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

How to relax again – much needed R, R&R for CCPs

By Rosenberg Marnie - Executive Director, Clearinghouse Risk, Strategy & Advisory, J.P. Morgan


We have come a long way since the global financial crisis – banks are now more resilient than in the past. However, more work is still needed to ensure CCPs have sufficient financial safeguards to minimize the threat of the new “too big to fail”. CCPs play a crucial role in reducing systemic risk by facilitating the netting of exposure and the mutualisation of tail risk among many participants, the volume of transactions going through these institutions has increased significantly and will continue to do so with mandatory clearing rules in place. Thus, should a CCP fail, we want the failure to be managed to limit market contagion, avoid pro-cyclicality and ensure the continuity of critical financial market functions.

This will be achieved in a number of ways: One, ensuring CCPs have robust resilience measures in place such as clearing member default coverage – we believe this should be funded and appropriately sized through a transparent and regulatory-driven stress framework. Member liability must be capped, on a consistent basis, across default fund assessments and replenishments, reducing the uncertainty in estimating the “true” cap. Governance and waterfall structures must align incentives and only products that can be risk managed and are suitable must be introduced for clearing.

Second, while Recovery tools aim to ensure continuity of CCPs, some of the tools could be potentially destabilizing and significantly exacerbate market distress; therefore, careful consideration needs to be given to systemic stability and provisions made to compensate impacted participants before CCPs utilize them – supervisory oversight here is critical. We need to think carefully about cash calls on clearing members which can be pro-cyclical, variation margin gains haircutting (VMGH) on participants which can further destabilize markets and, partial tear-up which should be done at fair market value, and not at last settlement price – which can be stale information.

Third, to the extent that Resiliency measures are insufficient and Recovery tools prove to be ineffective, systemically-important CCPs must be subject to Resolution plans to ensure continuity of critical services, while ensuring shareholders, management and creditors suffer the full consequences of a failure such that costs are not borne by taxpayers. In this context, a counter-cyclical resolution fund is needed as a part of any resolution plan of systemically important CCPs. Size and source of resources should be determined in a manner that balances risk mitigation benefits with broader impact to the market, undermining the objective of mandatory clearing.

Haircutting of initial margin is not a suitable option – it is pro-cyclical, will reduce liquidity as participants shift to securities collateral, and creates a rush to exit. Finally, access to central bank liquidity in emergency circumstances is absolutely critical to ensure financial stability.

The global nature of CCPs and products cleared makes a globally, consistent and workable CCP regulatory framework imperative. Cross-border cooperation is absolutely critical. To this end, we support both CPMI-IOSO’s and FSB’s efforts to review existing Resiliency/Recovery standards and develop Resolution guidance respectively. We look forward to continuing to works with policymakers on these important initiatives for the market.