The fact that we are discussing central counterparty (CCP) resolution after discussing bank resolution echoes the fact that CCP resolution is, by and large, an event that occurs only when all other safeguards, including bank resolution, have failed.
There are a number of reasons for this.
One is that the ways in which CCPs are set up makes them particularly resilient. CCPs are not banks, they are (financial market) infrastructures.
They manage the risk of a matched book and rely on the strength of their membership to provide margin and to share losses if this proves insufficient. Bail-in is integral to CCPs’ operational set-up, as clearing members are required to share losses. In this way, their resilience is further strengthened by banking supervision and recovery and resolution arrangements which help ensure that clearing members meet their obligations.
Another reason for CCPs’ resilience is the implementation of international standards.[2] The Principles for Financial Markets Infrastructures of the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have recently benefitted from more granular guidance providing clarity to CCPs and their regulators.
This also includes risks other than financial ones. The adoption of the CPMI-IOSCO guidance on cyber resilience for financial market infrastructures, for example, is an important step towards operational resilience.
Yet, while CCP resolution remains a very unlikely event, the disorderly failure of a major CCP would be disastrous.
Many CCPs are globally systemic, responsible for clearing global markets and with participants from across the world. This is why the Financial Stability Board (FSB) guidance on central counterparty resolution, and its focus on planning and cooperation between authorities, is important.
To sum up, CCPs are systemically important across border and across the EU. Any recovery and resolution planning for individual CCPs therefore requires an EU wide systemic risk assessment and a strong co-ordination at global level.
At EU level, this could involve, for instance, aggregated data collection, joint stress-testing and crisis simulation exercises, and the closer coordination of related supervisory assessments and recovery and resolution planning. And given the financial stability, macroprudential and liquidity issues a CCP resolution raises, central banks must be involved in all aspects of this work.
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