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Article (23/314)
Central Counterparty Recovery and Resolution Regulation (CCP) - regulation memo
Central Counterparty Recovery and Resolution Regulation (CCP) - regulation memo
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Central Counterparty Recovery and Resolution Regulation (CCP) - regulation memo

10/04/2019

The establishment of a recovery and resolution regime for financial markets infrastructures is one of the last remaining elements of the post-crisis reform agenda for financial services in the European Union (EU). CCPs emerge from the market infrastructure reforms as the new ‘too big to fail’ institutions, after the implementation of clearing obligations for over the counter (OTC) derivatives through EMIR in 2012, and the implementation of trading obligations for shares and derivatives through MiFID II/MiFIR.

About Central Counterparty Recovery and Resolution Regulation

Following the publication of several editions of guidelines at an international level (by the Financial Stability Board (FSB) on CCP resolution, and by the Committee on Payments and Market Infrastructures (CPMI-IOSCO) on CCP resilience and recovery), the European Commission released its own proposal for an EU regulation in November 2016. Authorities in Europe deem it necessary to have the adequate powers to step in when a CCP fails, and to be able to deal with it in an orderly manner.

Although no final text has been issued at EU level, discussions are still ongoing at international level. In spring 2018, CPMI-IOSCO published guidance on supervisory stress testing of CCPs and a report on the follow-up Level 3 assessment of CCPs’ recovery planning, coverage of financial resources and liquidity stress testing. Further guidance is expected at the international level, in particular from the FSB which launched a consultation regarding financial resources for CCP resolution in November 2018.

Scope

  • The EU regulation would be applicable to all EU CCPs

The proposal requires CCPs to draw up recovery plans which would include measures to overcome any form of financial distress exceeding the CCPs’ pre-funded resources. This should include scenarios based on a clearing default by members of the CCP, and other non-default scenarios, such as fraud or cyberattacks. Recovery plans are to be reviewed by the CCP’s supervisory authority.

CCP supervisors are granted specific powers to intervene in the operations of CCPs where their viability is at risk – even before they reach the point of activating the recovery or suffer an actual failure. Supervisors could also require the CCP to undertake specific actions (“Early Intervention”) or to change its business strategy, legal or operational structure, or its recovery plan.

A CCP will be placed in resolution when it is failing, when no private sector alternative can avert the failure, and when its failure would jeopardise the public interest and financial stability. EU Member States should designate a Resolution Authority, which will be responsible for preparing resolution plans outlining how their respective CCPs would be restructured and their critical functions maintained in this event.

Industry implications

Central clearing is based on two fundamental principles: risk sharing and, if need be, acceptance of loss-sharing for the benefit of preserving a greater value and maintaining the cleared portfolio as intact as possible. Thus one major issue is to define who would contribute to loss allocation.

CCPs will certainly have to comply with further transparency requirements and increase resources available for the default management process.

Banks mainly face a higher cost of risk. They may also need to review risk policies regarding CCPs and clearing clients due to new rules on recovery and resolution tools, and on loss allocation.

Clearing brokers may need to make new disclosures to clients and potentially amend clearing contracts so that they reflect liabilities and rights that may result from CCP recovery and resolution.

BNP Paribas Securities Services’ view

We welcome this EU initiative to establish a resolution and recovery regime for CCPs. Its primary aim should be preserving market stability, ensuring service continuity, and avoiding contagion effects.

This initiative should also respect the existing rules under EMIR on CCP governance, risk management, and default management process. Where necessary, it should advance those rules so as to guarantee more robust CCPs with greater capacity to sustain and manage internal crisis situations.

Furthermore, the CCP recovery and resolution regime should strike a balance between the risk-related and commercial concerns of the CCPs, and those of the clearing members and their clients.

There should also be distinct rules for loss-allocation in default-induced crises and in non-default loss scenarios. In the latter case, the responsibility should be primarily upon the CCP and losses should not be shared among clearing participants. The default waterfall should be fully protected from non-default losses. Initial Margins should be bankruptcy remote.

Key dates

August 2016 - CPMI-IOSCO and FSB consultations on CCP resilience, recovery and resolution. Publication of joint reports

November 2016 - EU Commission proposal for a framework for the recovery and resolution of CCPs

December 2017 - Draft Presidency Report by the Estonian Council Presidency published

January 2018 - European Parliament adopts its position on the Commission proposal,Council position still pending. New reports to be expected from FSB and CPMI – IOSCO

November 2018 - FSB consultation on financial resources for CCP resolution and the treatment of CCP equity in resolution launched

2020 - Expected application date of the European Commission text proposal

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