Joint study by EBRD and Oliver Wyman illustrates benefits of overcoming fragmentation of local capital markets
The creation of a regional Central Counterparty (CCP) across central and eastern Europe (CEE) will drive the development of capital markets and economic growth in the region, a report by the European Bank for Reconstruction and Development (EBRD) and the management consultancy Oliver Wyman, published today, has found.
The CEE region’s potential for convergence with average EU levels remains constrained by the current fragmentation of local capital markets. But strong economies need strong capital markets. In this context the establishment of the EU Capital Markets Union initiative and a new regulatory regime for the CEE countries represents “an unprecedented opportunity to accelerate the development of local capital markets to sustain economic growth”, the report says.
“CEE capital markets currently lag behind their European peers in terms of the number and size of the markets as well as in transaction volumes and international investment after adjusting for the relative size of the economy. By reducing this gap, access to debt and equity financing for local businesses can be expanded and fresh dynamism will be injected into local economies”, said Daniela Peterhoff, partner at Oliver Wyman and co-author of the report.
Furthermore, central clearing via a CCP is a prerequisite for the development of local capital markets according to international standards. The role of central clearing has been expanded globally in response to the 2008/09 financial crisis in order to reduce risks in the financial system. For instance, the EU has introduced a harmonised set of market regulations, whereas CEE is lagging behind.
Finally, the creation of a regional CCP is an economically viable option for bringing central clearing services to CEE capital markets on a broad basis. This applies especially to markets that do not use the services of a CCP today, but also others that operate comparatively small CCPs.
André Küüsvek, EBRD Director, Local Currency and Capital Markets Development, said: “This report comes up with a clear business case for a regional CCP and we stand ready to facilitate its implementation. We believe that a Central Counterparty will foster growth in the CEE region, deepening and diversifying local capital markets through attracting more international investment, creating improved liquidity and strengthening resilience through improved solidity of the financial system.”
A Central Counterparty (CCP) is an organisation that helps facilitate trading in European derivatives and equities markets. Their prime responsibility is to provide efficiency and stability to the financial markets that they operate in. The two main processes carried out by CCPs are the clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of securities and funds takes place.
The EBRD and Oliver Wyman report “Regional Central Counterparty: A solution for central and eastern Europe” was presented at a conference at the EBRD’s Headquarters in London today. Speakers and guests from clearing houses, banks and financial institutions discussed its findings and ways to implement the conclusions.