A Path Forward for CCP Resilience, Recovery, and Resolution
October 24, 2019
The Principles for Financial Market Infrastructures (PFMIs) that were agreed upon by global standards-setting bodies in 2012 and supplemented by additional guidance in the following years established the foundation for central counterparty (CCP) risk management standards. These principles have largely been incorporated into statutory and/or regulatory regimes in key jurisdictions, providing meaningful frameworks to enhance CCP safety and soundness, particularly in light of CCPs’ increased systemic importance post derivative market reforms.
Throughout this process, clearing participants have provided diverse perspectives and detailed feedback to CCPs and regu- lators through individual firm and industry association position papers, targeted comment letters, and participation in regulatory and industry-sponsored forums on a global scale. While CCPs and the regulatory community have taken significant steps to address the feedback received, there remain outstanding issues that require additional attention. Last year’s major default by a member of Nasdaq Clearing AB notably raised again broader concerns related to CCP governance as well as risk and default management standards and practices.
This paper brings together perspectives from clearing members and end users, identifies issues that regulators and CCPs should consider, and makes recommendations to address these out- standing issues. The purpose of these recommendations is to enhance financial stability by protecting the safety and soundness of CCPs through enhanced risk management standards and aligning incentives through requirements for meaningful CCP own capital for covering both default and non-default losses and recapitalization resources. It is important to remember thatmost CCPs have for-profit ownership structures that do not in and of themselves provide the incentives necessary to proceed down this path unassisted; hence, regulatory action on this front is needed.
These recommendations are intended to ensure that clearing members’ and end users’ exposures and liabilities to the CCP are limited, ascertainable and manageable. To this end, globally consistent, clear and transparent rules to resolve the unaddressed issues will provide greater certainty for market participants, particularly in times of stress.
We organize our recommendations under three broad categories: resilience, recovery, and resolution. While some of the recom- mendations have been central to the ongoing public dialogue, we provide new ideas for consideration, including enhanced member governance via the introduction of a clearing member voting mechanism to support CCP recovery, and the prepositioning of financial resources for resolution. One potential option we raise is to require CCPs or their holding companies to issue long-term debt that could be bailed in for recapitalization.