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CCP resilience, recovery and resolution - Resilience of the EU financial sector in the global context

Are CCPs too peculiar to resolve?

By Zautzik Emerico Antonio - Director General for Markets and Payment Systems, Banca d'Italia


There are some distinctive features of CCPs, when compared to banks, that may affect their recovery and resolution strategies. The banking market is competitive, while the market for CCP services is highly concentrated: the transfer of activities to another entity, feasible for banks, would thus be extremely challenging in the case of CCPs. The capital structure of a bank is deeply different from that of a CCP: the latter does not issue instruments subject to bail-in provisions.

The focus for CCPs should be strong resilience and effective recovery so as to prevent resolution as much as possible. Resilience can be strengthened by involving participants and the CCP itself. As for participants, higher margins and higher default fund contributions could spread the cost of preventing resolution in proportion to the risks brought to the CCP. For the CCP, dedicated own resources to cover losses should be required at the global level, and should also be disclosed to users, allowing them to know whose skin is in the game.
Recovery arrangements, tailored to the characteristics of the CCP, should be defined by the CCP in close cooperation with its participants. Recovery plans should be approved by, and implemented under the close scrutiny of, supervisory authorities, in cooperation with resolution authorities to ensure consistency with resolution strategies.

The focus for CCPs should be strong resilience and effective recovery.

Given the cross-border – or even global – relevance of most CCPs, the FSB work plan is important to achieve a common understanding by supervisors, CCPs and participants on what the expectations in terms of resilience, recovery and resolution are. A clear picture of interdependencies created via central clearing is also crucial here. No recovery or resolution plan can be credible without taking into consideration the nodes of systemic risk concentration and propagation. The outcome of the FSB study will be crucial for designing effective recovery and resolution strategies for CCPs.