Resolution of CCPs

Resolution of CCPs

The Financial Stability Board (FSB) is consulting on a set of guidelines for the resolution of central counterparties (CCPs). CCPs have become of greater systemic importance following the post-financial crisis reforms to mandate the central clearing of standardised OTC derivatives.

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These proposed guidelines build on an earlier FSB discussion note (August 2016) and the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions. The guidelines are intended to assist authorities in developing and implementing effective resolution regimes and developing credible resolution strategies and plans for CCPs.

The proposed guidelines cover:

  • Policy objectives for CCP resolution - to preserve the continuity of critical functions without exposing taxpayers to the risk of loss.
  • Potential indicators for considering when a CCP should be put into resolution.
  • The assessment of the financial resources that might be required to enable a failing CCP to continue to provide critical functions.
  • Resolution powers that the authorities should have – in particular to return a CCP to a matched book and to address default and non-default losses.
  • The use of loss allocation tools in resolution and the provisions necessary to protect creditor rights (the “no creditor worse off than under liquidation” principle).
  • Resolution planning, and the establishment of crisis management groups for CCPs that are systemically important in more than one jurisdiction.

The EU has already moved forward consistently with these proposed guidelines through its proposed Regulation on the Recovery and Resolution of CCPs, published by the European Commission in November 2016. We published a client alert on this which summarises the main provisions of the Regulation and its implications for CCPs and clearing members.

For CCPs, the main implications of the proposed EU Regulation relate to the requirements on them to:

  • Develop detailed recovery plans, specifying a range of recovery actions and linking these to event triggers. The recovery actions should include raising additional capital resources, cash calls, imposing haircuts on variation margins, book re-matching and voluntary auctions of defaulters’ positions to remaining members.
  • Respond to any demands by their supervisor to enhance the credibility of their recovery plan. This may require amendments to the plan itself, or more fundamental up-front changes to organisational and legal structures, contractual terms, resourcing and capital strength.
  • Provide all required information to their resolution authority to enable that authority to develop a credible and feasible resolution plan, and to respond to any demands by their resolution authority to make up-front changes to remove or address impediments to an orderly and effective resolution.

For clearing members, the proposed Regulation sets out the powers of a CCP resolution authority to allocate the losses or positions of a CCP in resolution to its clearing members, including by:

  • Voluntary auctions or forced allocations of the positions of defaulting clearing members to the remaining members;
  • Imposing haircuts on outgoing variation margin payments; and
  • Making a ‘resolution cash call’, up to an amount equivalent to each members’ contribution to the default fund of the CCP (in addition to the default fund itself).

In addition, shareholders of a CCP could have the value of their shareholdings written off in a resolution, while bond holders and senior unsecured creditors could be subject to either the writing-down of the value of their claims or the conversion of these claims into new equity of the CCP.

For more information on this, please contact Clive Briault.

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