The Financial Stability Board (FSB) is publishing today its discussion note on Essential Aspects of CCP Resolution Planning, which seeks comment on aspects of central counterparty (CCP) resolution that are considered core to the design of effective resolution strategies. The FSB is also publishing today, jointly with the Basel Committee, Committee on Payments and infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO), a progress report on the workplan to enhance the resilience, recovery planning and resolvability of CCPs.
With CCPs being an increasingly important part of the financial system through their ability to mitigate and manage counterparty credit risk, 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 Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) and implementation guidance on financial market infrastructure (FMI) resolution in Appendix II-Annex 1 to the Key Attributes set out a framework for FMI resolution. 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.
However, while the Key Attributes and existing guidance describe a number of tools that should be available to authorities, they do not discuss how those tools could be used or combined to develop strategies for the effective resolution of CCPs. In some areas, further guidance may be required to assist jurisdictions with implementing effective resolution regimes and to assist resolution authorities with developing credible resolution strategies and plans.
The discussion note covers a number of aspects of CCP resolution planning, including timing of entry into resolution; adequacy of financial resources; tools for returning to a matched book and allocating default and non-default losses; application of the No Creditor Worse Off safeguard and treatment of the CCP’s equity in resolution; and cross-border cooperation and effectiveness of resolution actions. The note also sets out related questions on which the FSB seeks comment.
Responses to the discussion note, which should be sent to email@example.com by 17 October, will assist the FSB in developing standards or guidance for CCP resolution planning, resolution strategies and resolution tools. The FSB will consult on proposals for such standards or guidance by early 2017.
In developing this guidance, the resolution work will continue to be coordinated closely with other elements of the CCP workplan. This includes resilience and recovery, on which the CPMI and the IOSCO have today published a consultative report on Resilience and recovery of central counterparties: Further guidance on the PFMI plus a report on Implementation monitoring of PFMI – Level 3 assessment – Report on the financial risk management and recovery practices of 10 derivatives CCPs. Additionally, a data collection exercise on the interdependencies in central clearing was launched last week, as part of a study on independencies that began last year.
Elke König, Chair of the FSB Resolution Steering Group and Chair of the European Single Resolution Board, said: “CCPs form a central part of the post-crisis reforms of OTC derivatives markets to help reduce risk in the financial system. But we must also ensure that CCPs are themselves robust and this includes appropriate resolution regimes. There has already been much industry comment on CCP resolution, and we welcome further public comment in response to this discussion note to support the work of the FSB as part of the overall CCP workplan.”