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1. Certainty, transparency and limited liability
Clearing Members (CMs) of CCP’s require limited liability to prevent systemic risk. Recovery measures and any resolution regime must provide this in a way which has certainty and transparency. Measures such as recapitalisation, the closure of segments of a CCP and variation margin (“VM”) haircutting must be implemented in a way which does not contradict the principle of CM limited liability, and features such as forced tearups and uncapped default fund liability should be avoided altogether.
Under EMIR, CCPs and other FMIs must have rules approved by the regulator. Through a combination of market discipline and thorough supervision these rules contain extensive provisions on how losses must be allocated from a particular source (for example, the credit loss arising from CM(s) default) and procedures in place to handle loss allocation. As approved operating rules, these provisions have been agreed by market participants and supervisors who have factored these procedures into their contingency plans. These rules form a contract between FMI’s and CMs and it is therefore important that the FMIs follow these loss allocation procedures prior to resolution. Put simply, the supervisors must respect the CCP rules. Where the rules may not effectively provide recovery in a given scenario, as with limited or capped VM gains haircutting, that limit or cap provides a trigger for supervisors to take over. Nevertheless, recovery rules should be effective in all conceivable circumstances. Resolution should be viewed as a last resort.
6. Cooperation and coordination between authorities
ISDA is supportive of an approach whereby an FMI’s national resolution authority should take prime responsibility for resolution arrangements, coordinating and cooperating with other national regulatory and resolution authorities as appropriate. ISDA stresses that such arrangements should be specified clearly in advance, and should allow for time-critical action to be taken without the need for lengthy discussion and negotiation. The situations in which resolution is invoked will likely be highly stressed and require actions to be taken in an extremely time-critical manner.