20 May 2014

Risk.net: EC tackling final questions on CCP resolution

Rules on the recovery and resolution of central counterparties (CCPs) are expected to take shape over the next months, according to participants at a Brussels conference on financial reform. Key elements, including where to draw the line between recovery and resolution, still need to be settled.

 

Two new regulatory documents are in the works. The first is a set of proposals from the European Commission on the rules that would apply if a piece of financial market infrastructure (FMI), including clearing houses, ran into trouble. The Committee on Payment and Settlement Systems (CPSS) is also working with the International Organization of Securities Commissions (Iosco) on further guidelines for FMIs – the two groups collaborated on a set of principles that were published in 2012 and are now used as the benchmark when judging CCP risk management. No international standards for recovery and resolution currently exist, despite the gradual adoption of rules that will require a big piece of the over-the-counter derivatives market to be cleared.

"With the clearing rules, we have put more pressure on CCPs and they are becoming more and more systemically important. That's why we now need recovery and resolution rules. We have worked very closely with the CPSS-Iosco working group on these issues but there are still a couple of open questions that will be discussed in the coming months," said Nicolas Gauthier, a policy officer within the EC's directorate-general for Internal Market and Services. According to Gauthier, regulators are still trying to nail down the relationship between recovery and resolution – with the former helping to put a damaged entity back on an even keel, while the latter is an attempt to end the life of a mortally wounded institution in a humane fashion. Regulators will also need to work out when and how to call time on an unsuccessful recovery process and switch to resolution, and – finally – settle the role that different authorities will play in supervision, Gauthier said. He was speaking during a panel discussion at an event run jointly by the Centre for European Policy Studies (Ceps) and the International Swaps and Derivatives Association.

Among other things, CPSS-Iosco's original FMI principles set expectations for the liquidity resources a CCP should have – the danger being that a clearing house might face a temporary shortfall in variation margin if one or more member firms were to default. For clearing houses that are systemically important, or that clear complex products, the requirement is set with reference to the possible shortfall that would be created if the two largest member firms collapsed. But there is no detail on how to cope with larger losses or other types of life-threatening events, which leaves a question about how these losses should be shared out among clearing house participants, potentially including clients of member firms – a controversial topic.

 

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