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

Recovery and resolution of CCPs – the global and EU agendas in step

By Pearson Patrick - Head of Resolution and Crisis Management Unit, DG for Financial Stability, Financial Services and Capital Markets Union, European Commission

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Since the financial crisis, the G20 and EU have been working on ways to manage the failure of systemic financial institutions while protecting taxpayers and financial stability. With recovery and resolution regimes for banks now in place, the focus has recently shifted to other institutions, most notably central counterparties (CCPs).

The business models of CCPs differ from those of banks. It is also generally understood that the likelihood of a CCP encountering severe distress or of failing is lower. Still, CCPs act as key bulwarks for global financial stability and many serve customers across borders. With the start of mandatory clearing of standardised over-the-counter derivatives under EMIR, the risk concentration in CCPs is set to increase. As the implications for global financial stability increase, there is growing recognition that recovery and resolution frameworks aimed at mitigating these risks should be as internationally consistent as possible.

Global standards were adopted in this area by the Financial Stability Board (FSB) and by the Committee on Payment and Market Infrastructures and the International Organisation of Securities Commissions (CPMI-IOSCO) in October 2014. These set out comprehensive requirements and options for managing the distress or failure of CCPs, fully reflecting where they differ from banks.

However, considering the potential global implications of a CCP failure, further international work is currently underway to refine and consolidate the standards for CCP resilience, recovery planning, and resolvability. The G20 is to take stock of this work at its summit in September this year.

The focus is on ensuring the viability of CCPs and on ensuring that recovery and resolution options are operational and effective against various risks and scenarios. As a result, CCPs in all of the main global financial centres should be subject to comparable standards to prevent their failure as far as possible. Authorities in these jurisdictions will also have a better, more consistent and shared understanding of how the resolution of CCPs could be carried out in an effective and non-discriminatory way.

Consistent international approaches will help ensure appropriate and broadly similar arrangements across key jurisdictions and maintain a competitive level playing-field for CCPs and their users globally.

An important aspect of the work looks at the resources required to fund CCP recovery and resolution effectively from private sources. This will help deliver greater international clarity on how best to allocate costs and obtain funds additional to those in CCPs’ existing default waterfalls, established under EMIR in the EU. This is instrumental to ensure that resolution succeeds in maintaining the continuity of CCPs’ critical services in a way which spreads costs in an equitable and transparent way and minimises spill-overs to the real economy. Consistent international approaches will help ensure appropriate and broadly similar arrangements across key jurisdictions and maintain a competitive level playing-field for CCPs and their users globally.

The future EU regime will look to build on this work. However, thanks to the single market and the regulatory framework under EMIR, including its equivalence provisions, the EU already benefits from considerable experience in cross-border cooperation regarding CCPs. With the comprehensive framework of the Bank Recovery and Resolution Directive (BRRD), we also have a legal template for cross-border crisis management. The future framework for CCP recovery and resolution can build on these accomplishments. Taking into account international progress on some of these key outstanding questions, the Commission expects to table a proposal later in the year.