The European Association of CCP Clearing Houses (EACH) responded today to the HM Treasury consultation “Expanded Resolution Regime: Central Counterparties”, which sets out the UK Government’s proposals to expand the resolution regime for Central Counterparties (CCPs).
EACH very much appreciates the opportunity to provide feedback to the HM Treasury consultation. Our views, in summary, are the following:
- Second tranche of SITG – It is EACH’s opinion that there is neither quantitative nor qualitative justification for introducing a second tranche of SITG. Introducing a second SITG could actually have the negative effect of distorting the incentives on which CCPs are based, therefore having the potential to weaken financial stability. In case UK Authorities decide nonetheless to impose it, EACH would recommend that a level playing field is ensured with the provisions included in Articles 9(14) and 9(15) of the EU CCP RR Framework.
- NCWO safeguard – EACH agrees with the proposal of introducing an explicit NCWO safeguard in the CCP resolution regime, with a transparent counterfactual that is consistent with the FSB guidance. In this regard, we are of the opinion that the NCWO counterfactual should be broad enough to balance the flexibility of the resolution authority to act in resolution and the protection of clearing members, and should therefore include the sum of CCP rulebook + insolvency proceedings + replacement costs.
- VMGH and cash calls - EACH agrees with the proposal of limiting the statutory VMGH power to default loss scenarios, giving to the resolution authority the power of using the VMGH subject to the NCWO counterfactual. In addition, we agree with having a larger cap on the cash-call for non-defaulting clearing members, provided that does not impact the right of the CCP to introduce recovery cash calls in its rulebook.
- Compensation – EACH is generally in favour of the modalities of the compensation scheme proposed in the consultation document, but firmly opposes any form of compensation that goes outside the limitations posed by the NCWO principle: this would indeed be detrimental for the incentives structure on which a CCP is based, as clearing members may be incentivized not to efficiently cooperate with the CCP in the default management process or the recovery phase in order to reach as quickly as possible the compensation stage. In addition, it may open the way to a parallel track for compensation of non-defaulting clearing members, exposing the resolution authority to possible unlimited claims.
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