention to cooperate with other authoritiesto facilitate effective collective action by theprivate sector in this regard. In December 2008the ECOFIN Council invited the ESCB andCESR to adapt their draft recommendationson CCPs to explicitly address the risk ofOTC derivatives.4.4 OTHER ACTIVITIESIn order to inform public authorities, marketinfrastructure providers and their participants, aswell as the general public‚ about developmentsrelated to its oversight framework, and about itsoversight activities related to specific paymentsystems, the ECB published its “Paymentsystems and market infrastructure oversightreport 2007” on 11 July 2008. This report wasthe first publication dedicated to the ECB’soversight activities. The scope of the report willbe widened, with subsequent issues taking theform of a Eurosystem oversight report.Given that payment and securities infrastructuresare crucial for the proper functioning of marketeconomies, it is important that theseinfrastructures, including their participants andthird-party service providers, implementeffective and efficient risk management andbusiness continuity procedures and are compliantwith the relevant national and internationalstandards. In view of the many interdependenciesbetween the various market infrastructures andthe need to ensure a high level of informationexchange and mutual understanding, the ECBand the EU NCBs have agreed to promoteinformation-sharing on international andnational standards relevant to operationalresilience, and in particular those relevant tobusiness continuity. In February 2008 the ECBestablished on its website a dedicated webpage168 ECBAnnual Report2008