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Different recovery and resolution approaches for different types of FMIs
The EBF considers the determination if an FMI takes on credit risks or not an important distinction in order to classify different groups for the application of different recovery and resolution rules and the achievement of different results. However, the Federation would prefer a clearer distinction between the different categories and specific types of financial market infrastructures and to reclassify them into CCPs, CSDs, SSSs, TRs, payment systems and others. Of course, overlaps are possible, for example when a CSD operates an SSS, but by reclassifying the financial market infrastructures more specifically, all peculiar features, issues and characteristics of the respective FMI can be taken into account more accurately. The EBF believes that this is crucial because different characteristics may call for different approaches, treatments and also possibly different results.
Recovery and resolution plans should also distinguish between the corporate structure and the infrastructure services. Financial market infrastructures have very different ownership and governance structures, being part of a for-profit listed group or owned by a public authority like a central bank for instance. The priority for the resolution authority should be to ensure continuity of the important infrastructure services and disregard the consequences in terms of corporate structure, i.e. the legal entity may well be liquidated as a consequence of the resolution plan whereas the services should still continue to be provided.
Loss allocation arrangements
The EBF also believes that the recovery and resolution regimes should distinguish the type of event that has created the FMI’s difficulty. When looking at financial market infrastructures that take on credit risk, especially the various credit risks and their consequences need to be taken into account: losses that emerge from the respective business model need to be treated differently from losses stemming from other sources such as false investments, operational losses, fines etc. The loss allocation arrangement should thus differ if the difficulty of the FMI is due to a member’s default and the waterfall procedure is insufficient leading the FMI to recovery and resolution or whether the difficulty is due to financial or operational failure that would be under the direct responsibility of the FMI, its owner or operator. In the first case the loss sharing arrangement should involve the members (and the clients of the members where relevant) whereas in the second case the loss should be first supported by the shareholders and creditors of the FMI.
The EBF and its members consider in general that the loss-sharing models (essentially relevant for CCPs) should cover the possibility that the potential fundraisings would be borne proportionally by the FMI, their members and the clients members. Indeed, an FMI participant is protecting the FMI from the risk of its clients however it does not protect its client from the FMI’s default.
As a consequence, the Federation is of the opinion that the main concerns for the financial market infrastructures mainly exposed to operational risks are the continuity of their activities and data portability. This is not only important for Trade Repositories, given their role in providing supervisory authorities with a complete view of market participants’ risk exposures to derivatives transactions, but also for CSDs which, until now, operate under a monopolistic structure in most countries. As a result, the non-functioning of an essential part of the market infrastructures will have a significant impact on the functioning of the financial market. This may even be more critical as regards payment systems on which not only the financial markets but the whole economy is reliant. The recovery and resolution plans should hence focus on business continuity and how to ensure that the services can be transferred to another operator or maintained by the resolution authorities for a temporary period.