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

Flexibility key to CCP resiliency, recovery and resolution

By Thompson Larry - Vice Chairman & General Counsel, The Depository Trust & Clearing Corporation (DTCC)


In the wake of the 2008 financial crisis, policymakers established a key goal of enhancing the resiliency and supervision of systemically important entities, such as central counterparties (CCPs), to improve the stability of the global financial system. While CCPs play a critical role by reducing counterparty risk and limiting contagion, the increasingly interconnected nature of financial markets and the growing reliance on central clearing makes it more important than ever before that clearinghouses are adequately equipped to manage this complex and evolving landscape, including mitigating the risk that they themselves may create.

Effectively mitigating this risk requires a globally coordinated and considerate approach. As the owner of the world’s largest securities CCPs, DTCC is encouraged by the ongoing work of financial policymakers to develop standards and guidance for CCP resiliency, recovery and resolution. These efforts – led by the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO), and the Bank for International Settlement’s Committee on Payments and Market Infrastructure (CPMI) – are intended to prevent a distressed or failing CCP from becoming a threat to the integrity and viability of the global financial system. However, a top challenge is how to achieve consistent global oversight of CCPs while still allowing them to work with their myriad stakeholders to tailor their recovery and resolution plans to match the individual risk profiles they face.

The development of a common standards and guidance is critical, but given the diversity of financial markets and products that these infrastructures serve it is it is essential that policymakers allow for flexibility in the development of recovery and resolution plans while also taking into account differences in CCP governance, ownership and operating models. For example, to ensure adequate resiliency in the face of extreme market conditions, DTCC supports the establishment of a stress testing framework for CCPs and welcomes the opportunity to engage with policymakers in its development. However, the substantial differences among CCPs may render fully standardized testing less useful than more customized stress tests that are targeted toward the scenarios most likely to stress a particular CCP. Regulators and CCPs should continue to assess the degree to which standardized testing scripts may provide valuable information, but should not maximize standardization at the expense of genuine usefulness.

In other words, frameworks for CCP resiliency, recovery and resolution planning cannot be one-size-fits-all. With the FSB and CPMI-IOSCO expected to issue their final guidance by the end of 2016, it is essential that policymakers continue to engage with the industry to find the appropriate balance in the oversight of CCPs.