International authorities strengthen standards for CCP resilience, recovery and resolution
On July 5, four international regulatory bodies issued a set of policy documents aimed at strengthening the oversight and supervision of central counterparties and protecting financial systems from a potential default. The documents, which consist of three guidance documents and two reports, are part of a "joint workplan" on CCP resilience, recovery and resolvability that was launched in April 2015 by the four international bodies: the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, the International Organization of Securities Commissions, and the Financial Stability Board.
"This work is an important part of G20 efforts to improve the safety and resilience of the global clearing landscape," said Benoît Coeuré, chairman of CPMI. To strengthen the resilience of clearinghouses to financial stresses, CPMI and IOSCO issued an update on the Principles for Financial Market Infrastructures, the international standards that were issued in April 2012. The update provided further guidance regarding financial risk management for CCPs and covered in particular governance, credit and liquidity stress testing, coverage, margin, and a CCP's contributions of its financial resources to losses.
To ensure that clearinghouses are prepared to recover from defaults and other losses, CPMI and IOSCO updated their 2014 guidance on recovery for financial market infrastructures to provide clarifications in four areas: 1) operationalization of recovery plans; 2) replenishment of financial resources; 3) non-default related losses; and 4) transparency with respect to recovery tools and how they would be applied.
The third guidance document was issued by the Financial Stability Board. It finalized guidance on implementing the key attributes of effective resolution regimes in arrangements for resolving CCPs that have reached the brink of failure. The guidance sets out powers for resolution authorities to maintain the continuity of critical CCP functions; details on the use of loss allocation tools; and steps that authorities should take to establish crisis management groups for relevant CCPs and develop resolution plans.
The four regulatory bodies also published two joint reports: an analysis of the interdependencies between CCPs and their clearing members and other financial service providers; and an implementation report on the work undertaken so far. The implementation report sets out several priorities for future action over the next two years, including:
- A review of the incentives for central clearing arising from the interaction of margin requirements for derivatives with other requirements such as the leverage ratio and liquidity coverage ratio
- Work on good practices for auctions of defaulting clearing member positions
- Whether there is a need for further guidance on the treatment of CCP equity in resolution
