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The European Association of CCP Clearing Houses (EACH) responds to the FSB discussion paper on ‘Financial resources to support CCP resolution and the treatment of CCP equity in resolution’
This response represents the views of European CCPs on the FSB discussion paper on ‘Financial resources to support CCP resolution and the treatment of CCP equity in resolution’. In summary:
- Welcome the FSB’s five-step approach - We believe that the five-step approach proposed by the FSB to evaluate the financial resources and tools for resolution is appropriate.
- Support the FSB reference to incentives - We particularly welcome the reference made by the FSB to ‘the potential impact on stakeholder (including clearing member) incentives to support recovery or resolution’, when evaluating existing recovery and resolution tools and resources against potential resolution strategies.
- Balancing authorities’ protection and flexibility - In applying the five-step approach and the resolution strategy, resolution authorities should aim to ensure the continuation of critical services while balancing the protection of the authority against claims and the flexibility for the authority to successfully resolve the CCP. To achieve this, we would suggest the resolution authority to consider applying the NCOWL counterfactual of ‘value of continuity’.
- Proportionality - To ensure a proportional and robust approach to resolution and in line with our response to Q2 above, we would support that the assessment should take into consideration the different products cleared by CCP and the risk linked to these.
- Non-default losses (NDL)
- Principle of responsibility for NDL - Loss allocation for NDL should therefore be proportional to the level of responsibility and/or benefits extracted from a service of each stakeholder, including CCP owner or CCP user. This principle of responsibility of NDL between CCP and its participants should be mirrored in the resolution planning by authorities. We therefore strongly welcome the reference to this principle under scenario A.2.i) which refers to losses potentially being borne by the CCP’s clearing members.
- Equity is not the answer for all NDL - If the existing CCP defences against NDL are not enough, there are other remedies than equity that would be much more adequate (e.g. for liquidity shortfalls, investment losses, legal risks, failure of a custodian or settlement platform, failure of a concentration bank, central banks actions or non-performance of vendors, service providers and IT suppliers). Even in cases where financial resources could be a response, European CCPs are subject to stringent capital requirements to address specifically operational & legal risk, credit counterparty, market and business-related risks.
- Compensation as the threat to CCP’s robust risk management - EACH has strong concerns and suggests deleting from the final guideline the possibility for CCPs to provide in their rulebooks that resolution variation margin gains haircuts (VMGH) would be repaid by the CCP and to compensate clearing members for cash calls. This compensation would break the CCP’s incentive structure and therefore jeopardises the current resilience of CCPs.
- Point in time for imposing losses on equity - EACH strongly suggests that the point in time for imposing losses on equity should be at the earliest somewhere close to the end of the application of recovery tools. This approach has two main benefits: i) it would increase the protection of the resolution authority against further claims, as the equity would be written down in recovery and therefore be part of the counterfactual; ii) this approach does not represent a threat to the incentive structure of the CCP because the equity is only written down close to the end of the recovery phase.
