Inclusion of CCP cleared contracts in the bail-in provisions would be counter to a number of the provisions in EMIR
In its regular monthly meeting on June, 7, 2013, EACH discussed the recent plans to amend certain elements of the banking recovery & resolution framework. The association of European clearing houses is fully supportive to include a clause which stipulates the exclusion by resolution authorities of liabilities arising from derivatives cleared and settled through an authorized central counterparty.
“This important exclusion prevents potential damage to the stability of CCPs and consequently to the financial system and is consistent with the default management procedures in EMIR,” explained Marcus Zickwolff, Chairman.
Not carving out contracts cleared through CCPs from the scope of bail-in would result in obstacles to the proper operation of CCPs. It would substantially reduce the effectiveness of a CCP’s default procedures, and increase the risk of contagion to other market participants. In the event of member default, CCPs have rigorous procedures for the closing out of clearing members’ positions to re-establish a matched book. These arrangements crystalise losses at the earliest possible stage, and prevent contagion to other market participants. The inclusion of centrally-cleared contracts in the bail-in provisions of the bank recovery & resolution framework would potentially prevent CCPs exercising such procedures. A CCP would be unable to liquidate a position with a failed clearing member which is subject to bail- in provisions. This would place the CCP in a position where it holds an un-matched book, increasing systemic risks.