Three papers have been
released focusing on central counterparty (CCP) risk and how CCPs should be
resolved or recovered in the event of a failure.
The Committee on
Payments and Market Infrastructures (CPMI) together with the International
Organisation of Securities Commissions (Iosco) has issued a consultative report
providing further guidance on certain aspects of the Principle for Financial
Market Infrastructures (PFMI).
Financial Stability Board (FSB) has published what it describes as a
“discussion note” seeking comments on “aspects of CCP resolution that are
considered core to the design of effective resolution strategies”.
The third paper,
issued by LCH Clearnet, argues that requiring CCPs or clearing members to hold
additional capital in a separate resolution fund in case of a CCP failure will
not help the resolution of that CCP and will ultimately increase clearing costs
for market participants.
guidance on five key aspects of a CCP’s financial risk management framework:
governance, stress testing for both credit and liquidity exposures, coverage,
margin, and a CCP’s contribution of its financial resources to losses.
It says that the aim
of this guidance is to help CCPs improve their resilience in the case of a
major risk event, such as a large default from one or more of their members.
To clarify where this
guidance fits in amongst the CCP requirements already in existence, the groups
state: “The guidance in this report is intended to be applied holistically
along with the requirements set out in the PFMI.
“Further, although the
guidance that is being consulted upon does not create additional standards beyond
those previously included in the PFMI, each CCP and the authorities responsible
for its regulation, supervision and oversight should ensure that the following
guidance is carefully considered.”
soliciting input on a number of issues raised in their paper and have set a
deadline of October 18 for the submission of feedback.
Meanwhile, the FSB plans
to use the feedback it receives from its discussion note to develop proposals
for more granular guidance by early 2017. The group says that in developing
this guidance it will coordinate clearly with other industry bodies, including CPMI
The Futures Industry
Association (FIA), which published its own position
paper on CCP risk last year, was quick to praise the regulatory bodies. “The
health and stability of the clearing system is a global priority, so we are
pleased to see proactive leadership from CPMI-Iosco and FSB, and we look
forward to reviewing these recommendations in more detail,” says Walt Lukken,
president and CEO of FIA.
“Since the G20 committed
to clearing all standardised over-the-counter derivatives in 2009, central
counterparties have grown in their systemic importance,” Lukken continues. “Developing
clear and effective global standards for managing CCP risk helps promote the
health, resiliency and stability of the central clearing system. We’re pleased
that these regulatory efforts echo FIA’s goal of ensuring that the risks of
central clearing are both transparent and effectively managed.”
In its paper LCH
Clearnet opens by stressing its support for the efforts of CPMI-Iosco, the FSB
and other policymakers around the world that are seeking to create a regulatory
framework that will enhance CCP resiliency.
However, it then notes,
“Strangely enough, the ways in which a CCP can fail do not appear to be well
understood. The current resolution debate tends to focus on the default of one
or more members of a CCP.
“The ability to
achieve a matched book in the event of a member default is core to the mission
and responsibilities of a CCP, with robust measures in place to deploy
financial resources according to its default loss waterfall,” it continues. “Trying
to add more financial resources or additional recovery tools to this already
established framework does not address the key issues, in particular
non-default loss events, which result in a CCP suffering direct losses to its
resolution for CCPs cannot be considered in isolation from the recovery and
resolution regimes of clearing members, which have been introduced in recent
years. These materially reduce the risk and the potential scale of a member
default,” it adds.
Instead of requiring
each CCP to hold more capital aside in case it fails, which LCH Clearnet argues
will lead to CCPs charging their members larger fees in response, it argues
that clearing houses should pool the capital they each hold to cover against
wind-down risk to create a new resolution fund.
Under Emir (European
Market Infrastructure Regulation) each CCP has a component of its capital
designated to cover wind-down risk. LCH Clearnet says if that each CCP were to
place these resources in a central account, controlled by a third-party, then
the size of the resulting fund would provide enough cover to handle the
simultaneous collapse of at least the largest two CCPs in Europe.
It adds in the paper:
“Importantly, this solution also means that there is no recourse to a taxpayer.”
All three papers are
published against the backdrop of continued debate about whether
there is enough transparency around CCP risk, whether
CCPs should endeavor to recover after failing or should be designed to fail and
have a resolution place in place and how
much “skin in the game” CCPs should have in the event of a member default.