15 February 2013

ISDA response to CPSS, IOSCO & FSB regarding Qualifying Central Counterparties

Without a centrally-held and internationally-agreed list of Qualifying CCPs or CPSS-IOSCO-compliant regimes, it is unclear how the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) could be consistently assessed for CCPs, including for capital purposes.

The principal issue is one of cross-border supervisory equivalence. There is doubt as to how, absent a definitive and globally consistent regulatory view, a bank can prudently determine whether a CCP is a QCCP for the purposes of complying with the Basel capital requirements. This is especially relevant given potential questions of equivalence between different bank and CCP supervisors.

Of all the implementation issues relating to CCPs, the approval as QCCPs is the most taxing. Several firms based in jurisdictions where these rules are in force (for example, Switzerland) have produced their own list of QCCPs. Further, it is unclear to the external observer that each IOSCO Member State has a commitment to comply with CPSS-IOSCO PFMI in a timeframe that will allow banks to make a credible determination of QCCP status within the Basel III framework’s timeframe. From the text and various questions raised, ISDA considers that the hierarchy of approval to become a QCCP is:

1. the CCP supervisor states that the CCP qualifies;
2. clearing members evaluate and state that the CCP qualifies;
3. the clearing members’ supervisor makes the final decision that the CCP qualifies.

However, potentially the bank supervisor may not consider the CCP supervisor to be equivalent, with capital consequences for the bank dealing with the CCP. Additionally, in Europe, a CCP must register under EMIR in order to be considered a QCCP. For CCPs that are not European, and do not deal with European firms, there is no incentive to register. If a CCP’s clearing member is a non-European subsidiary of a European bank, then on a consolidated basis exposure to the CCP will presumably have to be considered non-qualifying, again leading to a capital impact for the clearing member.

CCPs will not be required to calculate “Kccp”, which is necessary for Method 1 in the interim framework. ISDA considers that the APRA and the Indian Central Bank have been sufficiently transparent on their decision for other supervisors to accept this. Indeed, ISDA considers the approach is sensible given its long-held concerns with the hypothetical capital construct. However, ISDA is conscious that under the proposed CRD IV text this may negatively impact CCP designation for EU bank capital purposes.

It has been mooted that banks might integrate the CPSS-IOSCO PFMI into their own risk assessment of each CCP (as a fall-back option for internal consistency) and make a judgement based on that where there is lack of CCP supervisory guidance. While beneficial for internal risk management and assessment purposes, there may be practical impediments to this and it will raise further questions of consistency across banks and jurisdictions. The CCP is unlikely to provide banks as much information as would a supervisor and as such the judgement would have an element of subjectivity. ISDA considers that QCCP status should not be a subjective decision taken from an individual bank’s perspective but should rather be based on objective criteria that apply universally to all organisations interfacing with the CCP. Accordingly, ISDA recommends approaching this designation in a coordinated manner. To that end, ISDA supports a central list, or at the very least a public statement by each supervisor.

ISDA feels strongly that CPSS-IOSCO, as owners of the PFMI, ought to address this issue, for example by maintaining an official list of QCCPs that would be accepted globally by bank supervisors. ISDA understands consideration is being given to CPSS-IOSCO forming a new independent college of regulators that would assess third country CCP adherence to the PFMI. ISDA would support such an initiative.

As an alternative (albeit one that the industry considers inferior), ISDA is exploring the idea of maintaining a list of QCCPs. CCPs would need to demonstrate to ISDA that they are compliant according to agreed criteria (for example, based on an official statement or other disclosure) in order to be included on the list. Given that ISDA is not a regulator, the list would be published for information purposes only. However, ISDA and industry would make every effort to ensure its credibility.

Full document

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