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2016-05 WP CCP Resolution V7.Indd

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2016-05 WP CCP Resolution V7.Indd Considerations for CCP Resolution May 2016 Table Of Contents I. Introduction .............................................................................................................................................. 3 II. Executive Summary ................................................................................................................................. 4 III. Discussion .................................................................................................................................................. 8 A. CCP RESOLUTION PLANS ....................................................................................................................................8 B. RESOLUTION TRIGGERS .................................................................................................................................. 11 C. RESOLUTION FRAMEWORK AND AUTHORITY ..................................................................................................... 12 D. “SILOING” CLEARING SERVICES ....................................................................................................................... 12 E. RESOLUTION TOOLS ....................................................................................................................................... 14 F. CCP FUNDING AND RESOURCES ....................................................................................................................... 17 G. LIMITED AND TEMPORARY RELIEF FROM REGULATORY REQUIREMENTS .............................................................. 19 IV. Conclusion ............................................................................................................................................... 20 Endnotes .................................................................................................................................................. 21 2 CONSIDERATIONS FOR CCP RESOLUTION I. Introduction The Clearing House Association (“TCH”) and the Supervisors and industry have accordingly International Swaps and Derivatives Association given increased attention to the need to (“ISDA”) welcome the attention that the mitigate this risk through enhancements to Financial Stability Board (“FSB”) and others have CCP resilience, appropriate recovery tools and given to the resolution of systemically important measures to facilitate, where possible, the central counterparties (“CCPs”). TCH and ISDA continuity of critical clearing services in the recognize the FSB’s Key Attributes of Eff ective face of threats to a CCP’s viability. As a general Resolution Regimes for Financial Institutions matter, CCP continuity is preferably achieved (“Key Attributes”), Annex on Resolution of through resiliency and the use of recovery Financial Market Infrastructures and FMI (FMIs) tools. Nevertheless, circumstances may require Participants,1 in particular, as a key contribution the initiation of resolution. Accordingly, the to the guidance on this subject. In addition, the identifi cation and implementation of measures FSB Resolution Steering Group’s current work to facilitate the continuity of CCP clearing plan brings welcome attention to the need services, and to ensure that CCPs can be resolved for appropriate standards for CCP resolution, in an orderly manner while simultaneously particularly for derivatives CCPs.2 minimizing risks to fi nancial stability and to taxpayers, has become an important objective CCPs play an increasingly important role in the for supervisors and industry alike. global fi nancial system. Mandatory clearing has increased the volume of transactions cleared Against this background, initiatives such as through CCPs, and, today, it is estimated that the Key Attributes (with respect to resolution) more than 70% of swaps are cleared.3 While this and the CPMI-IOSCO Report on Recovery of development has contributed to a decline in fi nancial market infrastructures4 (with respect to bilateral credit exposures arising from uncleared recovery) have contributed signifi cantly to the swaps, it has, at the same time, signifi cantly identifi cation of measures that can enhance increased concentrations of risk within CCPs. These the ability of a CCP to recover from events increased risk concentrations can be expected to threatening its continued viability, promote continue in the near to medium term. the continuity of critical clearing services and thereby decrease systemic risk during a period These developments have led to the recognition of extreme fi nancial instability. that, during a period of severe market stress, the failure of a CCP could potentially contribute The Key Attributes, as they relate to systemically to and/or exacerbate fi nancial instability and important CCPs, are an important contribution to systemic risk. It is now widely accepted that the the development of international standards for potential failure, or other threats to the continued CCP resolution. This white paper is intended to viability, of a systemically important CCP, while an build on, supplement and, in some instances, off er unlikely event, cannot prudently be ignored. our perspective on the CCP resolution framework 3 CONSIDERATIONS FOR CCP RESOLUTION advanced in the Key Attributes, focusing on the evaluation should take into account, among seven key areas summarized below. other considerations, the need to achieve an appropriate balance between risk mitigation This paper identifi es a number of potentially benefi ts and associated impacts on the cost of signifi cant resolution tools or approaches that, clearing. This paper is intended to bring these as noted below, require further discussion into focus for further discussion and analysis between and evaluation by the offi cial sector and does not purport to present these as and industry. Any such discussions and comprehensive or defi nitive recommendations. II. Executive Summary The seven key elements of CCP resolution cannot be achieved without unacceptable addressed in this white paper are: consequences for fi nancial stability. Orderly wind-down should generally be limited to circumstances in which the 1. CCP RESOLUTION PLANS. CCPs should be CCP, or the relevant clearing service, is required to prepare resolution plans (i.e., no longer systemically important and/ ‘living wills’) for their orderly resolution or the market that it supports no longer based on standards prescribed by the requires continuity, or where continuity, relevant authorities. Resolution authorities, although desirable, cannot reasonably be in consultation with other responsible expected to be achieved (e.g., if there is no authorities, should also prepare public prospect of a matched book or a critical sector ‘playbooks’ or ‘action plans’ for the mass of clearing members (“CMs”) would orderly resolution of CCPs generally and, be unwilling to continue participating where appropriate, for individual CCPs, as as CMs in the clearing service) or cannot a supplement to each jurisdiction’s overall be achieved without unacceptable resolution framework. consequences for fi nancial stability. • CCP resolution plans should be designed • CCP resolution plans should be made to facilitate both continuity and available to clearing participants, subject resolvability should the CCP be placed to protection of confi dential content. in resolution. While continuity should be the preferred resolution approach, the • The resolution plans developed by plans must provide for an orderly wind- CCPs and relevant authorities should be down of a CCP’s clearing services where discussed and developed in a manner continuity, although desirable, cannot designed to facilitate optimal coordination reasonably be expected to be achieved or between the CCP and the relevant 4 CONSIDERATIONS FOR CCP RESOLUTION authorities, and at a cross-border level, cannot be achieved without unacceptably during any future crises. destabilizing impacts; (ii) a critical mass of CMs would be unwilling to continue • CCP resolution plans and resolution participating as CMs in the clearing service frameworks should incorporate resolution (either in the CCP, were it to emerge from tools and strategies designed to achieve resolution, or at a successor CCP to which continuity, while ensuring that, in resolution, the clearing service might be migrated); no clearing participant is divested of the (iii) a matched book cannot reasonably be entitlements and protections provided expected to be achieved either prior to or under the relevant CCP rulebook. in resolution; and (iv) the aff ected clearing service is no longer critical to the market. • In fashioning public sector action plans for CCP resolution, and in reviewing CCP • To facilitate informed decision-making, resolution plans, relevant authorities the resolution authority, in consultation should also give careful consideration to with the supervisory regulator (and other the appropriate point of entry for CCP relevant authorities, as appropriate), resolution and whether the legal entity should develop consultative and decision- structure of the CCP would facilitate making processes. These processes should entry both at a holding company, or support anticipatory actions, such as the intermediate holding company level, initiation of resolution in order to prevent and at an operating company level, or the exercise of a recovery tool that would otherwise require restructuring. be unacceptably destabilizing. They should also support discussions, for example, to 2. RESOLUTION TRIGGERS. The Key Attri- avoid
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