Reports from CPMI-IOSCO advance regulatory agenda on central counterparties

Reports published today by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are aimed at enhancing the resilience of central counterparties (CCPs), an important move towards completing the regulatory agenda for central clearing laid out after the financial crisis.
“Ensuring that central counterparties are safe and resilient is an important priority for the G20 and these reports deliver on key goals set by the Chinese presidency,” said CPMI chair Benoît Cœuré.
“Although the risk of default cannot be entirely eliminated from the global financial system, we aim to limit potential systemic risks arising from any default by a central counterparty member as much as possible by applying a robust but balanced approach to reinforce financial buffers and risk control,” said IOSCO board chair Ashley Alder.
The first report, Implementation monitoring of PFMI – Level 3 assessment – Report on the financial risk management and recovery practices of 10 derivatives CCPslooks at the implementation of the key standards for the industrythe Principles for financial market infrastructures (PFMI), as they relate to financial risk management and recovery practices (ie the procedures to follow in case a member defaults).
The report reviews measures in place at a selected set of derivatives CCPs and finds CCPs have made important and meaningful progress in implementing arrangements consistent with the standards. Some gaps and shortcomings have nevertheless been identified, notably in the areas of recovery planning and credit and liquidity risk management. The report also identifies a number of other differences in the outcomes of implementation across CCPs. They may reveal differences in interpretation or approach that could materially affect resilience; achieving a level playing field across jurisdictions will be assisted by further guidance on the PFMI outlined in the consultative report also published today (see below).
Looking ahead, CPMI and IOSCO intend to conduct a follow-up targeted review of CCPs’ progress in addressing the most important issues identified in the report in 2017.
The consultative report, Resilience and recovery of central counterparties (CCPs): Further guidance on the PFMIproposes more granular descriptions of how CCPs are expected to implement key parts of the PFMI to further improve their resilience and recovery planning.
In particular, the report provides proposed guidance on the following key aspects of a CCP’s financial risk management framework: (i) governance and disclosure relating to the CCP’s risk management framework; (ii) credit and liquidity stress testing; (iii) coverage of credit and liquidity resource requirements; (iv) margin; (v) a CCP’s contribution of its own financial resources to losses; and (vi) recovery planning.
The guidance contained in the report, once finalised, is also intended for use by authorities for regulation, supervision and oversight of CCPs. The guidance addresses several of the resilience and recovery priorities identified in the joint CCP workplan of the Financial Stability Board (FSB), CPMI, IOSCO and the Basel Committee on Banking Supervision. A discussion note on CCP resolution, also published today by the FSB, follows up on another key priority of the joint CCP workplan.
Comments on the guidance proposed in the report should be submitted by 18 October 2016. A cover note to the consultative report is available here.

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