Speakers of the session
Head of Resolution and Crisis Management Unit, DG for Financial Stability, Financial Services and Capital Markets Union, European Commission
Acting Director, Division of Clearing and Risk, U.S. Commodity Futures Trading Commission (CFTC)
Executive Director, Resolution, Bank of England
MEP, Rapporteur – Recovery and Resolution of CCPs, ECR Coordinator Economic and Monetary Affairs Committee, European Parliament
Emerico Antonio Zautzik
Director General for Markets and Payment Systems, Banca d’Italia
Executive Director, Clearinghouse Risk, Strategy & Advisory, J.P. Morgan
Vice Chairman & General Counsel, The Depository Trust & Clearing Corporation (DTCC)
Objectives of the sessionThe objective of this roundtable was to discuss the key elements of an EU regulatory framework for the recovery and resolution of CCPs, the level of flexibility or predictability that should be built into the framework, how the availability of appropriate financial resources could be ensured and the possible issues raised by the global dimension of many CCPs.
Points of discussion
What should be the key components of the EU CCP recovery and resolution (R&R) toolbox?
- What are the main tools that should be favoured or avoided in the context of a CCP recovery or resolution? How will resolution be different from recovery? What should be the triggers for entry into recovery or resolution? Should resolution authorities be able to step in before the recovery toolkit has been exhausted?
- What level of flexibility should be allowed in the development of R&R plans in order to take into account the circumstances of the default and the specificities of the CCP? What level of discretion should be allowed within CCP specific R&R plans and should the level of discretion differ in recovery vs resolution? How to ensure sucient legal certainty in resolution?
How to ensure that CCPs have sucient financial resources to face up to a potential recovery or resolution process without exposing participants to unlimited and unmanageable liability?
- What should be the additional resolution resources compared to recovery? How to make sure that sucient resources are available after the end of waterfall arrangements? Should additional recovery resources be reserved for resolution and should this be measurable and predictable upfront?
- What is the right liability structure to make a CCP recovery and resolution framework work? How to ensure that the incentives of CCP owners, clearing members and clearing member clients are suciently aligned in R&R and moral hazard is minimized? How to appropriately define the level of prefunded resources and skin-in-the-game? Should a counter-cyclical funding resource be envisaged?
How to ensure sucient compatibility and consistency of CCP R&R approaches at the international level?
- Can the CCP workplan presented by FSB / BCBS / CPMI / IOSCO help to define an appropriate recovery and resolution framework for EU CCPs? For which parts may more granular standards of guidance be required? To what extent can we continue to rely on CCP rulebooks? Do PFMIs need to be modified or completed in any way in this perspective?
- On which key aspects should CCP R&R frameworks be consistent at the international level? Should there be equivalence-based approaches?
- How do CCP R&R provisions inter-act with those for GSIBs and how much does this matter? What can be expected from an assessment of the interconnectedness between CCPs and their clearing members?
- Is the timing of the initiatives related to CCP R&R satisfactory?
Background of the sessionWith the mandatory central clearing of standardised derivative transactions, CCPs are becoming key elements of the financial system and their safety is vital for preserving financial stability. Moreover many of them serve clients across borders.
EMIR already provides measures for ensuring the resilience of CCPs, requiring them to implement risk management policies, capital requirements, disaster recovery arrangements and the establishment of a default waterfall including pre-funded loss-absorbing mechanisms with the capacity to handle the default of the two largest clearing members of the CCP. Most EU CCPs also already have additional rules and loss allocation arrangements in place such as “rights of assessment” which are an unfunded obligation to replenish the default fund. Some market observers however point out that the effectiveness of such unfunded arrangements is mostly untested. Work on a review of EMIR was launched by the EU Commission (EC) in 2015 in accordance with the requirements of the legislation. Four areas are part of this review: access to central bank liquidity, the systemic importance of the OTC derivatives transactions performed by non-financial firms, the functioning of CCP colleges and the efficiency of margining requirements to limit procyclicality.
These measures aiming at ensuring CCP resilience however cannot totally eliminate the risk of a CCP failing in a disorderly manner. In addition ordinary bankruptcy rules, which focus on creditors, are not adapted for those entities providing critical services for the market, This is why the EC is planning to propose legislation on CCP Recovery and Resolution (R&R) by the end of 2016.
Initially programmed for the end of 2015, the EU proposal was postponed to take into account international developments and build on global standards, in order to ensure that recovery and resolution frameworks are as consistent as possible given their implications for global financial stability.
Global standards were published in October 2014 by CPMI and IOSCO on the recovery of Financial Market Infrastructures (FMIs) and by the FSB on effective resolution regimes. The FSB, CPMI, IOSCO and BCBS are currently working jointly 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 2016 and a final report is due to be published at the end of 2016. The focus is on ensuring the viability of the critical economic functions of CCPs without reliance on taxpayer support and ensuring that recovery and resolution arrangements are operational and effective against various risks and scenarios.
A first key element of this on-going work is the evaluation of existing measures for CCP resilience taking into account the implementation of the PFMIs, including loss absorption capacity, liquidity and stress testing. There will also be a review of existing recovery and resolution mechanisms, including loss allocation tools, and a consideration of the need for more granular standards for CCP recovery and resolution planning. The resources required to fund CCP recovery and resolution effectively will be evaluated and more specifically the need for prefunded financial resources additional to those in existing CCP default waterfalls. The international workplan also includes an analysis of the interdependencies between CCPs and major clearing members and of any resulting systemic implications.