In a white paper released jointly, BlackRock, Goldman Sachs, JPMorgan, Allianz, Citi, Societe Generale, State Street, T. Rowe Price, and Vanguard, have presented detailed recommendations from both buy-side and sell-side perspectives to further enhance the safety and soundness of central counterparties (CCPs.
The firms say that while CCPs have been increasingly relied upon to protect market participants from counterparty losses when faced with major market shocks, despite enhancements in the past few years, they believe that outstanding issues remain relating to CCP resilience, recovery and resolution and that these require further action.
“In the spirit of ensuring on-going financial stability in times of market disruption or crisis, the paper seeks to better align incentives between CCPs and market participants, and ensure that clearing member and end-user liabilities are limited and manageable,” the dealers say. “Our recommendations address key elements of resilience, recovery, and resolution of a CCP.”
The key recommendation on resilience is ensuring that CCPs are subject to appropriate risk management standards and have sufficient financial resources in place to reduce the likelihood of ever needing to enter a recovery or a resolution process requiring them to make material contributions of their own capital to the default waterfall in two separate tranches.
On recovery, the dealers promote the introduction of a clearing member ballot to support CCP recovery compensation to be provided to clearing members and end-users for losses incurred through recovery or resolution tools pre-defined assessment rights capped at one times each clearing member’s default fund contribution
Finally, on resolution, the dealers call for the requirement for CCPs to set aside ex ante resources for recapitalisation, and for regular reviews of CCP rulebooks to be conducted by resolution authorities in conjunction with CCP primary regulators and systemic risk regulators to ensure a common understanding of CCP risk.
“Together, these recommendations form a path forward to aligning incentives and enhancing financial stability through even stronger CCPs,” says Nicolas Friedman, global co-head of counterparty risk at Goldman Sachs.
“Together, our recommendations will help ensure that CCPs are optimally structured to make sure the market remains resilient in the unlikely event of a meaningful disruption,” adds Eileen Kiely, deputy head of counterparty and concentration risk at BlackRock.
“Our recommendations would help ensure that clearing members’ and end-users’ exposures to the CCP are limited, ascertainable and manageable,” says Marnie Rosenberg, global head of clearing house risk & strategy at JPMorgan, while William Thum, global head of capital market leagal and regulatory at Vanguard, adds, “While central clearing has mitigated many risks, market resiliency can be enhanced by additional protections to strengthen margin calculations and default fund components, and to preserve the assets of non-defaulting market participants.”