The Financial Stability Board (FSB) today published for consultation draft Guidance on Central Counterparty Resolution and Resolution Planning. With central counterparties (CCPs) an increasingly important part of the financial system, particularly following post-crisis reforms to mandate central clearing of certain standardised over-the-counter derivatives, it is vital that CCPs do not themselves become a new source of “too-big-to-fail risk”.
The FSB issued a discussion note in August 2016 on essential aspects of CCP resolution planning. The draft Guidance issued for consultation today is informed by responses to the discussion note. The draft Guidance builds on the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) which sets out a framework for resolution of financial market infrastructures (FMI). This framework states the objectives of FMI resolution and a range of powers and tools that should be made available to resolution authorities to resolve a failing FMI. When finalised, the Guidance will assist authorities and jurisdictions with implementing effective resolution regimes and developing credible resolution strategies and plans for CCPs.
The Guidance covers a number of aspects which authorities should consider when developing frameworks for resolving failing CCPs, including:
- policy objectives for CCP resolution to maintain financial stability;
- the powers that resolution authorities should have to maintain the continuity of critical CCP functions, return the CCP to a matched book and address default and non-default losses, including potential indicators for considering when a CCP should enter resolution;
- use of loss allocation tools in resolution and provisions necessary to protect creditor rights so the triggering of resolution by authorities does not leave creditors worse off than if the authorities had not stepped in; and
- steps authorities should take to establish crisis management groups for CCPs that are systemically important in more than one jurisdiction, develop resolution plans and conduct resolvability assessments.
The FSB will undertake further work on financial resources for CCP resolution and, based on further analysis and experience gained in resolution planning, determine by end-2018 whether it should develop further guidance on this issue.
Elke König, Chair of the FSB Resolution Steering Group and Chair of the European Single Resolution Board, said: “CCPs are an integral part of the financial system and play an important role in mitigating risks to the financial system. They have grown substantially over the last years. The failure of a CCP would have a significant impact on financial stability. It is essential that authorities have effective resolution planning arrangements in place, including legal powers and tools to take action in a crisis. Once finalised the guidance will provide an internationally agreed standard for CCP resolution.”
The FSB welcomes comments and responses to the questions set out in the consultative documents by Monday, 13 March 2017. Responses should be sent to email@example.com. Responses will be published on the FSB website unless respondents expressly request otherwise.